UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Prepaid Card Holdings, Inc.
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(Name of Small Business Issuer in its charter)
Nevada 76-0222016
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
18500 Von Karman, Suite 530 Irvine, CA 92612
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 877-237-6260 x 110
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
(Do not check if a smaller
reporting company)
1
TABLE OF CONTENTS
Item 1. Description of Business. ..........................................3
Item 1A. Risk Factors. ....................................................16
Item 2. Financial Information. ...........................................19
Item 3. Description of Property. .........................................21
Item 4. Security Ownership of Certain Beneficial
Owners and Management. ...........................................21
Item 5. Directors and Executive Officers, Promoters
and Control Persons. .............................................23
Item 6. Executive Compensation. ..........................................27
Item 7. Certain Relationships and Related Transactions. ..................31
Item 8. Legal Proceedings. ...............................................33
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters. ...................33
Item 10. Recent Sales of Unregistered Securities. .........................34
Item 11. Description of Securities. .......................................36
Item 12. Indemnification of Directors and Officers. .......................39
Item 13. Financial Statements and Supplementary Data. .....................39
Item 14. Changes in and Disagreements with Accountants. ...................40
Item 15. Financial Statements and Exhibits. ...............................40
Signatures. ..................................................................41
2
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS DEVELOPMENT.
Prepaid Card Holdings, Inc., previously known as Berman Holdings, Inc., a Nevada
Corporation ("PCH," or the "Company"), through its wholly-owned operating
subsidiaries Berman Marketing Group, Inc., a California Corporation ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom"), is in
the business of multi-channel direct marketing, and is in the process of
entering the market for debit cards and other similar prepaid general use cards.
The Company was originally incorporated on October 8, 1986 as Nately National
Corporation, and after several name changes was named National HealthCare
Alliance, Inc. On October 11, 2007, the Company acquired BMG as its operating
business and changed its name to Berman Holdings, Inc. on November 2, 2007, and
then to Prepaid Card Holdings, Inc. on May 2, 2008. BMG was formed on February
2, 2007 by the Company's president, Bruce Berman. On March 8, 2008, the Company
acquired Merchant Processing International, Inc., which will be renamed Bank
Freedom, Inc. The Company has also changed its trading symbol from NHAL to
BRMN, and is currently in the process of obtaining a new symbol.
The Company has not been in bankruptcy, receivership, or any similar proceeding,
and, to the best knowledge of management, has not defaulted on the terms of any
note, loan, lease, or other indebtedness or financing arrangement requiring the
issuer to make any material payments.
B. FINANCIAL INFORMATION ABOUT SEGMENTS
As defined by generally accepted accounting principles ("GAAP"), we do not have
any segments separate and apart from our business as a whole. Accordingly,
there are no measures of revenue from external customers, profit and loss, or
total assets aside from what is reported in the Financial Statements attached to
this Form 10.
C. BUSINESS OF THE COMPANY
EXECUTIVE SUMMARY
Through our operating subsidiaries, Berman Marketing Group, Inc. ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom"), and
strategic alliances with processors, operators and other companies, we are in
the process of entering the prepaid general use debit, ATM, Point of Sale
("POS") and signature-based VISA and MasterCard card market. Our primary target
audience is an estimated 65 million unbanked and underbanked individuals in the
United States(FN 1).
We believe we are qualified to capture this market due to the following
strategic and tactical advantages:
- Over 4 years of successful direct marketing experience to this
demographic.
- --------------------
1. "The Race is On in Prepaid" - Edgar, Dunn, and Company, INSIGHT Volume 24,
Sept. 2007
3
- Experienced management of up to 20,000 customer acquisitions per
month and10,000 customer service calls per month.
- Technology infrastructure capacity to scale to over 250,000
customer acquisitions per month housed in a level 3 NOC Sarbanes Oxley
compliant technology center.
- Extensive fraud detection and prevention experience.
- Few competitors with similar experience currently in the marketplace.
- According to Industry Insiders the Market is untapped and not
penetrated (FN 2). Single digit percentages of market penetration
estimated (less than 9%).
Our new prepaid Life Style cards and services will target several markets
including the estimated 65 million people who either do not have access to
credit, do not have a checking account, or who wish for the convenience of a
prepaid method of using the debit/ATM/credit card networks. The 65 million
estimated is people living in the United States of America, which desire the
flexibility of giving their family members access to funds without the risk of
credit.
The company intends to raise capital for advertising, operations, acquisitions
and general business development.
BUSINESS MODEL AND STRATEGY
Our general business model is a two part process: acquisition and education.
Typical usage patterns of existing prepaid cards suggest that the first three
months of usage are loads (placing funds on the card) and ATM transactions while
the forth and beyond months are POS, debit, and signature based transactions.
(FN 3) While ATM transactions do generate revenue, our business model is to
encourage POS, signature, and debit transactions, as these types of transactions
generate significant revenue through transaction fees and interchange fees. We
believe we will achieve success by encouraging the acceptance and use of the
prepaid card for these everyday activities.
Therefore, our business strategy is to first to engage in an aggressive market
campaign to acquire customers, and then to educate and influence our customers
to adopt the prepaid card into their daily financial management. This will
require continuous marketing and touch points both prior to and after customer
acquisition.
Revenue
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The Company intends to derive revenues through fees charged to the cardholders.
Those sources may include:
- Interchange
- Bill pay fees
- Domestic and International ATM transaction fees
- --------------------
1. Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007
2. ATM, Debit, and Prepaid Forum, La Costa, CA - October 2007
4
- Debit purchase and PIN decline fees
- Paper statement fees (opt in)
- ACH and Bank withdrawals
- Monthly maintenance fees
- Lost or Stolen replacement cards
An agreement has been reached with Berman Investment Group, LLC ("BIG") where
BMG, our operating subsidiary, has a non-exclusive right to use BIG's 1.75
million lead database. BMG will not have to pay any list rental or acquisition
costs for use of the database. For the use, BMG will have to pay monthly email
server cost to BIG's current email service provider plus any direct costs
associated with sending the email.
Pricing
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We believe there is a threshold the unbanked consumer will pay for the benefits
of a prepaid card. So far, this threshold has yet to be determined. Major
players in the market have experienced minor success with little penetration.
(FN 4)
Critical to a long-standing relationship with our targeted demographic is
pricing. We believe there are several key strategic concepts that will move our
card offering beyond the current thinking. In particular:
Do not gouge the customer: There is an apparent perception that prepaid cards
offer issuers an opportunity to gouge the customers. We believe this is a
problematic strategy as more and more issuers find their way into the market.
Offer Free Services and/or Rebates: Everybody likes getting something free -
specifically our targeted demographic.
Following these two points of emphasis, we will determine the optimal type and
amount of pricing in order to maximize our penetration of the market.
PRINCIPAL PRODUCTS AND SERVICES
Types of Prepaid Card
- ------------------------
There are two basic types of prepaid cards: closed loop and open loop. They
have the following characteristics:
Closed Loop: Closed loop cards have replaced the traditional "gift certificate"
and are commonly known as "gift cards." Purchasers buy a card for a fixed amount
and can only use the card at the merchant that issues the card. Generally, few
if any laws govern these types of cards. Card issuers or sellers are not
required to obtain a license. Closed loop cards are not subject to the Patriot
Act, as they generally cannot identify a customer.
- --------------------
4. Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007
5
Semi-Closed Loop Cards: Cardholders are permitted to redeem the cards at
multiple merchants within a geographic area. These types of cards are issued by
a third party, rather than the retailer who accepts the card. Examples include
university cards and mall gift cards.
Open Loop Cards: All of our prepaid cards are open loop cards. Open loop
prepaid cards are the most regulated of the prepaid cards. An example is the
Payroll card. Payroll cards are used by employers to pay employees. The
employee is issued a card that permits access to an account established by the
employer. At the end of each pay period, the employee's ability to draw money
from that account is increased by the amount of his or her wages. The card may
be used at an Automated Teller Machine (ATM) to obtain cash, and, in some
instances, may be used at a store to pay for goods purchased. The payroll card
is particularly useful for employees who do not have a regular checking or
savings account at a financial institution because they can access their wages
conveniently.
Distinguishing features in an open loop prepaid are:
- Reloadability
- Higher reload amount limits
- Wide-ranging sources of funds (credit card, cash, corporate
payroll, ACH, other prepaid cards)
- More purchase locations
- Greater network access (ATM, POS, Signature, etc.)
- Easier cash access (ATM, remittance)
- More stringent identification processes
- Lower risk and a more evenly shared risk of loss
Under the Open loop umbrella, there are numerous types of cards being offered
today with various degrees of risk to the issuer. These include:
- Payroll
- Health Benefits
- Corporate travel and expense
- Incentive
- Remittance
- Government benefits
- Disaster relief
Our Prepaid Cards
- -------------------
Bank Freedom Prepaid MasterCard: Our Bank Freedom Prepaid MasterCard (R) cards
were first issued in March, 2008. Since then, the demand for our Bank Freedom
Prepaid MasterCard has greatly exceeded our expectations. In March and April
2008, we shipped a total of 53,729 cards. Of those, 17,558 have been activated.
In those two months there have been 4,804 loads via our reloading partner, Green
Dot, for a total of $781,809 loaded on these cards. An additional $440,999 has
been loaded onto these cards through 1,925 direct deposits during March and
April 2008.
6
Our marketing campaign has gone better than expected, and although we had plenty
of cards in our inventory, our embossing services could not keep up with the
amazing demand we have experienced, and caused a short delay. Our management is
greatly encouraged by the response from our customers, and we believe that after
temporarily reducing our aggressive marketing efforts, we will be able to absorb
this growth and continue to grow this and other brands of prepaid cards.
Spanish MasterCard: On June 1, 2008 we launched a Spanish version website for
our Bank Freedom Prepaid MasterCard(R) Card program. Spanish speaking customers
can go to www.bancolibertadtarjeta.com and order a Bank Freedom Prepaid
MasterCard from a website entirely in Spanish. Bank Freedom has always had
bilingual customer service agents and a bilingual website for its customers to
access their prepaid card accounts, however, to help new Spanish speaking
customers to better understand the benefits of the product they are ordering, we
are releasing this new card enrollment website.
Bank Freedom began airing a radio campaign in June entirely in Spanish on
several Spanish radio stations located in the Unites States. The company also
plans to market its Bank Freedom Prepaid MasterCard through its established
internet marketing network.
Bank Freedom VISA: Bank Freedom received approval from our issuing bank and
VISA International to release the Bank Freedom Prepaid VISA card. We anticipant
the release of our VISA card in the third quarter of 2008.
Reloading Options
- ------------------
The cash reload process is the key component to a successful general purpose
reloadable prepaid card. There are numerous reloading options for consumers of
general purpose reloadable cards including payroll bank to card, card to card,
money order, cashier's check and cash.
Direct Deposit
Our Bank Freedom Prepaid MasterCard (R) offers free direct deposit services for
loading customers' paychecks directly onto our prepaid card accounts. Customers
who don't have checking accounts can avoid paying for expensive check cashing
services with direct deposit. As an incentive to sign up and stay with Bank
Freedom the company currently waives its $4.95 monthly fee for customers who use
direct deposit. The company believes that once a customer signs up, and has
their payroll or benefits directly deposited on the card, our cardholder
retention rate will increase.
Cash Reloading Networks
There are several cash reload networks available today. These include:
GREEN DOT - www.greendotonline.com - The Green Dot MoneyPak(R) is the leading
product for loading cash onto prepaid cards, and can be used to make payments
and add cash to accounts. Usable in over 50,000 retail locations including
Wal-Mart, Walgreens, CVS/Pharmacy, Rite Aid,
7
Radio Shack, Kroger, Ralphs, Food4Less and Fred Meyer, consumers can purchase a
MoneyPak for the suggested retail price of $4.95 or less at any Green Dot
retailer location.
WESTERN UNION - www.westernunion.com - Western Union operates approximately
40,000 retail cash reload centers nationally. A significant portion of these
locations overlaps with Green Dot retailers. The remaining locations are
typically cash advance and payday loan centers. In addition, the cardholder must
locate a licensed Western Union customer service representative to complete the
load transaction using a complex form.
MONEYGRAM - www.moneygram.com - MoneyGram operates approximately 30,000 cash
reload centers nationally. A significant portion of these locations overlap with
Green Dot retailers. The remaining difference operate in Ace Cash centers. Ace
cash centers offer payday loans and expensive check cashing services. In
addition, the cardholder must locate a licensed Western Union customer service
representative to complete the load transactions using a complex form.
READYLINK - Visa Sponsored network. 7-Eleven joins Safeway which announced in
December 2006 that it would offer Visa prepaid reloading facilities from 1,550
retail outlets operating under the Safeway, Carrs, Dominick's, Genuardi's, Pak
'n Save, Pavilions, Randalls, Vons and Tom Thumb brand names. Fifth Third Bank
will serve as prepaid card acquirer for Safeway, according to Visa.
REPOWER - MasterCard sponsored reload network. Announced a partnership with
Green Dot in July 2007. The joint venture extends the rePower network to
50,000+ reload locations.
In December, 2007, we entered into an agreement with Green Dot. We believe that
with Green Dot's success in the reloading industry, along with its successful
alignment with MasterCard, our relationship with Green Dot will help establish
our network of prepaid cards.
MARKETING
Using our management's experience in the credit card processing field, we have
added prepaid cards to our portfolio of products. These cards would target the
65 million customers who have difficulty securing credit cards and bank
accounts. (FN 5)
During the company's first year of prepaid card business, our goal is to acquire
new prepaid card customers. This could be accomplished through:
Gaining market share through direct marketing and establishing a client base;
Maintaining a broad range of prepaid cards offerings; and
Using economies of scale to reduce cost, increase margins, and negotiate
preferential agreements.
In order to create awareness of our prepaid cards, the company plans to do the
following:
- Develop a comprehensive direct marketing campaign;
- --------------------
5. See "Market for Prepaid Cards," below.
8
- Match competitive pricing models;
- Implement our business plan more quickly and effectively than our
competitors; and
- Develop national branding that uses affiliate marketing and
related marketing efforts.
Our Value Proposition
- -----------------------
Through established direct marketing methods known to our executive staff, we
intend to propose the following value points to our potential customers:
- Provide access to financial networks for all people: 10% to 13%
of U.S. households, primarily low-to-moderate-income, minorities, and
recent immigrants, do not have bank accounts. (FN 6) This represents
65 million people who do not have access to the purchasing online,
travel reservation system, and the convenience of debit and ATM
networks.
