UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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Commission file number 0-53270
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/ \ / \ | PREPAID CARD HOLDINGS, INC.
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PREPAID CARD HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 76-0222016
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
20251 S.W. Acacia St. #200 Newport Beach Ca 92660
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 949 250 9556 ext 123
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None N/A
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Securities 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [x] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [x] No
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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
definition of "accelerated filer, large accelerated filer and smaller reporting
company" as defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [x] No
The aggregate market value of the common equity held by non-affiliates of the
registrant as of June 30, 2008 (the last business day of the registrant's most
recently completed second fiscal quarter) was $8,914,967.
The number of shares of the registrant's common stock outstanding as of March
26, 2009 was 403,903,870 shares.
PREPAID CARD HOLDINGS, INC.
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................4
Item 1A. Risk Factors......................................................12
Item 1B. Unresolved Staff Comments.........................................12
Item 2. Properties........................................................12
Item 3. Legal Proceedings.................................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.................13
Item 6. Selected Financial Data...........................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........17
Item 8. Financial Statements and Supplementary Data.......................17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................29
Item 9A. Controls and Procedures...........................................29
Item 9B. Other Information.................................................30
PART III
Item 10. Directors and Executive Officers of the Registrant................31
Item 11. Executive Compensation............................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management....39
Item 13. Certain Relationships and Related Transactions....................40
Item 14. Principal Accounting Fees and Services............................41
PART IV
Item 15. Exhibits and Financial Statement Schedules........................42
Signatures....................................................................43
Page 3
PART I
ITEM 1. BUSINESS
A. BUSINESS DEVELOPMENT
The following are changes in the development of our business during the year
ended December 31, 2008.
The Company changed its name to Prepaid Card Holdings, Inc. on May 2, 2008 to
better reflect its operating business and changed its trading symbol from BRMN
to PPDC. On March 8, 2008, the Company acquired Merchant Processing
International, Inc. dba Bank Freedom ("Bank Freedom") from the Company's
president, Bruce Berman, as its second operating business. Our operations are
currently divided between Berman Marketing Group ("BMG") and Bank Freedom, our
two operating businesses. BMG manages all of our marketing operations, while
Bank Freedom manages our prepaid card products, including the processing,
banking, printing, customer service, and infrastructure necessary for the
management and delivery of prepaid cards. Bank Freedom also manages our
merchant processing services portfolio.
The Company began operations in February 2008 as it began the process of
accepting orders and shipping the Bank Freedom Prepaid MasterCard, which was
first shipped to its customers approximately March 1, 2008. Prior to that, the
Company was in the development stage and focused on establishing relationships
with key operational partners.
B. FINANCIAL INFORMATION ABOUT SEGMENTS
As defined by generally accepted accounting principles ("GAAP"), we do not have
any segments separate and apart from our business as a whole. Accordingly,
there are no measures of revenue from external customers, profit and loss, or
total assets aside from what is reported in the Financial Statements attached to
this Form 10.
C. BUSINESS OF THE COMPANY
EXECUTIVE SUMMARY
Through our operating subsidiaries, Berman Marketing Group, Inc. ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom"), and
strategic alliances with processors, operators and other companies, we operate
in the prepaid card business, as well as the merchant processing services
business. Our primary focus right now is growing our prepaid card operations.
Our Bank Freedom prepaid card business focuses on both business to consumer and
business to business solutions. Our flagship consumer product, the Bank Freedom
Prepaid VISA and MasterCard general spending reloadable cards, offer unique
banking solutions to the estimated 100 million of America's underbanked
population as well as the banked population looking for a better way to control
their spending. In December of 2008, Bank Freedom introduced multiple business
solutions including a Payroll card program, Business Expense card program, and
private label co-branded prepaid card solutions. We believe we are qualified to
capture customers in these markets due to the following strategic and tactical
advantages:
- Significant internet presence - Bank Freedom has numerous
MasterCard and VISA general purpose reloadable advertising web sites
under multiple keywords. As a result, we are receiving FREE leads for
both our consumer and business related products.
Page 4
- Processor and fulfillment - We have built significant processor
and fulfillment strategic relationships that enable Bank Freedom to
respond to the quickly evolving customer and market demand.
Specifically, we are able to address our customers' needs without
complex programming and retooling.
Our Bank Freedom prepaid cards and services target several markets including the
estimated 100 million people who either do not have access to credit, do not
have a checking account, or who wish for the convenience of a prepaid method of
using the debit/ATM/credit card networks.
The company desires to raise capital for advertising, operations, and general
business development. However due to the recent downturn in the economy the
company has concerns that it will be able to raise additional capital.