- Safer than Cash: If the card is lost or stolen, the consumer does
not lose the cash. This is important with younger customers and the
elderly.
- Bill Pay: Though online or IVR bill pay, consumers can pay bills
at significantly reduced cost than money orders or retail payment
outlets.
- Payroll Deposit: Consumers can have their payroll checks deposits
made directly to the card at no cost. This eliminates the typical 3%
rate check cashing services offer to the unbanked and the underserved.
- Access to cash via the worldwide ATM Network: Access to cash
without the hassle of check cashing services 24/7.
- Consumer Recourse: Cash has no recourse. When a consumer wants to
return the product when cash is involved they are at the mercy of the
retailer for a refund. Leveraging the VISA/MasterCard/Discover
associations, the consumer has alternative recourse for refunds.
- Easy Approval: No credit check, no employment necessary, only
need valid ID for approval. People with credit and banking problems.
- Send Money To Anyone: Using our remittance services, customers
can send money to any person.
Marketing Tools
- ----------------
We intend to directly market our prepaid cards using these traditional and
non-traditional means:
- Direct Radio and television to web (sending customers to the
internet to order)
- Direct Radio and television to call centers (sending customers to
telephones)
- Email campaigns to managed opt-in lists of individuals known to
have credit issues and or in need of a credit card.
- --------------------
6. "Sizing the Market," US Banker, August 1, 2006.FDIC Chairman Don Powell
9
- Affiliate networks including banner, contextual, search engine
optimizations
- Pay-per-click (PPC) and Search Engine Marketing (SEM) campaigns
- Direct mail to web and call centers
Competitive Advantages
- -----------------------
Several companies have a meaningful presence in the prepaid card industry.
However, they do not have any significant traction in the direct response or
media markets. Their presence extends only to the Internet and an occasional TV
ad with little air time. Some of our competitors include: All Access (Net
Spend), Capital One, Vision Premier, Rush Card, Western Union, Account Now, and
Wired.
There are numerous other prepaid card programs. Most are focused on the
internet as a main strategy of application and enrollment. We believe this
creates a competitive advantage for the Company and allows us to truly leverage
our marketing skills to exploit a more dynamic marketing strategy, including in
the areas of direct response and other media markets.
Marketing Technology and Infrastructure
Through our operating subsidiary, we have a non-exclusive right to BIG software
and hardware technology housed at Equinix facility (http://www.equinix.com/).
BIG's technology foundation is capable of handling more than 250,000 unique
visitors daily through scalable platforms using Microsoft's SQLServer,
multi-redundant databases, web servers, and routers. All technology is highly
customizable allowing unlimited number of web sites access to common databases
while tracking unlimited marketing campaigns. For compensation of the
non-exclusive use of this hardware and software we will pay approximately $1,450
a month to Equinox and $100 a month to Limelight for the hosting of this
hardware and software on a month to month basis. We will also pay for any
software or hardware modifications it requests.
The hardware and software infrastructure we will be using cost BIG approximately
$350,000 to develop and maintain. This state-of-the-art marketing system allows
us to release multiple websites and track visitors' performance from multiple
marketing URLs and channels. Our operating subsidiary currently owns over 400
website URLs that can be run all at the same time with this system. Through
minute by minute reporting, BMG can tailor marketing and focus on key geographic
using internet, print, radio, and television.
Market for Prepaid Cards
Timing to enter the prepaid card market is excellent as the market is just
becoming established. (FN 7) Major obstacles have prevented market penetration
due to problems with reloading cards, inconsistent pricing strategies, and lack
of marketing knowledge for the demographic. (FN 8) A recent survey stated the
75% of the customers cited "ease of reload" as their number one concern for a
prepaid card. (FN 9)
- --------------------
7. "The Race is On in Prepaid" - Edgar, Dunn, and Company, INSIGHT Volume 24,
Sept. 2007
8. "The Race is On in Prepaid" - Edgar, Dunn, and Company, INSIGHT Volume 24,
Sept. 2007
9. Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007
10
However, based on the momentum of the reload network, the successful penetration
of Green Dot into major retail outlets and the successful alignment of
MasterCard with Green Dot, we believe the major obstacle to prepaid card market
adoption is cleared and the prepaid card market is finally ready to explode.
The demand for prepaid cards has increased dramatically over the past three
years. Independent market data indicates that there is a need for prepaid cards
for about 65 million customers. Customer demographics are persons:
- With poor or no credit;
- With a history of poor checking account management;
- Who pay bills through cashiers' checks and other store front outlets;
- Who use check cashing services; and
- Who may have companions needing transfer of funds to other
countries. (FN 10)
According to Aite Group, U.S. demand is expected to reach over $178 billion in
transaction dollars over the next three years. Recognizing this need caused us
to increase our presence to take advantage of this growth. The prepaid market is
growing at a rapid rate.
According to Aite Group, U.S. demand is expected to reach over $178 billion in
transaction dollars over the next three years. Recognizing this need caused us
to increase our presence to take advantage of this growth. The prepaid market is
growing at a rapid rate.
Green Dot's Effect on the Market
- -------------------------------------
Critical to the successful implementation of the prepaid card market is the
availability to reload the prepaid cards. Prior to early 2007, reloading of
prepaid cards was difficult and expensive. However, with recent success of
Green Dot, that has changed.
The Green Dot MoneyPak(R) is a safe, affordable way of turning cash into a
digital form of payment. It is the leading product for loading cash onto
prepaid cards, and can be used to make payments and add cash to accounts.
Available at over 50,000 retailers nationwide, MoneyPak is a reload and payment
solution that empowers consumers who don't use conventional banking and credit
card systems with electronic cash payment options. Consumers can purchase a
MoneyPak for the suggested retail price of $4.95 or less at any Green Dot
retailer location.
There can be no assurance, however, that the growth will continue at the present
rate, or at all, and the demand for our prepaid cards may not keep up with
increases in supply, in which case we may face heightened competition and be
unable to sell sufficient quantities of our cards to maintain our volume and
profit margin.
Industry Market Size
- ----------------------
The sale and use of prepaid general use cards has increased dramatically over
the past 5 years and we believe the market size to be 65 million people. We
believe based on market data(FN 11) the market for prepaid cards transactions
will raise from 4.5 billion in 2007 to 7.0 billion by 2010. (FN 12)
- --------------------
10. "General-Use Prepaid Cards: The Path to Gaining Mainstream Acceptance" -
James C. McGrath Corresponding author, Payment Cards Center, Federal
Reserve Bank of Philadelphia - March, 2007
11. ISOMetrics - The Green Sheet August 13, 2007. The Aite Group,
www.aitegroup.com.
11
It has also been estimated that the value of all prepaid card transactions in
the United States will increase from $113 billion in 2007 to $178 billion in
2010.
[GRAPH OF CARD TRANSACTIONS OMITTED HERE BUT INCLUDED IN THE PDF VERSION]
Market Demographic
- ------------------
We believe there are:
- - 65 million U.S. consumers who are unbanked or underbanked.
- - 46 percent of unbanked consumers in the U.S. are African American.
- - 34 percent of unbanked consumers in the U.S. are Hispanic or other.
- - 14 percent of unbanked consumers in the U.S. are Caucasian.
- - 32 percent of unbanked consumers in the U.S. are immigrants. (FN 13)
[GRAPHS OF UNBANKED CONSUMERS OMITTED HERE BUT INCLUDED IN THE PDF VERSION]
The national average for bounced-check fees has reached $27.40. On average,
banks charge $1.25 for using an out-of-network ATM. One-third of all consumer
purchases in the United States are made through debit cards. (FN 14)
Consumers that utilize money service businesses (check cashing, Moneygram,
Western Union and the like) for financial services will generally pay higher
fees when compared with customers of traditional financial institutions. For
example, a product cost comparison estimated the annual cost of a basic bank
account to be $79 compared to total annual fees of $246 when using a check
cashing outlet. (FN 15)
- --------------------
12. ISOMetrics - The Green Sheet August 13, 2007. The Aite Group,
www.aitegroup.com.
13. "The Power of Experience in Understanding the Underbanked Market" - Center
for Financial Services Innovation, July 2007.
14. BankRate.com
15. Federal Reserve Bank of Kansas City - "Strategies for Banking the Unbanked:
How Banks are Overcoming Entrance Barriers" - January 2006.
12
Economic Outlook
- -----------------
The economic outlook for the US economy does not reflect well on the common
citizen. According to the Wachovia Economic Group Monthly Outlook report for May
2008, the forecast is not good, stating, "Private domestic demand has already
fallen more than it did in the 2001 recession and will likely fall more this
year than any other time since the deep 1981-82 recession." With the US economy
heavily dependent on domestic spending, our prospects for a rapid recovery are
slim. Gasoline and food prices continue to spike and put considerable downward
pressure on the average family income.
We believe the downturn in the economy will increase the number of underbanked
persons in the US over the next three years, in the following way:
- Fewer dollars will be in consumers' pockets. Living paycheck to
paycheck, there is no room for mistakes - no savings to buffer errors
in banking.
- Overdrafts of checking accounts will occur. The banks, with
little compassion in their current financial crisis, are not likely to
dismiss overdraft fees. Consumers with no money to cover the overdrawn
accounts will walk away from the banks.
- Banking policies will force more into underbanked status. The
consumer, after walking away from the overdrafted account, is placed
in the Chex System. Unless the consumer immediately corrects the
situation, the consumer will not be able to secure a direct deposit
account for 3 years. They are now "underbanked".
Market Obstacles
- -----------------
The key barriers to entry to this market are twofold: education and trust. Key
ethnic and disenfranchised groups are not aware of the process and the security
of a general-purpose prepaid card. Acceptance of the new way of handling money
is critical, and education through continuous marketing touch points is
mandatory to successfully penetrate and retain this market.
Competition
- -----------
With an estimated 5% to 9% market penetration, the prepaid general use card has
no clear performers. Current active prepaid cards include:
- AccountNow
- RushCard
- All Access
- Capital One
- Vision VISA Prepaid Card
- Western Union Prepaid Card
We believe our current position, highly focused technology foundation, and
exceptional marketing skills will set us apart from other competitors.
13
OPERATIONS
Operational Partnerships
- -------------------------
Operationally, there are four key components we must have to issue prepaid
cards. They are:
1. Issuing bank
2. Card Association (MaterCard and/or Visa)
3. Processor
4. Manufacturer/printer
Issuing Bank: Merchant Processing International, Inc. DBA Bank Freedom ("Bank
Freedom"), acquired an issuing bank on November 19, 2007 through Meta Payment
Systems. Through our relationship with Bank Freedom, we received approval to
issue cards from MetaBank on November 19, 2007,
Card Associations: Bank Freedom obtained approval from MasterCard in December
2007 to issue the Bank Freedom Prepaid MasterCard (R) Card.
Processor: The second piece of the card issuing equation is the processor. A
processor is a company that connects to the various networks (Visa, MasterCard,
Discover, STAR, Cirrus, etc.) and handles the electronic transactions. In most
cases, they also provide services such as customer care (to the end user), IVR,
and web based services for balance inquiries, dispute resolution, replacement
cards, and other support issues.
Manufacturer: The card manufacturer is the company that prints, embosses and
delivers the cards to new cardholders. This company relationship is strictly a
volume/pricing decision. That is, selection of a manufacturing company will be
based on reputation, volume and the best possible pricing we can secure.
In-House Operations
- --------------------
Our operations will consist of the following major groups. They are:
Sales and Marketing: To acquire customers, we will engage in an aggressive
marketing campaign to drive prospects to web sites, call centers, mail order,
and/or automated voice response systems to order their prepaid card. To date
our marketing campaign has proven much more successful than anticipated.
Activation: Critical to our success is the activation and initial loading of
the card. A separate customer service marketing effort will be established to
increase activations and initial loading.
Secondary Marketing: Another critical operation is the persistent touch process
we must perform to remind the customers to use their card (reload, ATM, pay
bills, etc). This revenue generating group is critical to ongoing
profitability.
14
Customer Service: The prepaid card market will require some hand-holding for
new customers. Issues will range from stolen cards to "why was I charged ". We
believe this department must operate efficiently and address the "pre-sale"
questions effectively.
Technology: Infrastructure is absolutely critical. The technology used by
Marketing for the acquisition of new customers must be proven and well
established. With the potential of over 1,000,000 unique prospects visiting our
prepaid card sites a month, we must have mission critical technology to support
this level of volume. (FN 16)
OTHER MATTERS
Employees
- ---------
Not including our executive officers, Prepaid Card Holdings, Inc. currently has
no employees. Berman Marketing Group, a wholly owned subsidiary of the Company,
has 8 full time employees and 7 part time employees. Bank Freedom, Inc., a
wholly owned subsidiary of the Company, has 3 full time employees. We believe
our relationship with our employees is good.
Research and Development
- --------------------------
During the last two full fiscal years, we have not engaged in any research and
development activities. In the event that we undertake research and development
activities in the future, the costs of those efforts will not be bourn directly
by our consumers.
Intellectual Property
- ----------------------
We have applied for trademarks for "Bank Freedom", "Bank Freedom Card", and "a
card for everyone".
Regulation
- ----------
Open loop prepaid cards are subject to several forms of regulation. The most
notable of these regulations include Regulation E, the Electronics Funds
Transfer Act; the Anti-money Laundering and Bank Secrecy Act; the customer
identification program of the Patriot Act; customer security and privacy
provisions of the Gramm Leach Bylie act; and the funds availability requirement
of Regulation CC.
As open loop prepaid cards are essentially bank accounts, we anticipate that our
business will continue to be heavily regulated. Although we have extensive
experience in this area, and we have taken the necessary steps to comply with
regulations, compliance can represent a costly expense and there is no assurance
that the steps we have taken and will take will be sufficient to
- --------------------
16. BANK FREEDOM current uses highly effective technology located in Equinix
downtown Network Operations Center. We deploy multiple, redundant web
servers, routers, switches, database servers, and hot-swappable RAID level
5 disk arrays capably of handling many hundreds of thousands of unique
visitors a day (which is equal to systems deployed by Fortune 500
companies).
15
prevent adverse regulatory action. If we are unable to successfully comply with
all relevant regulation, it could materially affect our business.
We currently produce no product and conduct no activity that is subject to
environmental laws. All manufacturing is undertaken by a third party.