BUSINESS MODEL AND STRATEGY
Our Bank Freedom business model is to acquire customers who adopt our products
as their primary transaction account (PTA). Whether for business or consumer,
when a customer assimilates our card accounts into their day to day management
of funds, Bank Freedom gains higher retention, additional transaction volume
which generates additional fee revenue.
- General Purpose Reloadable (GPR) Card - Intended for the
underbanked consumer, our target customer is one that will set up
direct deposit of their pay check and use their VISA or MasterCard for
day to day purchases and as a bill payment solution. Within this
model, they act and behave much like a normal banked individual. We
also have customers that deposit cash only on to their cards as well
as customers who use both direct deposit and add cash.
- Payroll Cards - Introduced to employees by their employers, the
Bank Freedom Payroll MasterCard is identical to our GPR product with
slightly lower fees. Ordered and deployed in bulk, the program offers
businesses of all sizes a paperless solution for payroll while
bringing a banking solution to their underbanked employees. Our
products do not require complex integration or programming, and work
seamlessly with most payroll systems that support direct deposit.
- Business Travel and Expense Cards - With the current credit
crisis, businesses no longer can rely on their employees to carry
their company travel and field expenses on their personal credit
cards. With $2 trillion in available credit card debt recently removed
from the consumer credit card market, many employees no longer have
the credit line limits to accommodate company expenses. This has
created a significant opportunity in the business expense management
market.
- Private Label Card Programs - The prepaid card market is growing
at a significant rate. It is one of the few markets that actually is
expanding while the other markets are shrinking. With Bank Freedom's
internet presence, we are getting business leads from companies who
wish to monetize their customer base by issuing private label prepaid
cards. We believe these co-branded opportunities offer growth
potential for Bank Freedom.
Our business strategy includes marketing campaigns to acquire customers, and
then an education process 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.
Page 5
Bank Freedom Prepaid Card Revenue
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We derive revenues through fees charged to the cardholders. Those sources may
include:
1. Transaction Fees - As customers use their cards, we may collect
fees that include
a. Domestic and International ATM transaction fees
b. Debit purchase and PIN decline fees
c. Monthly maintenance fees
d. Re-issue card fees
2. Money Conversion Fees - For transactions that involve an
international source, we charge up to 2.95% of total dollar volume in
transaction fees.
3. Interchange - Bank Freedom receives interchange revenue on
Signature transactions. The interchange Bank Freedom receives is paid
by the merchant, not by our cardholder. The interchange fee Bank
Freedom receives on signature transactions is usually in excess of 1%
of the amount the customer spends at any merchant.
4. Private Label Application Fees - for private label opportunities,
Bank Freedom intends to collect an application fee for the set up and
development of custom prepaid card programs.
5. Card Purchase Fees - Our payroll and Business Travel and Expense
programs charge a one-time card issuance fees to businesses.
Bank Freedom Prepaid Card 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 successfully entered the market, but with estimates
of only 5% to 9% market penetration.
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: Everybody likes getting something free - specifically our
targeted demographic.
We will determine the optimal type and amount of pricing in order to maximize
our penetration of the market.
Merchant Processing Services
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In addition to our primary business of our Bank Freedom prepaid cards, since
2005 we have realized revenue by selling merchant processing services for retail
companies nationally, receiving revenues in the form of commissions paid as a
percentage of credit card volume for the retailers engaged.
Bank Freedom, one of our two operating subsidiaries, from 2005 to September 2007
focused exclusively on selling merchant services that enable US businesses to
accept credit and debit cards. As a result, Bank Freedom has built a portfolio
of merchant accounts that generate commissions on each credit card
Page 6
transaction processed by the business. In October of 2007, Bank Freedom changed
its focus and dedicated its resources to developing prepaid card solutions.
Currently, only 5% of Bank Freedom's resources are dedicated to managing the
merchant portfolio with the remaining resources dedicated to prepaid card
products.
Merchant processing services realized revenues of $141,263 from acquisition
through June 30, 2008. The Bank Freedom prepaid card, despite beginning
operations, did not receive any revenues until April, 2008. The Bank Freedom
card realized revenues of $127,723 through June 30, 2008. The prepaid card
business model earns revenues through interchange and service fees after
issuance of the cards. Prepaid Card Holdings, Inc. had an accumulated deficit
of $2,982,419 through June 30, 2008. We intend to continue to offer merchant
processing services to national retail companies and act as an independent sales
organization for Columbus Bank and trust.
PRINCIPAL PRODUCTS AND SERVICES
Our Prepaid Cards
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Bank Freedom Prepaid MasterCard: Our Bank Freedom Prepaid MasterCards (R) were
first shipped in March, 2008. The initial demand for our Bank Freedom
MasterCard exceeded our expectations. As of December 31, 2008, we had shipped a
total of 92,179 cards. Of these, 11,577 are actively being used. A total of
$29,678,000 has been loaded onto Bank Freedom cards by our cardholders via our
reloading partner, Green Dot, and through direct deposits.