Nevertheless, it is possible that our activities could fall within the ambit of
environmental regulation in the future. If so, compliance with environmental
laws could become a significant cost, and could materially affect our business.
ITEM 1A. RISK FACTORS.
The Company faces a number of risks and uncertainties which in some cases also
represent opportunities for its business.
RISK FACTORS CONCERNING OUR BUSINESS AND OPERATIONS:
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT FOR INVESTORS
TO PREDICT OUR FUTURE PERFORMANCE BASED ON OUR CURRENT OPERATIONS.
BMG, our operating business, was organized February 23, 2007, and since
inception has spent the majority of its time developing its business plan. The
Company accordingly has a limited operating history, which may not be a reliable
indicator of our future performance. The company will not realize profitability
unless it can successfully implement its plan of operation.
WE MAY NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON
ACCEPTABLE TERMS. IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, AS NEEDED, THE
FUTURE GROWTH OF OUR BUSINESS AND OPERATIONS WOULD BE SEVERELY LIMITED.
Our plan of operation requires substantial capital investment. Our future
capital requirements, however, depend on a number of factors, including our
ability to expand into the prepaid card market and to establish strategic
relationships that enable us to market our product. Our ability to implement
our plan of operation will depend upon our ability to raise additional capital,
possibly through the issuance of long-term or short-term indebtedness or the
issuance of our equity securities in private or public transactions.
If we raise additional capital through the issuance of debt, this will result in
increased interest expense. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage ownership of the
Company held by existing shareholders will be reduced and those shareholders may
experience significant dilution. In addition, new securities may contain
rights, preferences or privileges that are senior to those of our common stock.
There can be no assurance that acceptable financing necessary to implement our
plan of operation can be obtained on suitable terms, if at all. Our ability to
develop our business would suffer if we are unable to raise the additional funds
on acceptable terms, which would have the effect of limiting our ability to
increase our revenues or possibly attain profitable operations in the future.
16
WE PLAN TO EXPAND OUR BUSINESS INTO A NEW PRODUCT LINE WHERE WE HAVE SOME
RELATED EXPERIENCE BUT NO DIRECT EXPERIENCE, WHICH COULD AFFECT OUR ABILITY TO
MARKET OUR PRODUCT SUCCESSFULLY.
Our management is experienced in the Credit Card Processing industry, and has a
great amount of experience and success in this and other marketing industries.
Although this experience and success suggests the ability to roll out our new
product, prepaid cards, our previous experience and success does not assure
success in this new industry. If we are unable to successfully expand into this
new market, it could materially adversely affect the performance of the Company.
WE DEPEND ON KEY EMPLOYEES AND PERSONNEL TO OPERATE OUR BUSINESS, WHICH COULD
ADVERSELY AFFECT THE COMPANY'S ABILITY TO OPERATE IF WE ARE UNABLE TO RETAIN OR
REPLACE THESE PERSONS.
Our future success is largely dependent upon its existing management team,
including Bruce Berman, our Chief Executive Officer, and Robert Christiansen,
our Vice President. The loss of one or more of these officers or directors
through injury, death or termination of employment could result in the
investment of significant time and resources for recruiting and replacement. In
addition, there is no assurance that we will find the right mix of talent and
experience to replace our existing team. There is also no assurance that as we
grow, the existing team can successfully manage the growth of the Company or
that we can attract the new talent that will be necessary to run the Company at
a high level.
THE NATURE OF OUR PRODUCT MAY MAKE OUR CUSTOMERS VULNERABLE TO IDENTITY THEFT
AND OTHER TYPES OF FRAUD, WHICH COULD SUBJECT THE COMPANY TO COSTLY LEGAL ISSUES
AND A DIMINISHED LEVEL OF CUSTOMER TRUST.
Like credit cards, prepaid cards such as debit and ATM cards carry an inherent
risk of identity theft and other fraud. In addition, a recent presentation by a
Kansas City Federal Reserve Board Member ranked prepaid cards as "the perfect
storm" for money laundering.
Although management has extensive experience in dealing with these issues in the
Credit Card Processing industry, there can be no assurance that this experience
will prevent our customers from such fraud. Management believes that while an
amount of fraud is unavoidable, through extensive controls and vigilance we can
minimize this risk to what the industry considers an appropriate level. If we
cannot maintain fraud at minimal levels, it could expose the Company to legal
action which would cost the Company time, manpower and money. It could also
reduce the level of trust that we have developed with our customers, and
compromise our efforts to develop our brand.
WE FACE COMPETITION FROM SEVERAL SOURCES, WHICH MAY MAKE IT MORE DIFFICULT TO
ENTER NEW THE PREPAID CARD MARKET.
Management believes that the prepaid card industry has only penetrated less than
9% of its potential market, and has plenty of room for the Company to enter and
compete effectively. Nevertheless, we have several direct competitors in the
prepaid card industry. Management believes that the Company believes it has a
competitive advantage with these direct competitors
17
because none of them have created a dominant market share, and most have
restricted their marketing efforts to the internet and short television ads.
In addition, we compete with several alternatives to prepaid cards, including
credit cards, bank accounts, money service bureaus (i.e. Western Union,
Moneygram), and so forth. Management believes that the Company has a
competitive advantage over these indirect competitors because of our unique
combination of target demographic and product advantages.
Although management believes that we will be able to effectively enter the
prepaid card market and develop our brand, there is no assurance that we will be
able to successfully compete with these competitors, and no assurance that there
will not be new entrants to the market that impair our ability to compete.
Accordingly, if we are unable to adequately separate ourselves from these
sources of competition, it could materially adversely affect our business.
RISK FACTORS CONCERNING INVESTMENT IN OUR COMPANY:
THERE IS ONLY A LIMITED PUBLIC MARKET FOR OUR SHARES, AND IF AN ACTIVE MARKET
DOES NOT DEVELOP, INVESTORS MAY HAVE DIFFICULTY SELLING THEIR SHARES.
There is a limited public market for our common stock. We cannot predict the
extent to which investor interest in us will lead to the development of an
active trading market or how liquid that trading market might become. If a
trading market does not develop or is not sustained, it may be difficult for
investors to sell shares of our common stock at a price that is attractive. As
a result, an investment in our common stock may be illiquid and investors may
not be able to liquidate their investment readily or at all when he/she desires
to sell.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. The SEC generally
defines "penny stock" to be any equity security that has a market price less
than $5.00 per share, subject to exceptions.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors, and may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
18
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales of our common stock in the public market could lower the market price of
our common stock. Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable or at all.
ITEM 2. FINANCIAL INFORMATION
Forward Looking Statements: Statements about our future expectations
are "forward-looking statements" within the meaning of applicable Federal
Securities Laws, and are not guarantees of future performance. When used
herein, the words "may," "will," "should," "anticipate," "believe,"
"appear," "intend," "plan," "expect," "estimate," "approximate," and
similar expressions are intended to identify such forward-looking
statements. These statements involve risks and uncertainties inherent in
our business, including those set forth under the caption "Risk Factors,"
in this Disclosure Statement, and are subject to change at any time. Our
actual results could differ materially from these forward-looking
statements. We undertake no obligation to update publicly any
forward-looking statement.
This Management's Discussion and Analysis or Plan of Operation should be read in
conjunction with the following financial statements included in this Form 10
(the "Financial Statements):
- Prepaid Card Holdings, Inc. unaudited financial statements for
the quarter ended March 31, 2008;
- Prepaid Card Holdings, Inc. audited financial statements for the
years ended December 31, 2006 and 2007;
- Prepaid Card Holdings, Inc. unaudited Pro-Forma financial
statements for the year ended December 31, 2007; and
- Merchant Processing International, Inc. dba Bank Freedom audited
financial statements for the year ended December 31, 2007.
The financial statements have been prepared in accordance with generally
accepted accounting policies in the United States ("GAAP"). Except as otherwise
disclosed, all dollar figures included therein and in the following management
discussion and analysis ("MD&A") are quoted in United States dollars.
PLAN OF OPERATION
The Company's two most recent full fiscal years have had no revenue and
represent a dormant state of the Company. In 2007, the Company acquired Berman
Marketing Group, Inc. and the Company changed its name to Berman Holdings, Inc.
As of March 31, 2008, the Company had begun operations but had not realized any
revenues from operations.
19
The following is a discussion of the Company's plan of operation over the next
twelve months, including a discussion of cash requirements and efforts currently
underway to initiate the Company's plan. See the Company's Description of
Business, above, for a more detailed discussion of the Company's business
strategy and planned operations.
Business Plan
Through our operating subsidiaries, Berman Marketing Group, Inc. ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom"), we
are in the process of entering the prepaid general use debit, ATM, Point of Sale
("POS") and signature-based VISA, MasterCard, and Discover card market. Our
primary target audience is an estimated 65 million unbanked and underbanked
individuals in the United States
We intend to market and issue various prepaid cards to consumers, and to derive
revenues through fees charged to the cardholders. The fees may include, among
others, bill pay fees, ATM transaction fees, and monthly maintenance fees.
As of December 31, 2007, we had acquired an operating marketing business, BMG,
and had negotiated several partnerships necessary for implementation of our
business plan, including marketing, card production and printing, and vendor
channel development. Our plan for 2008 was to acquire an issuing bank and begin
the marketing and issuance of our first prepaid cards.
In March, 2008, the Company acquired Bank Freedom, which had acquired an issuing
bank in November, 2007. Beginning in March, 2008, the Company began issuance of
the Bank Freedom Prepaid MasterCard (R) Card. Our plan for the remainder of 2008
is to continue to develop the marketing and issuance of the Bank Freedom Prepaid
MasterCard, to begin issuance of Spanish version of the Bank Freedom Prepaid
MasterCard, and to potentially introduce additional Bank Freedom cards
associated with other card associations.
The Company does not anticipate posting a net profit for 2008 as it ramps up its
planned marketing campaigns for customer acquisition. Significant revenues are
not anticipated to be immediately recognized as card usage and integration into
customers' lifestyles may take several months. In addition, the Company
anticipates significant startup costs involved with building the prepaid card
brand which could have an impact on the Company's liquidity.
Cash Requirements
As of December 31, 2007, the Company had incurred $723,692 in expenses and had
had no revenues. Our ability to initiate our plan of operations and continue as
a going concern is dependent on our ability to raise capital.
In November, 2007, and January, 2008, the Company raised approximately
$1,500,000 in two private offerings, before costs. In addition, we are
currently seeking $3,000,000 in additional financing, and we may be required to
seek additional funding.
20
We hope to raise sufficient capital to finance marketing programs to gain market
share. We believe the cost of marketing general purpose prepaid debit cards
will increase as more competitors enter the market. These new competitive
forces will increase media costs on television and radio.
Significant Employee Changes
In 2007, the Company acquired BMG from Bruce Berman in consideration for
majority control of the Company. Following the acquisition, Mr. Berman became
president and sole director of the Company. Since then, the Company has hired a
Chief Operating Officer and a Vice President of Finance, but has hired no other
employees.
Following the acquisition of BMG and Bank Freedom, the Company, as consolidated
with both of its subsidiaries, now has a total of 21 employees, including 14
full time employees and 7 part time employees. Of the full time employees,
three are executive officers of the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The company has no off-balance sheet arrangements.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company currently operates at an office located 18500 Von Karman Suite 530,
Irvine, CA 92612. The office is in good condition.
BMG, the Company's wholly owned operating subsidiary, is renting this space on a
sublease from BIG under a lease from The Irvine Company. Within our Irvine
location are desktop computers and office equipment and for approximately 24
staff members.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows the beneficial ownership of our common stock as of May
9, 2008. The table shows the amount of shares owned by:
(1) each person known to us who owns beneficially more than five
percent of the outstanding shares of any class of the Company's stock,
based on the number of shares outstanding as of May 9, 2008;
(2) each of the Company's Directors and Executive Officers; and
(3) all of its Directors and Executive Officers as a group.
The percentage of shares owned is based on 516,366,390 shares being outstanding
as of May 9, 2008. Where the beneficially owned shares of any individual or
group in the following table includes any options, warrants, or other rights to
purchase shares in the Company's stock, the
21
percentage of shares owned includes such shares as if the right to purchase had
been duly exercised.
AMOUNT OF SHARES PERCENT OF SHARES
IDENTITY OF BENEFICIALLY BENEFICIALLY
PERSON OR GROUP OWNED OWNED CLASS
------------------- ---------------- ------------------ ------
Bruce Berman
CEO and Chairman 403,575,000 78.2% Common
------------------- ---------------- ------------------ ------
Robert Christiansen
COO and Director 127,500,0001 19.8% Common
------------------- ---------------- ------------------ ------
John Weber, Jr.
VP, Finance 412,5002 Less than 1% Common
------------------- ---------------- ------------------ ------
All Directors and
Officers as a Group 446,487,500 86.4% Common
------------------- ---------------- ------------------ ------
(1) Includes 42,500,000 shares and options to purchase up to 85,000,000 shares
held by Mr. Berman. Mr. Berman had issued an option to Mr. Christiansen to
purchase up to 127,500,000 shares of his stock on the following schedule: (a)
42,500,000 shares once the Company has 30,000 activated cards (these options
were exercised on May 27, 2008); (b) an additional 42,500,000 shares once the
Company has 70,000 issued cards; and (c) an additional 42,500,000 shares once
the company has 120,000 issued cards. Mr. Christiansen may exercise those
options upon reaching those milestones upon payment to Mr. Berman of an exercise
price of $.0001 per share for the options.
(2) Mr. Weber was issued a warrant to purchase 5,000,000 shares of the Company's
common stock, vested equally over three years beginning in May, 2009, at an
exercise price of $0.075. The warrants terminate immediately upon termination
of his employment for cause, and 6 months after termination of his employment
for any other reason. No right has currently vested to purchase shares pursuant
this warrant, and none will vest within the next 60 days.
BENEFICIAL OWNERSHIP OF SECURITIES: Pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, involving the determination of beneficial owners of
securities, a beneficial owner of securities is person who directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise has, or shares, voting power and/or investment power with respect to
the securities, and any person who has the right to acquire beneficial ownership
of the security within sixty days through means including the exercise of any
option, warrant or conversion of a security.