Spanish MasterCard: On June 1, 2008 we launched a Spanish version website for
our Bank Freedom Prepaid MasterCard(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 Prepaid VISA: Bank Freedom received approval from our issuing bank
and VISA International to release the Bank Freedom Prepaid VISA card. We began
issuing the Bank Freedom Prepaid Visa Card in September, 2008.
Cash Reloading Agreement with Green Dot
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In December, 2007, Bank Freedom entered into an exclusive agreement with Green
Dot to provide cash loading services for card programs managed by Bank Freedom.
In May, 2008, Green Dot offered Bank Freedom branding on its point of purchase
displays nationally.
According to Green Dot Corporation, Bank Freedom's logo appears on all of Green
Dot's point of purchase displays. Green Dot has point of purchase displays in
Walgreens, K-Mart and CVS/Pharmacy locations throughout the US.
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MARKETING
Using our management's experience in the credit card processing field, we have
developed and offered the Bank Freedom prepaid MasterCard and the Bank Freedom
Prepaid VISA card. These cards target the 100 million customers who have
difficulty securing credit cards and or bank accounts.
During the company's first year in the prepaid card market, our goal was to
acquire new prepaid card customers. This was accomplished through:
- Direct marketing and establishing a client base; and
- Maintaining a broad range of prepaid cards offerings;
In order to create awareness of our prepaid cards, the company did the
following:
- Developed a comprehensive direct marketing campaign;
- Matched competitive pricing models;
- Implemented our business plan quickly by leveraging existing
technology infrastructure previously developed for marketing to the
underbanked, leveraging our CEO's experience in marketing and customer
service of the underbanked, and our management team's experience in
Internet technologies; and
- Developed national branding.
Our Value Proposition
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Through established direct marketing methods known to our executive staff, we
offered 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 accounts100 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 associations,
the consumer has alternative recourse for refunds.
Page 8
- 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
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We directly marketed our prepaid cards using the following means:
- Direct Radio and television to web (sending customers to the
internet to order)
- Email campaigns to managed opt-in lists of individuals known to
have credit issues and or in need of a credit card.
- Affiliate networks including banner, contextual.
- Search engine optimization.
- Pay-per-click (PPC) and Search Engine Marketing (SEM) campaigns
- Direct mail
Competitive Advantages
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Several companies have a meaningful presence in the prepaid card industry.
Their presence extends mainly to the Internet and an occasional TV or radio ad
with little air time. Some of our competitors include: All Access (Net Spend),
Green Dot, Vision Premier, RushCard, Western Union, AccountNow, Ready Debit and
Wired Plastic.
There are many other small, general spending prepaid card programs that do not
represent significant market share or recognition. They focus on the internet
as their main strategy of application and enrollment. We believe this creates a
competitive advantage for the Company and allows us to truly leverage our
marketing skills to exploit a more dynamic marketing strategy, including in the
areas of direct response and other media markets.
Marketing Technology and Infrastructure
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Through our operating subsidiary, we have a non-exclusive right to BIG software
and hardware technology housed at Equinix facility (http://www.equinix.com/).
BIG's technology foundation is capable of handling more than 10,000 orders per
day through scalable platforms using Microsoft's SQLServer, multi-redundant
databases, web servers, and routers. All technology is highly customizable
allowing unlimited number of web sites access to common databases while tracking
unlimited marketing campaigns. For compensation of the non-exclusive use of this
hardware and software we will pay approximately $1,675 a month to Equinox and
$100 a month to Limelight for the hosting of this hardware and software on an
annual basis. We will also pay for any software or hardware modifications we
request.
The hardware and software infrastructure we are using is a state-of-the-art
marketing system that allows us to release multiple websites and track visitors'
performance from multiple marketing URLs and channels. Our operating subsidiary
currently owns over 700 website URLs that can be run all at the same time with
this system. Through minute by minute reporting, BMG can tailor marketing and
focus on key geographic using internet, print, radio, and television. In 2008,
the Company agreed to spend approximately $60,000 for custom modifications made
to this software in order for it to best operate the Company's unique
requirements. This payment will be made in 2009.
Page 9
OPERATIONS
Operational Partnerships
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Operationally, there are five key partnership components we must have to issue
prepaid cards. They are:
1. Issuing bank
2. Card Association (MasterCard and/or Visa)
3. Processor
4. Manufacturer/printer
5. Cash Load Network
Issuing Bank: An issuing bank is a bank that offers card association branded
payment cards directly to consumers. Merchant Processing International, Inc.
DBA Bank Freedom ("Bank Freedom"), signed an agreement with Meta Payment Systems
a prepaid card on November 19, 2007 to issue our branded payment cards. Meta
Payment Systems is a leading issuing bank for prepaid card products within the
US. We received approval to issue cards from MetaBank on November 19, 2007.
Card Associations: A card association is a network of issuing banks and
acquiring banks that process payment cards of a specific brand, including Visa,
MasterCard, American Express, etc. Bank Freedom obtained approval from
MasterCard in December 2007 to issue the Bank Freedom Prepaid MasterCard (R)
Card.
Processor: A processor is a company that connects to the various networks
(Visa, MasterCard, Discover, STAR, Cirrus, etc.) and handles the electronic
transactions. They also provide services for customer care (to the end user),
an interactive voice response ("IVR") telephone-based customer service system,
and web based services for balance inquiries, dispute resolution, replacement
cards, and other support issues. Bank Freedom signed an agreement with I2C,
Inc. for prepaid card processing and support services on November 19, 2007.
Manufacturer: The card manufacturer is the company that prints, embosses and
delivers the cards to new cardholders. Bank Freedom signed an agreement with
EFT Source for card printing, personalization, and fulfillment services on
December 14, 2007. EFT Source provides printing, inventory, and delivery of
Bank Freedom's prepaid cards. Integration between I2C, Inc. and EFT Source
occurred on February 15, 2008 for secure transmission of cardholder orders for
printing and delivery.
Cash Load Network: The cash load network is a company that allows your customers
to load cash on to their card accounts. We have chosen Green Dot as our cash
load network. The Green Dot MoneyPak(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, Radio Shack, Kroger, Ralphs, Food4Less and Fred Meyer,
consumers can purchase a MoneyPak for the suggested retail price of $4.95 or
less at any Green Dot retailer location.
In-House Operations
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Our operations consist of the following major groups. They are:
Sales and Marketing: To acquire customers, we have engaged in aggressive
marketing campaigns to drive prospects to our websites to order their prepaid
card.
Page 10
Activation: Critical to our success is the activation and initial loading of
the card. We use a separate customer service marketing effort that uses email
to contact low activity card accounts to increase card activations and loads.
Secondary Marketing: We engage in a persistent touch process that reminds the
customers to use their card (reload, ATM, pay bills, etc). This revenue
generating group (part of internet marketing) is critical to ongoing
profitability and card usage.
Customer Service: We provide 24/7 customer service to our cardholders in both
English and Spanish. We handle all inbound customer services calls between the
hours of 8:00 AM and 5:00 PM, Monday to Friday with our internal staff of
customer service representatives.
Technology: We have three fully operational main technology centers used in our
operations:
1. Marketing - The technology used by Marketing for the acquisition
of new customers is housed in our Level 3 NOC in Equinix Network
Center in Los Angeles, CA. This scalable system can handle 10,000 new
card orders a day, and is fully redundant with separation of routing,
firewall, web servers, database servers, and RAID Level 5 storage.
2. Processing - Our processor, I2C, Inc. (www.i2cinc.com) provides
multi-location, redundant 24/7 processing of cardholder transactions.
We integrate our marketing systems with I2C's platform for secure
order processing and management. All customer information is
maintained and secured by encrypted data systems certified by
MasterCard and VISA associations.
3. Printing and Fulfillment - Our printer, EFTSource
(www.eftsource.com) provides secure manufacturing infrastructure and
information systems for card printing, personalization and
fulfillment. EFTSource is certified by both MasterCard and VISA and
provides redundant fulfillment capabilities.
OTHER MATTERS
Employees
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Not including our three executive officers, Prepaid Card Holdings, Inc. and
Berman Marketing Group, Inc., a wholly owned subsidiary of the Company,
currently have no employees. Bank Freedom, Inc., a wholly owned subsidiary of
the Company, has eight full time employees including our three executive
officers. We believe our relationship with our employees is good.
Independent Contractors
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The company has several independent contractors that work on a revenue sharing
basis.
Research and Development
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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.
Page 11
Intellectual Property
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We have applied for trademarks for "Bank Freedom", "Bank Freedom Card", and "A
card for everyone".
On February 24, 2009 "Bank Freedom" trademark was issued registration number
3581447. On September 30, 2008 "A Card For Everyone" trademark was issued
registration number 3507604. "Bank Freedom Card" is still pending.
Regulation
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Open loop prepaid cards are subject to several forms of regulation. The most
notable of these regulations include Regulation E, the Electronics Funds
Transfer Act; the Anti-money Laundering and Bank Secrecy Act; the customer
identification program of the Patriot Act; customer security and privacy
provisions of the Gramm Leach Bylie act; and the funds availability requirement
of Regulation CC.