22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
DIRECTOR AND EXECUTIVE OFFICER SUMMARY
The following table sets forth the names, ages, and principal offices and
positions of our current directors, executive officers, and persons we consider
to be significant employees. The Board of Directors elects our executive
officers annually. Our directors serve one-year terms or until their successors
are elected, qualified and accept their positions. The executive officers serve
terms of one year or until their death, resignation or removal by the Board of
Directors. There are no family relationships or understandings between any of
the directors and executive officers. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.
NAME OF DIRECTOR OR OFFICER AGE POSITION
--------------------------- --- ---------------------------------------
Chief Executive Officer and
Bruce Berman 50 Chairman of the Board of Directors
Robert Christiansen 46 Chief Operating Officer and Director
Vice President, Finance
John Weber, Jr. 44 (Principal Financial Officer)
Vice President, Compliance for
Marc De La Cruz 51 Bank Freedom
Vice President, Customer Care for
Ryan Guenthart 29 Bank Freedom
Vice President, Internet Marketing for
Rick Galasieski 33 Berman Marketing Group, Inc.
EXECUTIVE OFFICER AND DIRECTOR BIOS
BRUCE BERMAN: Chief Executive Officer and Chairman of the Board of Directors
Mr. Berman was nominated by Sprint(R) for the Ernst & Young "Entrepreneur of the
Year Award" for a technology incubator he founded in 1999 and took public in
2000. Mr. Berman has numerous successful entrepreneurial ventures throughout his
30 year career. At the age of 23, he started his first venture which was
financing business startups. In the mid 1980's before he was 30, he had a vision
of bringing wind energy to California. Not only was he a co-founder of the San
Gorgonio Wind Energy Association, he also co-founded or purchased several
companies
23
within the industry including a NASD licensed broker dealer, a licensed
construction company and a manufacturing facility which in a few short years
employed over 100 staff.
Mr. Berman has beneficially owned 50% or more of two NASD licensed broker
dealers. In that capacity as well as a corporate officer and as a consultant to
Mr. Berman has been involved in the capital-raising for several companies and
their ultimate public status.
Recently, Mr. Berman is the author of the Aggressive Wealth(R) financial
empowerment program, a program marketed to a demographic similar to that of Bank
Freedom. It is estimated that Mr. Berman has over 3,000,000 Financial
Empowerment CD's in circulation. He is also the author of the book, "I Got
Here. You Can Too!"(R), a book on how to start, fund, and run companies that
has approximately 500,000 copies in circulation. Mr. Berman continues to
demonstrate his skills at direct marketing and building businesses.
ROBERT CHRISTIANSEN: Chief Operating Officer and Director
Mr. Christiansen is a 25-year veteran of the technology industry. Prior to
joining Berman Investment Group in June of 2006, Mr. Christiansen operated
several successful Internet retail operations (as both owner and consultant)
from 2002 to 2006. In 1998, Mr. Christiansen launched the Southern California
operations of All Bases Covered, Inc, a professional consulting company focused
on small business technology services. Mr. Christiansen grew the western region
of All Bases Covered from 10 to over 400 employees in 10 western states. From
1986 to 1998, Mr. Christiansen held various positions including VP of Consulting
Services for Artios Corporation, a technology provider for then international
paper industry.
JOHN WEBER, JR.: Vice President, Finance
Mr. Weber joined the Company on May, 26, 2008. From 2002 until he joined the
Company, Mr. Weber served as a Corporate Auditor / Investigator for Boeing. At
Boeing, he focused his efforts on financial reporting compliance, working with
various segments of the company and both the Law and the Ethics divisions to
provide assessments of risk, financial controls, and the effectiveness of the
corporate governance of the company. In particular, he had spent much of his
time at Boeing working specifically with compliance with the requirements of
Sarbanes-Oxley, including creating and monitoring Boeing's internal controls
over financial reporting, and verifying the truth and accuracy of financial
statement assertions. He also has extensive experience in the preparation of
public company financial statements, including forecasts.
Mr. Weber received a Masters of Business Administration in Finance from
Pepperdine University, and a Bachelor of Business Administration in Accounting
from Gonzaga University. He is a Certified Public Accountant in the State of
California.
24
OTHER SIGNIFICANT EMPLOYEES
In addition to the above listed Executive Officers and Directors, we consider
the following non-executive officers to be instrumental to the conduct of our
business:
MARC DE LA CRUZ: Vice President, Compliance for Bank Freedom
Mr. De La Cruz has 25 years of experience in the financial markets and
compliance. From 1983 to 1997 he worked in local government for the county of
Los Angeles as a housing compliance officer and in the city of Glendale as an
analyst. In 1999, his career focus shifted to the financial service markets
where he went to work for Washington Mutual Bank. At Washington Mutual, Mr. De
La Cruz held the position of Senior Financial Analyst and was responsible for
maintaining up to date knowledge of regulatory issues including: Patriot Act,
CIP, ECOA, Anti-Money Laundering, OFAC and FinCen monitoring, HMDA and Truth in
Lending. Since 2006, Mr. De La Cruz has been consulting with Southern California
banks and companies, which included senior AML/BSA positions for Union Bank,
First Vietnamese American Bank, and AML Solutions. He received a BA in Business
Administration from California State University at Los Angeles. He completed the
Identity Theft Red Flags Program in February, 2008. He completed California
Bankers Association Compliance School in June, 2007 and Washington Mutual
Corporate Commercial Credit Program in October, 2002.
RYAN GUENTHART: Vice President, Customer Care for Bank Freedom
Mr. Guenthart joined Bank Freedom following its acquisition from Mr. Berman. He
has served as Vice President of Customer Care for Berman Investment Group, LLC
("BIG"), a publisher and marketer of financial empowerment books and CDs, from
2004 to 2008. Starting as BIG's first Customer Care agent, Mr. Guenthart built a
Customer Care division from the ground up to a Customer Care organization
servicing approximately 500,000 customers and averaging 10,000 calls a month.
The customers he serviced are very similar to Bank Freedom's customer
demographic. He was responsible for writing and implementing Customer Care
scripts, policies, and procedures, and monitoring agents' performance. He
assisted the company in writing the design specifications of its advanced
software development tracking and fraud prevention system. He established an
outsourced customer care division in India, reducing costs while delivering 24/7
high quality customer care to a highly vocal demographic. Besides handling
legitimate customers, Mr. Guenthart is experienced in early warning fraud
detection. While administering his duties for BIG, he exposed a large
international fraud scheme involving thousands of stolen credit cards and
identities.
RICK GALASIESKI: Vice President, Internet Marketing for Berman Marketing Group,
Inc.
Rick Galasieski serves as the Vice President of Internet Marketing for Berman
Marketing Group, Inc. He is an experienced executive who has been involved with
launching, operating, and marketing numerous internet and technology startup
companies. Mr. Galasieski founded Epic Results, Inc., an interactive internet
marketing firm specializing in driving keyword targeted traffic to web
properties. He co-founded EdgeFocus, Inc., which was acquired by Wireless Logic
Group, a leading supplier of Wi-Fi services to multi-dwelling units across the
25
Southwestern United States. He served as their Vice President of Operations and
Strategic Development and played an instrumental role in the vision and
development of the company and its day-to-day operations.
Prior to EdgeFocus, Inc., Mr. Galasieski co-founded Broadband Digital Group,
Inc. He was instrumental in growing this company from its inception to over 200
employees, which was acquired by Winfire, Inc., and grew to the number six
broadband company in the United States at the time. The company had over 50,000
active DSL subscribers and over 500,000 desktop software clients when the
subscriber base was sold off to the regional bell operating companies. He
received his BS in Marketing from Arizona State University.
ADVISORY BOARD
We are also in the process of establishing an Advisory Board to the Company. We
intend to reserve 5,000,000 warrants to be issued as compensation for the
Advisory Board.
LEGAL AND DISCIPLINARY HISTORY
No officer, director or control person of the Company has been the subject of:
1. A conviction in a criminal proceeding or named as a defendant in a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
2. The entry of an order, judgment, or decree, not subsequently reversed,
suspended or vacated, by a court of competent jurisdiction that permanently
or temporarily enjoined, barred, suspended or otherwise limited such
person's involvement in any type of business, securities, commodities, or
banking activities;
3. A finding or judgment by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission, the Commodity Futures
Trading Commission, or a state securities regulator of a violation of
federal or state securities or commodities law, which finding or judgment
has not been reversed, suspended, or vacated; or
4. The entry of an order by a self-regulatory organization that permanently or
temporarily barred, suspended or otherwise limited such person's
involvement in any type of business or securities activities.
26
ITEM 6. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS
Objectives and Philosophy ofour Executive Compensation Program
- --------------------------------------------------------------------
We do not have a standing compensation committee. Our board of directors as a
whole makes the decisions as to employee benefit programs and officer and
employee compensation. The primary objectives of our executive compensation
programs are to:
- - attract, retain and motivate skilled and knowledgeable individuals;
- - ensure that compensation is aligned with our corporate strategies and
business objectives;
- - promote the achievement of key strategic and financial performance measures
by linking short-term and long-term cash and equity incentives to the
achievement of measurable corporate and individual performance goals; and
- - align executives' incentives with the creation of stockholder value.
To achieve these objectives, our board of directors evaluates our executive
compensation program with the objective of setting compensation at levels they
believe will allow us to attract and retain qualified executives. In addition,
a portion of each executive's overall compensation is tied to key strategic,
financial and operational goals set by our board of directors. We also
generally provide a portion of our executive compensation in the form of options
that vest over time, which we believe helps us retain our executives and align
their interests with those of our stockholders by allowing the executives to
participate in our longer term success as reflected in asset growth and stock
price appreciation.
Named Executive Officers
- --------------------------
The following table identifies our principal executive officer, our principal
financial officer and our most highly paid executive officers, who, for purposes
of this Compensation Disclosure and Analysis only, are referred to herein as the
"named executive officers."
Name Corporate Office
------------------- ---------------------------------------
Bruce Berman Chief Executive Officer
Robert Christiansen Chief Operating Officer
John Weber, Jr. Vice President, Finance
Rick Galasieski Vice President, Internet Marketing, BMG
Components of our Executive Compensation Program
- -----------------------------------------------------
At this time, the primary elements of our executive compensation program are
base salaries and option grant incentive awards, although the board of directors
has the authority to award cash bonuses, benefits and other forms of
compensation as it sees fit.
27
We do not have any formal or informal policy or target for allocating
compensation between short-term and long-term compensation, between cash and
non-cash compensation or among the different forms of non-cash compensation.
Instead, we have determined subjectively on a case-by-case basis the appropriate
level and mix of the various compensation components. Similarly, we do not rely
on benchmarking against our competitors in making compensation related
decisions.
Base salaries
- --------------
Base salaries are used to recognize the experience, skills, knowledge and
responsibilities required of our named executive officers. Base salary, and
other components of compensation, may be evaluated by our board of directors for
adjustment based on an assessment of the individual's performance and
compensation trends in our industry.
Equity awards
- -------------
Our stock option award program is the primary vehicle for offering long-term
incentives to our executives. Our equity awards to executives have typically
been made in the form of warrants. We believe that equity grants in the form of
warrants provide our executives with a direct link to our long-term performance,
create an ownership culture, and align the interests of our executives and our
stockholders.
To date, the Company has issued warrants to Rick Galasieski, Ryan Guenthart, and
John Weber, Jr. to purchase 5,000,000 shares of common stock each. The warrants
will vest annually in three equal installments beginning in May, 2009, at an
exercise price of $0.075, and will terminate immediately upon termination of
employment for cause, and 6 months after termination of employment for any other
reason. We also anticipate reserving 5,000,000 shares for warrants to be issued
to an Advisory Board that we intend to establish, and 5,000,000 shares for
warrants to be issued pursuant to an employee compensation plan.
Cash bonuses
- -------------
Our board of directors has the discretion to award cash bonuses based on our
financial performance and individual objectives. The corporate financial
performance measures (revenues and profits) will be given the greatest weight in
this bonus analysis. We have not yet granted any cash bonuses to any named
executive officer nor have we yet developed any specific individual objectives
while we wait to attain revenue and profitability levels sufficient to undertake
any such bonuses.
Benefits and other compensation
- -------------------------------
Our named executive officers are permitted to participate in such health care,
disability insurance, bonus and other employee benefits plans as may be in
effect with the Company from time to time to the extent the executive is
eligible under the terms of those plans. As of the date of this Registration
Statement, with exception to health care, we have not implemented any such
employee benefit plans. Mr. Berman, Mr. Christiansen, and Mr. Weber's health
care costs are paid by the company.
28
CURRENT LEVELS OF EXECUTIVE COMPENSATION
Summary Annual Salary
- -----------------------
As discussed above, we have agreed to pay the Named Executive Officers an annual
salary. Base salary may be increased from time to time with the approval of the
board of directors. The following table summarizes the agreed annual salary of
each of the named executive officers.
Name Annual Salary
------------------- --------------
Bruce Berman $ 1*
Robert Christiansen $ 120,000
John Weber, Jr. $ 120,000
Rick Galasieski $ 100,000
* Mr.Berman has agreed to defer receiving an annual salary
commensurate with his contributions to the Company until the Company has
reached certain milestones, as more fully described below.
Agreed Compensation
- -------------------
Bruce Berman, Chief Executive Officer - The Company has paid no compensation to
Mr. Berman. Mr. Berman will be paid an annual salary of $1 for his services as
Chief Executive Officer until the earlier of January 2, 2009 or upon the
issuance of 70,000 cards by the Company. Upon reaching that date or milestone,
the Company intends to pay Mr. Berman a salary of $297,500 per year for 2009.
The company will need to negotiate with Mr. Berman for the year 2010 and beyond.
He will be paid no other compensation.
Robert Christiansen, Chief Operating Officer - Mr. Christiansen will be paid an
annual salary of $120,000 for his services as Chief Operating Officer. His
salary will increase to $127,500 when the Company reaches 70,000 cards issued
through January 1, 2010. The company will need to negotiate with Mr.
Christiansen for the year 2010 and beyond. He will be paid no other
compensation.
John Weber, Jr., Vice President, Finance - Mr. Weber will be paid an annual
salary of $120,000 for his services as Vice President of Finance. In addition,
he will also receive warrants to purchase 5,000,000 shares of the Company's
common stock, vested annually in three equal installments beginning in May,
2009, at an exercise price of $0.075. The warrants terminate immediately upon
termination of his employment for cause, and 6 months after termination of his
employment for any other reason.