As open loop prepaid cards are essentially bank accounts, we anticipate that our
business will continue to be heavily regulated. Although we have extensive
experience in this area, and we have taken the necessary steps to comply with
regulations, compliance can represent a costly expense and there is no assurance
that the steps we have taken and will take will be sufficient to prevent adverse
regulatory action. If we are unable to successfully comply with all relevant
regulation, it could materially affect our business.
We currently produce no product and conduct no activity that is subject to
environmental laws. All manufacturing is undertaken by a third party.
Nevertheless, it is possible that our activities could fall within the ambit of
environmental regulation in the future. If so, compliance with environmental
laws could become a significant cost, and could materially affect our business.
ITEM 1A. RISK FACTORS
Not required by smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company currently operates at an office located at 20251 SW Acacia St. #200,
Newport Beach CA 92660. The office is in good condition.
Bank Freedom, the Company's wholly owned operating subsidiary, is renting this
space under a lease from L&J properties which expires in December, 2010.
Monthly rent is due on the first of each month in the amount of $2,756
Page 12
ITEM 3. LEGAL PROCEEDINGS
During the year ended December 31, 2008, the Company had a dispute with one of
its vendors over the amount of about $360,000. On January 13, 2009, the Company
agreed to a settlement of this dispute. We have agreed to execute a note in the
amount of $182,900 at 4% simple annual interest payable monthly over three
years, whereby we will pay $5399.64 a month
On January 20, 2009, Robert McBride and Bruce Barton filed a complaint against
the Company in the District Court for Clark County, Nevada for damages in excess
of $40,000. Mr. McBride and Mr. Barton claim the Company owes each of them cash
payments or restricted stock pursuant to agreements allegedly executed between
the Company and the plaintiffs while Mr. McBride was president of the Company.
We are disputing these claims. On February 5, 2009 Mr. McBride and Barton filed
a motion for preliminary injunction against the company. That motion was denied
by the court on March 16th 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 1, 2008, a majority of the Shareholders of the Company executed a
resolution authorizing the Company to enact a 1 for 10 reverse split of the
Company's common stock. The Company filed a preliminary information statement
on Form 14C notifying shareholders of the resolution by written consent. The
Company's Board of Directors subsequently determined that the reverse split
would not be in the best interest of the Company, and decided not to effectuate
the reverse split.
No other matters were submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 2008.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is quoted in United States markets on the Pink Sheets,
maintained by Pink Sheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." There is no assurance that the common stock
will continue to be traded on the Pink Sheets or that any liquidity exists for
our shareholders.
We are currently exploring the process of getting our common stock on the
Over-the-Counter Bulletin Boards ("OTCBB").
MARKET PRICE
The following table shows the high and low per share price quotations of the
Company's common stock as reported by the Pink Sheets 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 Pink
Sheets 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.
Page 13
HIGH LOW
Fiscal 2008
First Quarter 0.17 0.06
Second Quarter 0.13 0.07
Third Quarter 0.16 0.04
Fourth Quarter 0.13 0.03
As of December 31, 2008, the Company had 500,000,000 shares of common stock
authorized with 396,966,390 shares issued and outstanding and approximately
4,128,209 freely tradable shares in the public float. These shares were held by
approximately 250 shareholders of record and Company estimates by a total of
approximately 290 beneficial shareholders.
PENNY STOCK REGULATIONS
Our common stock is quoted in United States markets on the Pink Sheets,
maintained by Pink Sheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." On March 25, 2009 the last reported sale
price of our common stock was $0.02 per share. As such, the Company's common
stock may be subject to provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock rule."
Section 15(g) and Rule 15g-9 sets forth certain requirements for transactions in
penny stocks, in particular that either (1) the transaction meets one of a few
specific exemptions, or (2) the broker dealer executing the transaction for a
customer (a) obtain informed consent from the customer and (b) make an
individualized determination of the customer's suitability for trading in penny
stocks based on personal financial information. Rule 15g-9(d) incorporates the
definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act.
The SEC generally defines "penny stock" to be any equity security that has a
market price less than $5.00 per share, subject to certain exceptions. As long
as the Company's common stock is deemed to be a penny stock, trading in the
shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors.
WARRANTS
On February 3, 2009, the Company issued warrants to purchase 5,000,000 shares of
common stock to one of our Vice Presidents and Directors. The options vest in
one year and are exercisable for five years after that at an exercise price of
$0.025. We also agreed to amend two warrants previously issued to our Vice
President employees in the amount of 5,000,000 each, reducing the exercise price
to $0.025 and extending the exercise date until 5 years from their vesting date.