Rick Galasieski: Vice President, Internet Marketing for Berman Marketing Group,
Inc. - will be paid an annual salary of $100,000 for his services as Vice
President of Internet Marketing for Berman Marketing Group, Inc. In addition, he
will also receive warrants to purchase 5,000,000 shares of the Company's common
stock, vested annually in three equal installments beginning in May, 2009, at an
exercise price of $0.075. The warrants terminate immediately upon termination of
his employment for cause, and 6 months after termination of his employment for
any other reason.
29
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to, or accrued by,
the Company's highest paid executive officers during the fiscal year ended
December 31, 2007. No restricted stock awards, long-term incentive plan payout
or other types of compensation, other than the compensation identified in the
chart below and its accompanying notes, were paid to these executive officers
during that fiscal year. Similar information for the fiscal year ended December
31, 2006 is not included as the Company was dormant for that period.
NAMED ANNUAL ANNUAL OTHER COMPENSATION LONG TERM
EXECUTIVE COMPENSATION COMPENSATION ANNUAL RESTRICTED COMPENSATION LTIP
OFFICER(1)(2) YEAR SALARY ($) BONUS ($) COMPENSATION STOCK OPTIONS PAYOUTS ALL OTHER
- ------------------- ---- ------------- ------------- ------------ ------------ ------------ ------- ---------
Bruce Berman 2007 1 0 0 0 0 0 0
Robert Christiansen 2007 30,000(3) 0 0 0 0 0 0
<FN>
1. This table does not include Mr. Weber because he began his employment on May 26, 2008.
2. This table does not include Mr. Galasieski because he began his employment on January 1, 2008.
3. Mr. Christiansen began his employment in October, 2007. He was paid a pro rata portion of his agreed $120,000 annual salary.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
The following table sets forth information regarding the outstanding warrants
held by our named officers as of June 4, 2008.
OPTION AWARDS
--------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF EQUITY INCENTIVE PLAN AWARDS: OPTION
SECURITIES UNDERLYING SECURITIES UNDERLYING NUMBER OF SECURITIES EXERCISE OPTION
UNEXERCISED OPTIONS UNEXERCISED OPTIONS UNDERLYING UNEXERCISED PRICE EXPIRATION
NAME (#) EXERCISABLE (#) UNEXERCISABLE UNEARNED OPTIONS ($) DATE
--------------------- --------------------- ----------------------------- --------- ----------
John Weber, Jr. - 5,000,000 - 0.075 *
Rick Galasieski - 5,000,000 - 0.075 *
<FN>
*Warrants expire upon termination of employment for cause, or 6 months after termination of employment for any
other reason.
30
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2007
The Company currently does not participate in any equity award plan. During
fiscal 2007, we did not grant any equity awards under any equity award plan.
OPTION EXERCISES FOR FISCAL 2007
During fiscal 2007, none of the named executive officers exercised options.
NONQUALIFIED DEFERRED COMPENSATION
We currently offer no defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified to any of our
employees, including the named executive officers.
COMPENSATION OF DIRECTORS
We intend to use a combination of cash and equity-based compensation to attract
and retain candidates to serve on our board of directors. We do not compensate
directors who are also our employees for their service on our board of
directors. Therefore, Mr. Berman did not receive any compensation for his
service on our board of directors, and we have not provided any compensation to
any member of our Board of Directors for the fiscal year ended December 31,
2007.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a standing Compensation Committee. Our entire board of
directors participated in deliberations concerning executive officer
compensation.
COMPENSATION COMMITTEE REPORT
The board of directors has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K with management and,
based on such review and discussions, the board of directors has recommended
that this Compensation Discussion and Analysis be included in this Registration
Statement on Form 10.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
BERMAN INVESTMENT GROUP LLC
Bruce Berman, the Company's Chief Executive officer, owns Berman Investment
Group LLC ("BIG"). BIG is allowing on a non-exclusive basis Berman Marketing
Group, Inc. ("BMG"), a wholly owned subsidiary of the Company, to use its
hardware, software, Data Base, Business Support Facilities and Equipment In
exchange for appropriate compensation. If something happened to BIG, BMG could
incur substantial costs to reproduce the aforementioned.
31
MERCHANT PROCESSING INTERNATIONAL, INC. DBA BANK FREEDOM
Prior to March 8, 2008, Bruce Berman, the Company's Chief Executive Officer,
owned Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom").
Bank Freedom is a registered Independent Sales Organization ("ISO") with
Columbus Bank and Trust and is authorized by Visa and MasterCard as a merchant
account provider that specializes in all areas of bankcard processing. Bank
Freedom has been approved by a sponsoring bank as well as MasterCard and Visa to
issue prepaid debit cards.
Bank Freedom had an exclusive agreement with BMG to pay BMG 80% of the gross
revenue it receives for all debit card issued. Because of the purchase of MPI,
this agreement is canceled.
Bank Freedom has recently received approval to issue cards from a bank, Visa and
MasterCard. Bank Freedom was also in negotiation stages with companies that
offer the use of their platforms to issue debit cards known as white labeling,
however we have cancelled these negotiations. Bank Freedom has begun marketing
its Bank Freedom Prepaid MasterCard (R) card, and beginning in March, 2008 has
shipped 53,729 cards.
Effective January 25, 2008, the Company entered into an Acquisition and Stock
Purchase Agreement to purchase all 600 shares of Bank Freedom, representing 100%
of the issued and outstanding common stock, from Mr. Berman. In consideration
for the controlling stake in Bank Freedom, the Company issued Mr. Berman
22,500,000 shares of common stock, and executed a note in the amount of
$750,000, payable in monthly installments over two years with a simple interest
rate of 7.25%. This agreement was approved by a majority of disinterested
shareholders of PCH. Following the transaction, the Company filed a dba to do
business as "Bank Freedom." The Company has recently filed in California to
change the name of Merchant Processing International, Inc., dba Bank Freedom to
Bank Freedom, Inc.
LEASED PROPERTY
The Company currently operates at 18500 Von Karman Suite 530, Irvine, CA 92612.
BMG, the Company's wholly owned operating subsidiary, is renting this space on a
sublease from BIG under a lease from The Irvine Company.
DIRECTOR INDEPENDENCE
The Company is not listed on any national exchange, or quoted on any
inter-dealer quotation service, that imposes independence requirements on any
committee of the Company's directors, such as an audit, nominating or
compensation committee. The Company does not have any independent directors on
its Board. The company's Board of Directors consists of Bruce Berman, who is
not independent.
32
ITEM 8. LEGAL PROCEEDINGS.
The company has a dispute with one of its vendors regarding the validity of
approximately $360,000 of services the company was billed for. The company is
currently negotiating with the vendor to resolve the issue.
Other than the foregoing, the Company is not a party to any material legal
proceedings and, to the Company's knowledge, no such proceedings are threatened
or contemplated by any party.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is quoted in United States markets on the PinkSheets,
maintained by PinkSheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." There is no assurance that the common stock
will continue to be traded on the PinkSheets or that any liquidity exists for
our shareholders.
MARKET PRICE
The following table shows the high and low per share price quotations of the
Company's common stock as reported by the PinkSheets for the periods presented.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions, and may not necessarily represent actual transactions. The
PinkSheets market is extremely limited and the prices quoted by brokers are not
a reliable indication of the value of the common stock. The periods presented
represent fiscal quarters, with the fourth quarter of each year ending on
December 31.
The Company acquired its current operating business on October 11, 2007. Prior
to then, the Company's common stock rarely traded and did not reflect any
existing business. As a consequence, pricing prior to such date would not
reflect any real stock transactions or pricing and has been omitted.
HIGH LOW
Fiscal 2007
Fourth Quarter (from October 11) 0.11 0.06
Fiscal 2008
First Quarter 0.17 0.06
Second Quarter (through June 2) 0.13 0.08
As of December 31, 2007, the Company had 500,000,000 shares of common stock
authorized with 456,874,837 shares issued and outstanding, and approximately
4,128,209 freely tradeable shares in the public float. These shares were held
by approximately 250 sharesholders of record and Company estimates by a total of
approximately 290 beneficial shareholders.
33
PENNY STOCK REGULATIONS
Our common stock is quoted in United States markets on the PinkSheets,
maintained by PinkSheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." On May 22, 2008 the last reported sale price
of our common stock was $0.11 per share. As such, the Company's common stock may
be subject to provisions of Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as
the "penny stock rule."
Section 15(g) sets forth certain requirements for transactions in penny stocks,
and Rule 15g-9(d) incorporates the definition of "penny stock" that is found in
Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny stock" to be
any equity security that has a market price less than $5.00 per share, subject
to certain exceptions. As long as the Company's common stock is deemed to be a
penny stock, trading in the shares will be subject to additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors.
DIVIDENDS
The Company has not issued any dividends on the common stock to date, and does
not intend to issue any dividends on the common stock in the near future. We
currently intend to use all profits to further the growth and development of the
Company.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
From February 5 to May 6, 2008, the Company issued 15,000,000 shares, 7,500,000
Class A warrants, and 7,500,000 Class B warrants in connection with the January,
2008 Private Offering. The Class A warrants are convertible into common stock
for 12 months after issuance at an exercise price of $0.10. The Class B
warrants are convertible into common stock for 18 months after issuance at an
exercise price of $0.15. This issuance was completed in accordance with Section
4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
From April 7 to May 8, 2008, the Company issued 1,407,000 shares as finders'
fees in connection with the January, 2008 Private Offering, and 93,000 shares as
finders' fees in connection with the November, 2007 Private Offering. This
issuance was completed in accordance with Section 4(2) of the Securities Act in
an offering without any public offering or distribution. These shares are
restricted securities and include an appropriate restrictive legend.
On May 8, 2008 the Company issued one Convertible Note with a principal amount
of $100,000, to William B. Blundin, an accredited investor. The note is
convertible at 85% of the bid price of the stock on the exercise date, with a
maximum of $0.05, and a minimum of $0.025. In all, the notes can be converted
into a maximum of 4,000,000 shares. In the event the Convertible Note is
converted by the holder or holders, the common stock would be diluted by between
2,000,000 shares and 4,000,000 shares. In connection with the note, the Company
issued Mr. Blundin
34
150,000 shares of Common Stock as an incentive for making the notes. The
Company issued 125,000 of these shares on April 7, 2008 in anticipation of
completing an earlier note that was not completed; with Mr. Blundin's
permission, these shares were applied to the Note of May 8. The remaining 25,000
shares were issued on May 8, 2008. This issuance was completed in accordance
with Section 4(2) of the Securities Act in an offering without any public
offering or distribution. These shares are restricted securities and include an
appropriate restrictive legend.
On May 5, 2008, the Company issued warrants to three employees to purchase
5,000,000 shares each, vested annually in three equal installments beginning in
May, 2009, at an exercise price of $0.075. The warrants terminate immediately
upon termination of employment for cause, and 6 months after termination of
employment for any other reason. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
On April 29, 2008, the Company issued two Convertible Notes with a combined
principal amount of $250,000, to William B. Blundin, an accredited investor.
The notes are convertible at 85% of the bid price of the stock on the exercise
date, with a maximum of $0.05, and a minimum of $0.025. The notes can be
converted into a maximum of 10,000,000 shares. In the event the Convertible
Notes are converted by the holder or holders, the common stock would be diluted
by between 5,000,000 shares and 10,000,000 shares. In connection with the
Notes, the Company issued Mr. Blundin 250,000 shares of Common Stock as an
incentive for making the notes. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
On January 25, 2008, the Company issued 22,500,000 shares to Bruce Berman, the
Company's President, for 100% of the outstanding equity of Merchant Processing
International Inc. This issuance was completed in accordance with Section 4(2)
of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
On January 2, 2008, the Company issued 1,781,250 shares on the conversion of
warrants issued in connection with the November, 2007 Private Offering. This
issuance was completed in accordance with Section 4(2) of the Securities Act in
an offering without any public offering or distribution. These shares are
restricted securities and include an appropriate restrictive legend.
From December 4, 2007 to January 22, 2008, the Company issued 2,155,303 shares
as finders' fees in connection with the November, 2007 Private Offering. This
issuance was completed in accordance with Section 4(2) of the Securities Act in
an offering without any public offering or distribution. These shares are
restricted securities and include an appropriate restrictive legend.
From December 4, 2007 to January 22, 2008, the Company issued 22,500,000 shares,
11,250,000 Class A warrants, and 11,250,000 Class B warrants to various
accredited investors in connection with the Company's November, 2007 Private
Offering. The Class A warrants are convertible into common stock for 12 months
after issuance at an exercise price of $0.05. The Class B
35
warrants are convertible into common stock for 18 months after issuance at an
exercise price of $0.10. This issuance was completed in accordance with Section
4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
On October 11, 2007 the Company issued 425,000,000 shares to Bruce Berman, the
Company's President for 100% of Berman Marketing Group. This issuance was
completed in accordance with Section 4(2) of the Securities Act in an offering
without any public offering or distribution. These shares are restricted
securities and include an appropriate restrictive legend.
On May 17, 2007, Robert K. McBride converted debt owed to him for his salary
into 13,000,000 common shares. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
In 2005 the Company issued a Convertible Note with an original principal amount
of $50,000 to Robert McBride, the Company's former Chief Executive Officer. The
note can be converted into a maximum of 400,000 shares of the Company's common
stock regardless of how many shares of Common Stock are issued or outstanding at
the time of exercise or any interim forward or reverse stock splits or
reorganizations. In the event the Convertible Note is converted by the holder
or holders, the common stock would be diluted by 400,000 shares. This issuance
was completed in accordance with Section 4(2) of the Securities Act in an
offering without any public offering or distribution. The Note would be
considered a restricted security.
ITEM 11. DESCRIPTION OF SECURITIES.
The following sets forth the material terms of the Company's securities.
However, a more detailed description of our securities is contained in the
Company's Articles of Incorporation.
COMMON STOCK
Our Articles of Incorporation authorize the issuance of up to 1,000,000,000
shares of common stock, par value $0.001, after increasing it from 500,000,000
on January 14, 2008. There were 516,366,390 shares of common stock issued and
outstanding as of May 9, 2008.
Holders of our common stock are entitled to one vote per share on all matters to
be voted on by the stockholders. Holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution, or winding up of the Company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding stock.
Holders of our common stock have no preemptive rights to purchase common stock.
There are no conversion or redemption rights or sinking fund provisions with
respect to the common stock. The outstanding shares of common stock are validly
issued, fully paid and non-assessable.
36
NUMBER OF SHARES OUTSTANDING
As of December 31, 2007, the Company had 500,000,000 shares of common stock
authorized with 456,874,837 shares issued and outstanding and approximately
4,128,209 freely tradeable shares in the public float. These shares were held
by approximately 250 sharesholders of record and Company estimates by a total of
approximately 290 beneficial shareholders.
As of December 31, 2006, the Company had 51,000,000 shares of common stock
authorized, 12,529,837 shares issued and outstanding and 4,028,209 freely
tradeable shares in the public float. These shares were held by 238
shareholders of record and the Company estimates by a total of 271 beneficial
shareholders.
As of December 31, 2005, the Company had 51,000,000 shares of common stock
authorized, 12,529,837 shares issued and outstanding of which 4,028,209 were
freely tradeable shares in the public float. These shares were held by 238
shareholders of record and the Company estimates by a total of 271 beneficial
shareholders.
PREFERRED STOCK
Our Articles of Incorporation do not authorize the issuance of Preferred Stock.
There are presently no shares of preferred stock outstanding.
CONVERTIBLE NOTES
In 2005, the Company issued a Convertible Note with an original principal amount
of $50,000 to Robert McBride, the Company's former Chief Executive Officer. The
note can be converted into a maximum of 400,000 shares of the Company's common
stock regardless of how many shares of Common Stock are issued or outstanding at
the time of exercise or any interim forward or reverse stock splits or
reorganizations. In the event the Convertible Note is converted by the holder
or holders, the common stock would be diluted by 400,000 shares.
On April 29, 2008, the Company issued two Convertible Notes with a combined
principal amount of $250,000, and on May 8, 2008 issued one Convertible Note
with a principal amount of $100,000, to William B. Blundin, an accredited
investor. The notes are convertible at 85% of the bid price of the stock on the
exercise date, with a maximum of $0.05, and a minimum of $0.025. In all, the
notes can be converted into a maximum of 14,000,000 shares. In the event the
Convertible Notes are converted by the holder or holders, the common stock would
be diluted by between 7,000,000 shares and 14,000,000 shares.
WARRANTS
The Company completed two private offerings in November, 2007 and January, 2008.
Each of the offerings included Series A and Series B warrants in addition to
shares of common stock. The following table summarizes the warrants currently
outstanding from the Company's November, 2007 and January 2008 private
offerings:
37
Series Outstanding Exercise Price Expiration Date
------ ----------- --------------- ----------------------
A 9,468,750 $ 0.05 January 2, 2009
A 7,500,000 $ 0.10 February-March, 2009
B 11,250,00 $ 0.10 July 2, 2009
B 7,500,000 $ 0.15 August-September, 2009
Prior to exercise, the holders of the warrants will have no rights as
shareholders. The warrants do not contain any cashless exercise option.
In addition, the Company has issued warrants to Rick Galasieski, Ryan Guenthart,
and John Weber, Jr., employees of the Company or its subsidiaries, to purchase
5,000,000 shares of common stock each. The warrants will vest annually in three
equal installments beginning in May, 2009, at an exercise price of $0.075, and
will terminate immediately upon termination of employment for cause, and 6
months after termination of employment for any other reason.
We also anticipate reserving 5,000,000 shares for warrants to be issued to an
Advisory Board that we intend to establish, and 5,000,000 shares for warrants to
be issued pursuant to an employee compensation plan.
No other outstanding options or warrants to purchase shares of Company common
stock.
DIVIDEND POLICY
Holders of the Company's common stock will be entitled to receive cash dividends
when declared by the Board of Directors of the Company, out of funds legally
available for payment thereof. However, if dividends are not declared by the
Board of Directors, no dividends shall be paid. Under Nevada Revised Statutes
Sec. 78.228(2), a corporation is prohibited from paying dividends if the
Company, as a result of paying such dividends, would not be able to pay its
debts as they come due, or if the Company's total liabilities and preferences to
preferred shareholders if any exceed total assets. Any payment of cash
dividends of the Common Stock in the future will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, as well as other factors the Board of
Directors deems relevant.
It is not anticipated that any cash dividends will be paid in the foreseeable
future. While the Company's dividend policy will be based on the operating
results and capital needs of the business, it is anticipated that all earnings,
if any, will be retained to finance the future expansion of the Company's
business. Therefore, prospective investors who anticipate the need for
immediate income by way of cash dividends from their investment should not
purchase the Shares offered.
REPORTS TO STOCKHOLDERS
The Company intends to comply with the periodic reporting requirements of the
Securities Exchange Act of 1934. The Company plans to furnish its stockholders
with an annual report for each fiscal year ending December 31, 2007 containing
financial statements audited by its independent certified public accountants.
38
The SEC maintains an Internet site at www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The public may also read and copy any materials we
file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 (call 1-800-SEC-0330 for information).
TRANSFER AGENT
The transfer agent and registrar for our Common Stock is:
Pacific Stock Transfer Company
500 E. Warm Springs Road, Suite 240
Las Vegas NV 89119
Phone: (702) 361-3033
Fax: (702) 433-1979
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada Revised Statutes ("NRS") Sec. 78.7502 provides, in effect, that any
person made a party to any action by reason of the fact that he is or was a
director, officer, employee or agent of our company may and, in certain cases,
must be indemnified by our company against, in the case of a non-derivative
action, judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees) actually and reasonably incurred by him as a result
of such action; and in the case of a derivative action, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred, if in either type of action he either (1) Is not liable for a breach
of his fiduciary duties to the Company pursuant to NRS 78.138, or (2) acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of our company and in, with respect to any criminal, had
reasonable cause to believe his conduct was lawful. This indemnification does
not apply, in a derivative action, to matters as to which it is adjudged that
the director, officer, employee or agent is liable to our company, unless upon
court order it is determined that, despite such adjudication of liability, but
in view of all the circumstances of the case, he is fairly and reasonably
entitled to indemnification for expenses.
At present, there is no pending litigation or proceeding involving any director
or officer as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director or officer.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set Forth Below.
39
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
As of January 1, 2007, the Company had no operations and had not engaged an
accountant. We appointed Gruber & Company LLC as our certified public auditing
firm on November 12, 2007.
Since engaging them, there have been no disagreements between the Company and
Gruber & Company LLC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope of procedure, which
disagreements, if not resolved to the satisfaction of such firm, would have
caused them to make reference to the subject matter thereof in their report on
the Company's financial statements for such periods.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
Please see the following financial statements set forth below beginning on page
F-1:
- Financial statements for the quarter ended March 31, 2008 (unaudited);
- Financial statements for the years ended December 31, 2007 and
December 31, 2006;
- Pro-Forma financial statements for the year ended December 31, 2007;
and
- Financial statements of Merchant Processing International, Inc.
dba Bank Freedom for the years ended December 31, 2007 and December
31, 2006.
EXHIBITS
3.1 Articles of Incorporation, as amended, of Prepaid Card Holdings, Inc.
3.2 Bylaws of Prepaid Card Holdings, Inc.
10.1 Technology, Data Usage and Facilities Agreement between Berman
Investment Group, LLC and Berman Marketing Group, Inc.
10.2 Prepaid Debit Card Co-Brand Marketing Agreement between Berman Marketing
Group, Inc. and Merchant Processing International, Inc. dated November
25, 2007.
10.3 Consulting Agreement between Berman Investment Group and National Health
Care Alliance dated October12, 2007.
10.4 Card Program Management Agreement between Merchant Processing
International, Inc. and MetaBank, dba Meta payment Systems dated
November 19, 2007
10.5 Electronic Transaction Processing Services Agreement between Merchant
Processing International, Inc. and i2c, Inc. dated November 15, 2007.
10.6 Card Production Service Agreement between Merchant Processing
International, Inc. and EFT Source, Inc. dated December 19, 2007.
10.7 Sponsored Membership Agreement between Merchant Processing
International, Inc. and Green Dot Corporation dated January 10, 2008
10.8 Risk & Information Analytics Agreement between Berman Marketing Group,
Inc. and LexisNexis Risk & Information Analytics Group Inc. dated March
12, 2008
10.9 Web Services Marketplace Usage Agreement between Merchant Processing
International, Inc. and StrikeIron, Inc. dated March 26, 2008.
40
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREPAID CARD HOLDINGS, INC.
(Registrant)
Date: June 9, 2008 By: /s/ Bruce Berman
---------------------- --------------------------
Bruce Berman
Chief Executive Officer
41
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PREPAID CARD HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER
ENDED MARCH 31, 2008 (UNAUDITED)
Consolidated Balance Sheets as at March 31, 2008. ......................F-2
Consolidated Statement of Operations for the quarter
ended March 31, 2008. ................................................F-4
Consolidated Statements of Cash Flows for the quarter
ended March 31, 2008. ................................................F-4
Notes to Financial Statements. .........................................F-5
PREPAID CARD HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2007 AND DECEMBER 31, 2006
Report of Independent Registered Public Accounting Firm. ..............F-11
Consolidated Balance Sheets as at December 31, 2007
and December 31, 2006. ..............................................F-12
Consolidated Statement of Operations for the years ended
December 31, 2007 and December 31, 2006. ............................F-13
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2007 and December 31, 2006. ........F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 2007 and December 31, 2006. ............................F-15
Notes to Financial Statements. ........................................F-16
PREPAID CARD HOLDINGS, INC. PRO-FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2007 (UNAUDITED)
Pro-Forma Balance Sheets as at December 31, 2007. .....................F-21
Pro-Forma Statement of Operations for the year ended
December 31, 2007. ..................................................F-22
Pro-Forma Statement of Changes in Stockholders' Equity
for the year ended December 31, 2007. ...............................F-23
Pro-Forma Statement of Cash Flows as at December 31, 2007. ............F-24
Notes to Financial Statements. ........................................F-25
MERCHANT PROCESSING INTERNATIONAL, INC. DBA BANK FREEDOM FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007
Report of Independent Registered Public Accounting Firm. ..............F-30
Balance Sheets as at December 31, 2007 and December 31, 2006. .........F-31
Statements of Operations for the years ended December 31,
2007 and December 31, 2006. .........................................F-32
Statements of Changes in Stockholders' Equity for the years
ended December 31, 2007 and December 31, 2006. ......................F-33
Statements of Cash Flows for the years ended December 31,
2007 and December 31, 2006. .........................................F-34
Notes to Financial Statements. ........................................F-35
F-1
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
F-2
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008
ASSETS MARCH 31, DECEMBER 31,
Current Assets 2008 2007
------------ --------------
Cash and Cash Equivalents $ 674,076 $ 563,512
Fixed Assets-Net 5,349 -
------------ --------------
Goodwill 732,348 -
Total assets $ 1,411,773 $ 563,512
============ ==============
Liabilities and Stockholders' Equity
Accounts Payable and Accrued Expenses $ 261,785 $ 3,454
Notes Payable-Short Term 187,500 -
------------ --------------
Total Current Liabilities 449,285 3,454
Note Payable-long Term 562,500 -
------------ --------------
Total liabilities 1,011,785 3,454
Stockholders Equity
Common Stock, authorized
1,000,000,000 shares, 509,873,587
and 476,873,587 issued and
outstanding @.001 per share 509,874 476,874
Subscription Receivable - (114,163)
Subscription Payable - -
Additional Paid in Capital 1,445,069 955,569
Deficit Accumulated During
the Development Stage (1,554,955) (758,222)
------------ --------------
Total Stockholders' Equity 399,988 560,058
------------ --------------
Total Liabilities and
Stockholders Equity $ 1,411,773 $ 563,512
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2008
FOR THE THREE MONTHS
MARCH 31,
2008 2007
------------- -----------
Revenues $ 27,260 $ -
Expenses
Sales 291,003 -
Professional Fees 124,907 -
Selling General and Administrative Costs 408,083 -
------------- -----------
Total 823,993 -
Net Loss $ (796,733) $ -
============= ===========
(Loss) per share $ (0.00) $ -
============= ===========
Weighted Average Shares Outstanding 482,313,148 -
============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
QUARTER ENDED MARCH 31, 2008
FOR THE THREE MONTHS
ENDED MARCH 31,
Cash Flows from Operating Activities: 2008 2007
----------- ---------
Net (Loss) for the period: $ (796,733) $ -
Depreciation 343 (22,000)
Common Stock issued 22,500 -
Changes in Assets and Liabilities
Accounts Payable and Accrued Expenses 258,331 22,000
----------- ---------
(515,559) -
Cash Flows from Investing Activities
Purchase of Fixed Assets (5,692) -
----------- ---------
Goodwill (732,348) -
Net Cash Used by Investing Activities (738,040) -
Cash Flows from Financing Activities
Issuance of note 750,000 -
Proceeds from the Issuance of Common Stock 500,000 -
Subscription receivable receipt 114,163 -
----------- ---------
Net Cash Flows from Financing Activities 1,364,163 -
----------- ---------
Net Increase (Decrease) in cash 110,564 -
Cash-beginning 563,512 -
----------- ---------
Cash-end $ 674,076 $ -
=========== =========
Supplemental disclosures:
Interest Paid $ - $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- ---------------------------------
Prepaid Card Holdings, Inc. formerly Berman Holdings, Inc. (the "Company") was
incorporated under the name Nately National Corporation in the state of Nevada
on October 8, 1986 and then changed its name National Health Care Alliance, Inc.
The Company was dormant until October 11, 2007 when the Company acquired Berman
Marketing Group, a wholly owned subsidiary as its operating business. In October
2007 the name was changed from National Health Care Alliance, Inc. to Berman
Holdings, Inc. In March of 2008 the Company acquired Merchant Processing
International, from a related party, and it became a wholly owned subsidiary. In
May of 2008 the Company changed its name to Prepaid Card Holdings, Inc. The
company trades under the symbol PPDC on the pink sheets.
The Company intends to enter in early 2008 the prepaid general use debit, ATM,
POS and signature based card market. The Company's primary target audience is
the nonbanked and underserved individuals in the country.
Basis of Presentation/Going Concern
- --------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred losses and has yet to begin total operations. These
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. These
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The accompanying consolidated financial
statements have been prepared on the accrual basis of accounting in accordance
with accounting principles generally accepted in the United States.
The Company is a development stage enterprise after its dormant period which
commenced in October 2007.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries Berman Marketing Group, Inc and Merchant
Processing International. All material inter company balances and transactions
have been eliminated on consolidation. Merchant Processing International profit
and loss, is included only from the period of acquisition in March 2008 thru the
end of the period.