These changes were made in exchange for agreeing to a decrease in pay and an
increase in duties. The company also agreed to issue 250,000 warrants each to
two other key employees of the company which vest in one year, at an exercise
price of $0.025 and a 5 year from vesting exercise provision.
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.
Page 14
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 2008, the Company made no issuances of
securities that have not otherwise been reported. We have reported various
issuances made during the period on our Registration Statement on Form 10, as
amended most recently on November 4, 2008, which Form 10 is hereby incorporated
herein by this reference.
PURCHASES OF EQUITY SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required by smaller reporting companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 in Item 1A under the caption
"Risk Factors," in this Annual Report on Form 10-K for the year ended December
31, 2008, and other filings with the SEC, 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 should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 2008 (the
"Financial Statements"). 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.
RESULTS OF OPERATIONS - 2008 VS. 2007
Revenues
During the year ended December 31, 2008, merchant processing services realized
revenues of $404,103 and the Bank Freedom prepaid card realized revenues of
$614,793 for a total of $1,018,896. This represents an increase of 9% or
$80,900 from $937,996 for the same period last year. The increase is the result
of no revenues generated in 2007 by prepaid card operations, offset by merchant
processing revenues not continuing with its consulting line of business. In
2008, merchant processing revenues are generated in the form of commissions paid
as a percentage of credit card volume for the retailers engaged, while the
prepaid card business model earns revenues through interchange and service fees
after issuance of the cards.
Page 15
Cost of Sales
During the year ended December 31, 2008, we incurred $425,346 in costs directly
attributed to our sales. This represents an increase of 43% or $127,343 over
$298,003 realized in the same period last year. The increase is primarily due
to the operations of the prepaid card business, partially offset by the decrease
in merchant processing consulting costs. In 2008, Cost of Sales includes, bank
and MasterCard Association fees, merchant processing fees, and fulfillment
costs.
Expenses
During the year ended December 31, 2008, we incurred $3,248,555 in expenses.
This represents a 142% or $1,903,989 increase over $1,344,566 realized in the
same period last year. Expenses consisted of the following:
EXPENSES: 2008 2007
- ---------------------------------------- ----------- --------
Sales $1,214,914 $731,495
Professional Fees (784,219) 116,538
Selling General and Administrative Costs 1,167,261 418,941
Related Party Expense - Rent 82,161 77,592
Sales - Consist of internet marketing to potential cardholders using various
affiliate marketing channels and pay-per-click campaigns. This category also
includes direct mail, radio commercial production, radio air time, and printing
expense necessary to attract new cardholders. This represents a 66% or
$483,419 increase over $731,495 realized in the same period last year, as 2007
only recognized these expenses in the final quarter of the year.
Professional Fees - Consist of accounting, legal and other professional fees
including the cost of the fair market value for the stock provided to investor
representatives for investor referrals. This represents a 573% or $667,681
increase over $116,538 realized in the same period last year, as most of these
expenses did not exist in 2007.
Selling General and Administrative Costs - Consists of insurance, office
supplies and expense, payroll expenses, investor referral fees and other
miscellaneous expenses. The 179% or $748,320 increase over $418,941 realized in
the same period in 2007 is the result of the new prepaid card operations.
Related Party Expense - Rent - Consists of office space rental. This represents
an increase of 6% or $4,569 over $77,592 realized from the same period in 2007,
resulting from prorate share of office space occupied by the prepaid card
operations.
FINANCIAL CONDITION AND LIQUIDITY
Our liquidity requirements arise principally from our working capital needs,
including the cost of goods and marketing costs. Although in the future we
intend to fund our liquidity requirements through a combination of cash on hand
and revenues from operations, for the year ended December 31, 2008, the Company
had incurred $3,673,901 in expenses (of which $330,689 were non-cash expenses)
and had realized only $1,018,896 in revenues.
Accordingly, our ability to initiate our plan of operations and continue as a
going concern is currently dependent on our ability to raise external capital.
We have raised $350,000 on the issuance of three convertible notes. We believe
that it will be very difficult to obtain any form of debt financing without
equity conversion terms due to our current lack of revenues from operations and
the current state of our
Page 16
balance sheet, including a lack of hard assets against which to borrow.
Accordingly, we are focusing on obtaining equity financing. However, with the
economic turmoil in the finical markets today we are concerned about the ability
to raise any capital at all
From November, 2007, through September, 2008, the Company raised approximately
$2,164,237 in three private offerings, before costs. In addition, we may be
required to seek additional funding.