Stock Based Compensation
- --------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant and if the stock has
restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
F-6
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
- -------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long-lived asset to be held and
used.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
- ----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
F-7
Recently Issued Accounting Pronouncements
- --------------------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the acquirer to disclose the nature and financial effect of the
business combination. FAS 141(R) is effective for fiscal years beginning after
December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of
fiscal 2010 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
than the first quarter of fiscal 2010 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We will adopt SFAS No. 159 no later than the first quarter of fiscal 2009.
We are currently assessing the impact the adoption of SFAS No. 159 will have on
our financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158 is
effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end of fiscal 2007. The
adoption of SFAS No. 158 did not have an effect on the Company's financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We will adopt SFAS No. 157 in the
first quarter of fiscal 2009. We are currently assessing the impact that the
adoption of SFAS No. 157 will have on our financial position and results of
operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. The Company is in the
process of evaluating the impact of the application of the Interpretation to its
financial statements.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 22,500,000 shares of stock, for the acquisition of Merchant
Processing International, an entity who was owned by the majority stockholder of
the Company.
F-8
NTOE 3 - GOODWILL
The Company recognized goodwill on the amount paid for Merchant Processing
International in excess of its book value. The Company issued 22,500,000 shares
of stock, valued at par, due to the related party interest, of $22,500 and
incurred a note payable for $750,000, the total of which was $772,500. This
amount exceeded the book value by $732,348 which was assigned to Goodwill. The
company evaluated this and has concluded that any impairment is not warranted at
this time.
NOTE 4 - FIXED ASSETS
Furniture and Fixtures $3,267
Computers 2,425
Total 5,692
-------
Accumulated Depreciation (343)
Net Fixed Assets $5,349
NOTE 5 - NOTE PAYABLE
The Company is indebted to its main shareholder for the purchase of the
subsidiary for $750,000 interest only from April 2008 to June 30, 2008 at 7.25%.
Commencing on July 1, 2008 the Company will pay 24 monthly payments of $31,250.
NOTE 6 - COMMON STOCK TRANSACTIONS
During the first quarter 2008 the Company issued 33,000,000 shares of stock,
22,500,000 shares for the purchase of the subsidiary and the balance of
10,500,000 shares for $500,000 cash. Also during the quarter subscription
receivables of $114,163 were collected.
NOTE 7 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period,that includes the enactment date.
The Company has a net loss carryforward equal to approximately $700,000. The
deferred tax asset related to this carryforward has been reserved in full due to
the uncertainty of realization.
NOTE 8 - COMMITMENTS
The Company is obligated under a lease arrangement for office space expiring in
December 2008. Monthly terms indicate an amount of approximately $10,000 per
month.
NOTE 9 - SUBSEQUENT EVENT
During April and May of 2008 the Company issued 6,992,803 shares and cancelled
500,000 shares. Of the 6,992,803 shares 5,000,000 were issued for cash of
$250,000, 275,000 shares for a note of $350,000 and the balance of 1,717,803
shares for services valued at market for $85,890.
F-9
NOTE 10 - PRIOR YEAR
For the quarter ended March 31, 2007 both the Parent and Berman Marketing Group
had zero activity. Merchant Processing International, at that time was not a
subsidiary. If it had been the first quarter results would have been as follows:
Sales $236,516
Expenditures 166,817
Profit 65,766
F-10
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Berman Holdings, Inc.
We have audited the accompanying balance sheet of Berman Holdings, inc. (A
Development Stage Company) as of December 31, 2007 and 2006 and the related
statements of operations, stockholders equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform our audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as at December 31,
2007 and 2006 and the results of its' operations and its' stockholders equity
and cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the notes to these financial
statements the Company has incurred losses. This raises substantial doubt about
its ability to continue as a going concern. These financial statements to not
include any adjustments that might result from the outcome of this uncertainty.
\s\ Gruber & Company LLC
Gruber & Company LLC
Lake St. Louis MO 63367
February 21, 2008
F-12
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
DECEMBER 31,
2007 2006
---------- ---------
Assets
Current Assets
Cash and Cash Equivalents $ 563,512 $ -
---------- ---------
563,512
Fixed Assets - Net - -
---------- ---------
Total assets $ 563,512 $ -
========== =========
Liabilities and Stockholders Equity
Accounts Payable and Accrued Expenses $ 3,454 $ 22,000
---------- ---------
Total Liabilities 3,454 22,000
Stockholders Deficit
Common Stock, authorized
1,000,000,000 shares, 456,874,837
and 12,529,837 issued and
outstanding @.001 per share 476,874 12,530
Subscription Receivable (114,163) -
Subscription Payable - -
Additional Paid in Capital 955,569 -
Deficit Accumulated During
the Development Stage (758,222) (34,530)
---------- ---------
Total Stockholders' Deficit 560,058 (22,000)
---------- ---------
Total Liabilities and Stockholders Deficit $ 563,512 $ -
========== =========
The accompanying notes are an integral part of these financial statements.
F-13
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
2008 2007
------------- -----------
Revenues $ - $ -
Expenses
Stock for Services 548,750 -
Professional Fees 97,329 -
Selling General and Administrative Costs 77,613 22,000
------------- ------------
Total (723,692) 22,000
------------- ------------
Net Loss $ (723,692) $ (22,000)
============= ============
(Loss) per share $ (0.01) $ 0.00
============= ============
Weighted Average Shares Outstanding 129,616,816 12,529,837
============= ============
The accompanying notes are an integral part of these financial statements.
F-14
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Additional Retained
Common Stock Preferred Stock Subscription Subscription Paid in Earnings
Shares Amount Shares Amount Receivable Payable Capital (Deficit) Total
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Balance January
1, 2006 12,529,837 $ 12,530 $ $ - $ - $ $ (12,530) $ -
Net (Loss) for
the year ended
December 31, 2006 - - - - - - - (22,000) (22,000)
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Balance December
31, 2006 12,529,837 12,530 - - - - - (34,530) (22,000)
Stock issued
for cash 21,750,000 21,750 - - - - 713,250 - 735,000
Shares receivable 2,531,250 2,531 - - (114,163) - 111,632 - -
Shares issued
for services 2,062,500 2,063 - - - - 121,687 - 123,750
Net (Loss) for
the year ended
December 31, 2007 - - - - - - - (723,692) (723,692)
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Stock issued
for debt 13,000,000 13,000 - - - - 9,000 - 22,000
Stock issued
for founder 425,000,000 425,000 - - - - - - 425,000
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Balance December
31, 2007 476,873,587 $476,874 - $ - $ (114,163) $ - $ 955,569 $(758,222) $ 560,058
=========== ======== ======== ======== ============== ============= =========== ========== ==========
F-15
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
2007 2006
---------- ---------
Cash Flows from Operating Activities:
Net Profit (Loss) for Year $(723,692) $(22,000)
Common Stock issued for services 548,750 -
Changes in Assets and Liabilities
Accounts Payable and Accrued Expenses (18,546) 22,000
---------- ---------
(193,488) -
Cash Flows from Investing Activities
Purchase of Fixed Assets - -
Net Cash Used by Investing Activities - -
Cash Flows from Financing Activities
Stock issued for debt 22,000 -
Proceeds from the Issuance of Common Stock 735,000 -
Issuance of Preferred Stock net of assets - -
---------- ---------
Net Cash Flows from Financing Activities 757,000 -
---------- ---------
Net Increase (Decrease) in cash 563,512 -
Cash-beginning - -
Cash-end $ 563,512 $ -
========== =========
Supplemental disclosures:
Interest Paid $ - $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these financial statements.
F-16
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- ---------------------------------
Berman Holdings, Inc. (the "Company") was incorporated under the name Nately
National Corporation in the state of Nevada on October 8, 1986 and
then changed its name National Health Care Alliance, Inc. The Company was
dormant until October 11, 2007 when the Company acquired Berman Marketing Group,
a wholly owned subsidiary as its operating business. In October 2007 the name
was changed from National Health Care Alliance, Inc. to Berman Holdings, Inc.
The company trades under the symbol BRMN on the pink sheets.
The Company intends to enter in early 2008 the prepaid general use debit, ATM,
POS and signature based card market. The Company's primary target audience is
the non- banked and underserved individuals in the country.
Basis of Presentation/Going Concern
- --------------------------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
incurred losses and has yet to begin operations. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The accompanying
financial statements have been prepared on the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States.
The Company is a development stage enterprise after its dormant period which
commenced in October 2007.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Berman Marketing Group, Inc. All material inter
company balances and transactions have been eliminated on consolidation.
Stock Based Compensation
- --------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant and if the stock has
restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
F-17
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
- -------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and
liabilities that represents the unit of accounting for a long-lived asset to be
held and used.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
- ----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises' financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognizing, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently reviewing the effect, if any, FIN 48 will have on
its financial position and operations.
F-18
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures" ("SFAS
No. 157"). SFAS No157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), expands
disclosures about fair value measurements, and applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 does
not require any new fair value measurements, however the FASB anticipates that
for some entities, the application of SFAS No. 157 will change current practice.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, which for the Company would be its fiscal
year beginning November 1, 2008. The implementation of SFAS No. 157 is not
expected to have a material impact on the Company's results of operations and
financial condition.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)". This statement requires employers to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multi-employer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. This statement also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
provisions of SFAS No. 158 are effective for employers with publicly traded
equity securities as of the end of the fiscal year ending after December 15,
2006. The adoption of this statement is not expected to have a material effect
on the Company's future reported financial position or results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 (Topic 1N), "Quantifying Misstatements in Current
Year Financial Statements" ("SAB No. 108"). SAB No. 108 addresses how the effect
of prior year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. SAB No. 108 requires SEC
registrants (i) to quantify misstatements using a combined approach which
considers both the balance sheet and income statement approaches; (ii) to
evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors; and (iii) to
adjust their financial statements if the new combined approach results in a
conclusion that an error is material. SAB No. 108 addresses the mechanics of
correcting misstatements that include effects from prior years. It indicates
that the current year correction of a material error that includes prior year
effects may result in the need to correct prior year financial statements even
if the misstatement in the prior year or years is considered immaterial. Any
prior year financial statements found to be materially misstated in years
subsequent to the issuance of SAB No. 108 would be restated in accordance with
SFAS No. 154, "Accounting Changes and Error Corrections." Because the combined
approach represents a change in practice, the SEC staff will not require
registrants that followed an acceptable approach in the past to restate prior
years' historical financial statements. Rather, these registrants can report the
cumulative effect of adopting the new approach as an adjustment to the current
year's beginning balance of retained earnings. If the new approach is adopted in
a quarter other than the first quarter, financial statements for prior interim
periods within the year of adoption may need to be restated. SAB No. 108 is
effective for fiscal years ending after November 15, 2006, which for Company
would be its fiscal year beginning December 1, 2007. The implementation of SAB
No. 108 is not expected to have a material impact on the Company's results of
operations and financial condition.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 425,000,000 shares of its stock as founders shares to its
president.
Based upon a marketing agreement, during 2007 the Company paid $52,000 to
Merchant Processing International, Inc. a company which is owned by the
president.
NOTE 3 - COMMON STOCK TRANSACTIONS
During 2007 the Company issued 464,343,750 shares of which 425,000,000 was for
its founder, 13,000,000 for debt reduction of $22,000, 21,750,000 for cash of
$725,000, 2,062,500 for services valued at market totaling $123,750, 2,531,250
for subscription receivable of $114,163. The founder also contributed capital of
$10,000.
NOTE 4 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
F-19
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company has a net loss carryforward equal to approximately $700,000. The
deferred tax asset related to this carryforward has been reserved in full due to
the uncertainty of realization.
NOTE 5 - COMMITMENTS
The Company is obligated under a lease arrangement for office space expiring in
December 2008. Monthly terms indicate an amount of approximately $10,000 per
month.
NOTE 6 - SUBSEQUENT EVENT
In January 2008 the Company received the subscription amount included in note 3
above.
F-20
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO-FORMA FINANCIAL STATEMENTS
DECEMBER 31, 2007
F-21
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO-FORMA BALANCE SHEETS
DECEMBER 31, 2007
DECEMBER 31,
2007 2006
----------- ------
Assets
Current Assets
Cash and Cash Equivalents $ 577,331 $ -
Total Current Assets 577,331 -
----------- ------
Fixed Assets-Net 3,973 -
Goodwill 751,132 -
----------- ------
Total assets $1,332,436 $ -
=========== ======
Liabilities and Stockholders' Equity
Accounts Payable and Accrued Expenses $ 3,454 $ -
Note Payable 187,500 -
----------- ------
Total Current Liabilities 190,954
Note Payable 562,500 -
----------- ------
Total Liabilities 753,454 -
Stockholders' Equity
Common Stock, authorized
1,000,000,000 shares, 499,373,587
issued and outstanding @.001 per share 499,374 -
Subscription Receivable (114,163) -
Subscription Payable - -
Additional Paid in Capital 951,993 -
Deficit Accumulated During
the Development Stage (758,222) -
----------- ------
Total Stockholders' Equity 578,982 -
----------- ------
Total Liabilities and Stockholders' Equity $1,332,436 $ -
=========== ======
The accompanying notes are an integral part of these financial statements.
F-22
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
FOR THE YEAR ENDED
DECEMBER 31
2007 2006
------------- --------
Revenues $ - $ -
------------- --------
Expenses
Stock for Services 548,750 -
Professional Fees 97,329 -
Selling General and Administrative Costs 77,613 -
------------- --------
Total (723,692) -
------------- --------
Net Loss $ (723,692) $ -
============= ========
(Loss) per share $ (0.01) $ -
============= ========
Weighted Average Shares Outstanding 129,678,459 -
============= ========
Th The accompanying notes are an integral part of these pro-forma financial
statements.
F-23
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO-FORMA STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2007
Additional Retained
Common Stock Preferred Stock Subscription Subscription Paid in Earnings
Shares Amount Shares Amount Receivable Payable Capital (Deficit) Total
----------- -------- ------ ------- ------------ ------------ ---------- ---------- ----------
Balance January
1, 2006 12,529,837 $ 12,530 - $ - $ - $ - $ - $ (12,530) $ -
Net (Loss) for
the year ended
December 31, 2006 - - - - - - - (22,000) (22,000)
----------- -------- ------ ------- ------------ ------------ ---------- ---------- ----------
Balance December
31, 2006 12,529,837 12,530 - - - - - (34,530) (22,000)
Stock issued
for cash 21,750,000 21,750 - - - - 713,250 - 735,000
Shares receivable 2,531,250 2,531 - - (114,163) - 111,632 - -
Shares issued
for services 2,062,500 2,063 - - - - 121,687 - 123,750
Stock issued
for debt 13,000,000 13,000 - - - - 9,000 - 22,000
Stock issued
for founder 425,000,000 425,000 - - - - - - 425,000
Stock issued
for acquisition 22,500,000 22,500 - - - - (3,576) - 18,924
Net (Loss) for
the year ended
December 31, 2007 - - - - - - - (723,692) (723,692)
----------- -------- ------ ------- ------------ ------------ ---------- ---------- ----------
Balance December
31, 2007 499,373,587 $499,374 - $ - $ (114,163) $ - $ 951,993 $(758,222) $ 578,982
=========== ======== ====== ======= ============ ============ ========== ========== ==========
<FN>
The accompanying notes are an integral part of these pro-forma financial statements.
F-24
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO-FORMA STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2007
FOR THE YEAR ENDED
DECEMBER 31,
2007
----------- --------
Cash Flows from Operating Activities:
Net Profit (Loss) for Year $ (723,692) $ -
Common Stock issued for services 548,750 -
Changes in Assets and Liabilities
Accounts Payable and Accrued Expenses (18,546)
----------- --------
(193,488) -
Cash Flows from Investing Activities
Purchase of Fixed Assets and Goodwill (758,681) -
----------- --------
Net Cash Used by Investing Activities (758,681) -
Cash Flows from Financing Activities
Stock issued for debt and acquisition 44,500 -
Proceeds from the Issuance of Common Stock 735,000 -
Issuance of Note Payable 750,000 -
----------- --------
Net Cash Flows from Financing Activities 1,529,500 -
----------- --------
Net Increase (Decrease) in cash 577,331 -
Cash-beginning - -
----------- --------
Cash-end $ 577,331 $ -
=========== ========
Supplemental disclosures:
Interest Paid $ - $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these pro-forma financial
statements.
F-25
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- ---------------------------------
Prepaid Card Holdings, Inc. formerly Berman Holdings, Inc. (the "Company") was
incorporated under the name Nately National Corporation in the state of Nevada
on October 8, 1986 and then changed its name National Health Care Alliance, Inc.
The Company was dormant until October 11, 2007 when the Company acquired Berman
Marketing Group, a wholly owned subsidiary as its operating business. In October
2007 the name was changed from National Health Care Alliance, Inc. to Berman
Holdings, Inc. The company trades under the symbol BRMN on the pink sheets.
The Company intends to enter in early 2008 the prepaid general use debit, ATM,
POS and signature based card market. The Company's primary target audience is
the non-banked and underserved individuals in the country.
Basis of Presentation/Going Concern
- --------------------------------------
The accompanying pro forma financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company
has incurred losses and has yet to begin operations. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The accompanying
financial statements have been prepared on the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States.
The Company is a development stage enterprise after its dormant period which
commenced in October 2007.
The financial statements presented indicate on a pro forma basis how the Company
would appear at December 31, 2007 had the transaction of acquiring Merchant
Processing Services had occurred on that date. The actual transaction closed on
March 14, 2008. Merchant Processing was acquired for $750,000 plus 22,500,000
shares of stock, which were valued at par as the acquired company was a related
party. The owner of the acquired company is the majority stockholder in Prepaid
Holdings, Inc.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Berman Marketing Group, Inc. All material inter
company balances and transactions have been eliminated on consolidation as well
as Merchant Processing International.
Stock Based Compensation
- --------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant and if the stock has
restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
F-26
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
- -------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and
liabilities that represents the unit of accounting for a long-lived asset to be
held and used.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
- ----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises' financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognizing, classification,
interest and penalties, accounting in interim
F-27
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently reviewing the
effect, if any, FIN 48 will have on its financial position and operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures" ("SFAS
No. 157"). SFAS No157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), expands
disclosures about fair value measurements, and applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 does
not require any new fair value measurements, however the FASB anticipates that
for some entities, the application of SFAS No. 157 will change current practice.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, which for the Company would be its fiscal
year beginning November 1, 2008. The implementation of SFAS No. 157 is not
expected to have a material impact on the Company's results of operations and
financial condition.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)". This statement requires employers to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multi-employer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. This statement also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
provisions of SFAS No. 158 are effective for employers with publicly traded
equity securities as of the end of the fiscal year ending after December 15,
2006. The adoption of this statement is not expected to have a material effect
on the Company's future reported financial position or results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 (Topic 1N), "Quantifying Misstatements in Current
Year Financial Statements" ("SAB No. 108"). SAB No. 108 addresses how the effect
of prior year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. SAB No. 108 requires SEC
registrants (i) to quantify misstatements using a combined approach which
considers both the balance sheet and income statement approaches; (ii) to
evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors; and (iii) to
adjust their financial statements if the new combined approach results in a
conclusion that an error is material. SAB No. 108 addresses the mechanics of
correcting misstatements that include effects from prior years. It indicates
that the current year correction of a material error that includes prior year
effects may result in the need to correct prior year financial statements even
if the misstatement in the prior year or years is considered immaterial. Any
prior year financial statements found to be materially misstated in years
subsequent to the issuance of SAB No. 108 would be restated in accordance with
SFAS No. 154, "Accounting Changes and Error Corrections." Because the combined
approach represents a change in practice, the SEC staff will not require
registrants that followed an acceptable approach in the past to restate prior
years' historical financial statements. Rather, these registrants can report the
cumulative effect of adopting the new approach as an adjustment to the current
year's beginning balance of retained earnings. If the new approach is adopted in
a quarter other than the first quarter, financial statements for prior interim
periods within the year of adoption may need to be restated. SAB No. 108 is
effective for fiscal years ending after November 15, 2006, which for Company
would be its fiscal year beginning December 1, 2007. The implementation of SAB
No. 108 is not expected to have a material impact on the Company's results of
operations and financial condition.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 425,000,000 shares of its stock as founders shares to its
president.
Based upon a marketing agreement, during 2007 the Company paid $52,000 to
Merchant Processing International, Inc. a company which is owned by the
president.
The Company acquired Merchant Processing International in March 2008, the owner
of which is a related party.
F-28
NOTE 3 - COMMON STOCK TRANSACTIONS
During 2007 the Company issued 464,343,750 shares of which 425,000,000 was for
its founder, 13,000,000 for debt reduction of $22,000, 21,750,000 for cash of
$725,000, 2,062,500 for services valued at market totaling $123,750, 2,531,250
for subscription receivable of $114,163. The founder also contributed capital of
$10,000.
The company issued 22,500,000 shares of stock for Merchant Processing
International.
NOTE 4 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company has a net loss carryforward equal to approximately $700,000. The
deferred tax asset related to this carryforward has been reserved in full due to
the uncertainty of realization.
NOTE 5 - COMMITMENTS
The Company is obligated under a lease arrangement for office space expiring in
December 2008. Monthly terms indicate an amount of approximately $10,000 per
month.
NOTE 6 - SUBSEQUENT EVENT
In January 2008 the Company received the subscription amount included in note 3
above.
NOTE 7- GOODWILL
The Company has recognized Goodwill, which is the amount paid in excess of net
assets, of Merchant Processing International. The Company issued a note for
750,000 plus 22,500,000 shares valued at par which totaled $772,500 which
exceeded the net assets of cash of $17,395 and fixed assets of $3,973 by
$751,132, the value of goodwill.
NOTE 8 - NOTE PAYABLE
The Company is indebted for the purchase of Merchant Processing International
for $750,000, interest only at 7.25% from March 2008 to June 2008, then payable
in monthly installments over 24 months of $31,250
NOTE 9 - FIXED ASSETS
Fixed Assets consist of Computers, Furniture and Fixtures and other office
equipment with asset lives of between three and five years.
F-29
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Merchant Processing International Inc.
We have audited the accompanying balance sheet of The Merchant Processing
International Inc. as of December 31, 2007 and 2006 and the related statements
of operations, stockholders equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as at December 31,
2007 and 2006 and the results of its' operations and its' stockholders equity
and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
\s\ Gruber & Company LLC
Gruber & Company LLC
Dated May 25, 2008
F-31
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
BALANCE SHEETS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
DECEMBER 31, DECEMBER 31,
2007 2006
-------------- --------------
Assets
Current Assets
Cash and Cash Equivalents $ 13,819 $ 822
Prepaid Costs - 2,346
-------------- --------------
13,819 3,168
Fixed Assets - Net 3,973 5,730
-------------- --------------
Total assets $ 17,792 $ 8,898
Liabilities and Stockholders Equity (Deficit)
Accounts Payable and
Accrued Expenses $ - $ 10,225
-------------- --------------
Total Liabilities - 10,225
Stockholders Equity (Deficit)
Common Stock, authorized,
1,000,000 shares, $.01 par value,
500,000 issued and
outstanding respectively 5,000 5,000
Treasury Stock (25,000) (25,000)
Additional Paid in Capital
Retained Deficit 37,792 18,673
-------------- --------------
Total Stockholders' Equity (Deficit) 17,792 (1,327)
-------------- --------------
Total Liabilities and Stockholders
Equity (Deficit) $ 17,792 $ 8,898
============== ==============
The accompanying notes are an integral part of these financial statements.
F-32
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
2007 2006
-------- ----------
Revenues $937,936 $1,173,992
Expenses
Consulting 558,280 262,512
Professional Fees 19,209 451,848
Selling General and Administrative Costs 341,328 440,755
-------- ----------
Total 918,817 1,155,115
-------- ----------
Profit from Operations 19,119 18,877
Other Income (expense) - -
-------- ----------
Net Profit $ 19,119 $ 18,877
======== ==========
Profit (Loss) Per Share $ 3.82 $ 3.78
======== ==========
Weighted Average Shares Outstanding 5,000 5,000
======== ==========
The accompanying notes are an integral part of these financial statements.
F-33
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Common Stock Treasury Stock Retained
Shares Amount Shares Amount APIC Earnings (Deficit) Total
------- ------- ------ --------- ----- ------------------- ---------
Balance, January 1, 2006 500,000 $ 5,000 - $ - $ - $ (204) $ 4,796
Treasury Stock issued - - - (25,000) - - (25,000)
Net Profit for the Year ended December 31, 2006 - - - - - 18,877 18,877
------- ------- ------ --------- ----- ------------------- ---------
Balance December 31, 2006 500,000 5,000 - (25,000) - 18,673 (1,327)
Net Profit for the Year ended December 31, 2007 - - - - - 19,119 19,119
------- ------- ------ --------- ----- ------------------- ---------
Balance December 31, 2007 500,000 5,000 - (25,000) - 37,792 17,792
======= ======= ====== ========= ===== =================== =========
F-34
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
2007 2006
--------- ---------
Cash Flows from Operating Activities:
Net Profit for Year $ 19,119 $ 18,877
Adjustments to reconcile net loss to
cash used by operating activities
Depreciation 3,076 3,106
Changes in Assets and Liabilities
Decrease in Prepaid Expenses 2,346 11,847
Accounts Payable and Accrued Expenses (10,225) (27,024)
--------- ---------
14,316 6,806
Cash Flows from Investing Activities
Purchase of Fixed Assets (1,319) (535)
--------- ---------
Net Cash Used by Investing Activities (1,319) (535)
Cash Flows from Financing Activities
Repurchase of Treasury Stock - (25,000)
--------- ---------
Net Cash Flows from Financing Activities - (25,000)
--------- ---------
Net Increase (Decrease) in cash 12,997 (18,729)
Cash-beginning 822 19,551
--------- ---------
Cash-end $ 13,819 $ 822
========= =========
Supplemental disclosures:
Interest Paid $ - $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these financial statements.
F-35
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- ---------------------------------
Merchant Processing International, Inc. (the "Company") was incorporated in the
state of California on July 18, 2005. The Company is a credit card processing
firm.
Basis of Presentation
- -----------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
Stock Based Compensation
- --------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant and if the stock has
restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
F-36
Impairment of Long-Lived Assets
- -------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long-lived asset to be held and
used. The Company impaired its acquisition of its subsidiary as its valuation
determined it would not be returning the profits it had anticipated, as well as
the Company's decision to relinquish the subsidiary effective July 15, 2007.
(See subsequent events)
Income Taxes
- -------------
The Company for 2006 and 2007 was a subchapter S Corporation, whereby the
individual shareholders report their proportional income of the Company earnings
and therefore there is no provision for income taxes included in these financial
statements.
Earnings Per share
- --------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the acquirer to disclose the nature and financial effect of the
business combination. FAS 141(R) is effective for fiscal years beginning after
December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of
fiscal 2010 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
than the first quarter of fiscal 2010 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We will adopt SFAS No. 159 no later than the first quarter of fiscal 2009.
We are currently assessing the impact the adoption of SFAS No. 159 will have on
our financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158 is
effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end
F-37
of fiscal 2007. The adoption of SFAS No. 158 did not have an effect on the
Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We will adopt SFAS No. 157 in the
first quarter of fiscal 2009. We are currently assessing the impact that the
adoption of SFAS No. 157 will have on our financial position and results of
operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. The Company is in the
process of evaluating the impact of the application of the Interpretation to its
financial statements.
NOTE 2 - FIXED ASSETS
Fixed Assets consist of Computers, Furniture and Fixtures and other office
equipment with asset lives of between three and five years. At December 31,
2007:
Computers $ 3,682
Furniture, Fixtures Equipment 6,807
-------
Total $10,489
Accumulated Depreciation 6,516
-------
Net $ 3,973
Depreciation Expense in 2007 and 2006 was 3,076 and 3,106.
NOTE 3 - RELATED PARTY TRANSACTIONS
During 2006 the Company paid a management fee of $21,000 to its majority
stockholder.
NOTE 4- LEASE COMMITMENT
The Company has a month to month sub lease agreement.
NOTE 5-SUBSEQENT EVENT
On March 14, 2008, the Company was acquired by a public entity for 22,500,000
shares of the entity plus $750,000, interest only to June 1, 2008, at 7.25%,
then monthly payments of $31,250 for 24 months.
F-38