OFF-BALANCE SHEET ARRANGEMENTS
None
CONTRACTUAL OBLIGATIONS
At December 31, 2008, our contractual obligations were:
MORE
WITHIN 1-3 3-5 THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ------------------------ ---------- -------- -------- ------ -------
Office Lease(1) $ 66,144 $ 33,072 $ 33,072 $ - $ -
EnPointe Systems(2) $ 55,050 $ 55,050 $ - $ - $ -
Equinix(3) $ 9,900 $ 9,900 $ - $ - $ -
Bruce A. Berman(4) $ 664,229 $201,683 $462,546 $ - $ -
Repayment Obligations to
Other Vendors(5) $ 263,727 $116,406 $147,321 $ - $ -
Total: $1,059,050 $416,111 $642,939 $ - $ -
========== ======== ======== ====== =======
(1) The company is obligated under a lease arrangement for office space
expiring in December, 2010. Monthly rent is due on the first of each month
in the amount of $2,756.
(2) The company is obligated under a repayment agreement for services rendered
in 2008 for information systems work.
(3) The company is obligated under a repayment agreement for web site marketing
services performed in 2008.
(4) The company is obligated under an agreement with Bruce A. Berman for
$16,746 per month the purchase of Merchant Processing International, Inc.
in 2007.
(5) The company is obligated under repayment agreements to other vendors for
services performed in 2008.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description Page
- ----------- ----
Report of Independent Registered Public Accounting Firm.....................F-18
Consolidated Balance Sheets.................................................F-19
Consolidated Statements of Operations.......................................F-20
Consolidated Statements of Changes in Shareholders' Interest................F-21
Consolidated Statements of Cash Flows.......................................F-22
Notes to Consolidated Financial Statements..................................F-23
Page 17
GRUBER & COMPANY LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Prepaid Card Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Prepaid Card
Holdings, Inc. as of December 31, 2008 and 2007, 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,
2008 and 2007 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 the financial
statements, the Company has a negative equity and substantial losses. These
items among others, raises substantial doubt about its ability to continue as a
going concern. These financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Gruber & Company LLC
Lake St. Louis MO 63367
February 27, 2009
F-18
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008
ASSETS DECEMBER 31, DECEMBER 31,
Current Assets: 2008 2007
-------------- --------------
Cash and Cash Equivalents $ 83,011 $ 577,331
Accounts Receivable 79,472 -
Prepaid Expenses 33,100 -
-------------- --------------
Total Current Assets $ 195,583 $ 577,331
Fixed Assets - net $ 4,420 3,973
Other Assets:
Deposits 10,000 -
-------------- --------------
Total Other Assets $ 10,000 $ -
-------------- --------------
Total Assets $ 210,003 $ 581,304
============== ==============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and
Accrued Expenses $ $ 3,454
Interest Payable - related party 2,768 -
Notes Payable - related party 197,269
Notes Payable 58,551
Accrued Derivative Liability -
-------------- --------------
Total Current Liabilities $ 530,687 $ 3,454
Long Term Liabilities:
Note Payable - related party $ 466,960 $
Note Payable 124,338
-------------- --------------
Total Long Term Liabilities $ 591,298 $
-------------- --------------
Total Liabilities $ 1,121,985 $ 3,454
Stockholders Equity:
Common Stock, authorized
1,000,000,000 shares,
403,903,890 and
476,873,587 issued and
outstanding @.001 per share $ 403,904 $ 476,874
Subscription Receivable - (114,163)
Additional Paid in Capital 2,057,597 935,569
Retained Deficit (3,373,483) (720,430)
-------------- --------------
Total Stockholders' Equity (Deficit) $ (911,982) $ 577,850
-------------- --------------
Total Liabilities and Stockholders
Equity (Deficit) $ 210,003 $ 581,304
============== ==============
The accompanying notes are an integral part of these financial statements.
F-19
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008
FOR THE YEAR ENDED
----------------------------
DECEMBER DECEMBER
31, 2008 31, 2007
------------- -------------
Revenues
Card Operations $ 614,793 $ -
Processing Services 404,103 937,996
------------- -------------
Total Revenues 1,018,896 937,996
Cost of Revenues 425,346 298,003
------------- -------------
Gross Profit 593,550 639,993
Expenses:
Sales 1,214,914 731,495
Professional Fees 784,219 116,538
General and Administrative 1,167,261 418,941
Related Party Expense-Rent 82,161 77,592
-
-------------
Total 3,248,555 1,344,566
Profit (Loss) from operations (2,655,005) (704,573)
Other income 1,952
Net Profit (Loss) $ (2,653,053) $ (704,573)
============= =============
Profit (Loss) per share $ (.0070) $ (.0060)
============= =============
Weighted Average Shares Outstanding 377,763,729 116,515,560
============= =============
The accompanying notes are an integral part of these financial statements.
F-20
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2008
Addit-
Common Stock Preferred Stock Subscr- Subscr- ional Retained
------------------------- --------------- iption iption Paid in Earnings
Shares Amount Shares Amount Receivable Payable Capital (Deficit) Total
------------- ---------- ------ ------- ------------ -------- ----------- ------------ ------------
Balance January
1, 2007 12,529,839 $ 12,530 $ (20,000) $ (15,857) $ (23,327)
Stock issued for cash 21,750,000 21,750 713,250 735,000
Shares Receivable 2,531,250 2,531 (114,163) 111,632
Shares issued for
services 2,062,500 2,063 121,687 123,750
Stock issued for
debt 13,000,000 13,000 9,000 22,000
Stock issued for
founder 425,000,000 425,000 425,000
Net (Loss) for the
year ended December
31, 2007 (704,573) (704,573)
------------- ---------- ------ ------- ------------ -------- ----------- ------------ ------------
Balance December
31, 2007 476,873,589 $ 476,874 (114,163) - 935,569 (720,430) 577,850
Shares for
Combination 22,500,000 22,500 (732,348) (709,848)
Subscription Cash
Received 114,163 114,163
Shares for Cash 29,187,500 29,188 1,400,049 1,429,237
Shares returned to
Treasury (127,500,000) (127,500) 127,500 -
Shares Issued for
Services 3,342,801 3,342 326,327 329,669
Shares Cancelled (500,000) (500) 500 -
Net (Loss) for the
year ended December
31, 2008 - - - - - - - (2,653,053) (2,653,053)
------------- ---------- ------ ------- ------------ -------- ----------- ------------ ------------
Balance December
31, 2008 403,903,890 $ 403,904 - $ - $ - $ - $2,057,597 $(3,373,483) $ (911,982)
============= ========== ====== ======= ============ ======== =========== ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
F-21
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2008
FOR THE YEAR ENDED
DECEMBER 31,
Cash Flows from Operating Activities: 2008 2007
------------ ----------
Net (Loss) for the period: $(2,653,053) $(704,573)
Depreciation 1,272 3,076
Common Stock issued 352,169 548,750
Changes in Assets and Liabilities
Accounts Receivable (79,472)
Prepaid Expenses and Deposits (43,100) 2,346
Accounts Payable and Accrued Expenses 268,645 (28,771)
------------ ----------
Net Cash flows used for
Operating Activities (2,153,539) (179,172)
Cash Flows Used for Investing Activities -
Business Combination and Fixed Assets (734,067) (1,319)
Cash Flows from Financing Activities
Stock issued for Debt 22,000
Issuance of notes 1,288,782 -
Repayments on notes (438,896)
Proceeds from the Issuance of Common Stock 1,429,237 735,000
Collection of subscription Receivable 114,163 -
------------ ----------
Net Cash Flows from Financing Activities 2,393,286 757,000
------------ ----------
Net Increase (Decrease) in cash (494,320) 576,509
Cash-beginning 577,331 822
------------ ----------
Cash-end $ 83,011 $ 577,331
============ ==========
Supplemental disclosures:
Interest Paid $ 35,002 $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
PREPAID CARD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 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 is in the prepaid general use debit, ATM, POS and signature based
card market. The Company's primary target audience is the non banked and
underserved individuals in the country.
Basis of Presentation/Going Concern
- --------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred losses and has a negative equity. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
These consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. These consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The accompanying consolidated financial statements have been
prepared on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries Berman Marketing Group, Inc and Merchant
Processing International. All material inter-company balances and transactions
have been eliminated on consolidation. The acquisition of Merchant Processing
International has been accounted for as a transfer of assets under common
control, and accordingly is accounted for in all periods presented.
For 2007 the financial includes the activity of Merchant Processing
International which was the only operating company during that 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
F-23
based compensation the Company recognizes an expense in accordance with SFAS No.
123 and values the equity securities based on the fair value of the security on
the date of grant. For stock-based awards the value is based on the market value
for the stock on the date of grant. Stock option awards are valued using the
Black-Scholes option-pricing model.
During the period 3,342,801 shares were issued for services totaling $329,669.
These shares were issued from April 4, 2008 to November 24, 2008 at market
prices between .04 and .14 cents per share to four individuals for consulting
services.
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 $250,000 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.
F-24
Revenue Recognition
- --------------------
The company recognizes revenue both from merchant processing costs and activity
charges for card usage. These fees are transactionally based and recorded at the
time of occurrence.
For the merchant processing services, the company receives revenues in the form
of commissions paid resulting from a percentage of credit card volume for the
retailers engaged. This revenue is recognized on a monthly basis under the
accrual basis of accounting.
For the Bank Freedom prepaid cards operations, we derive revenues through fees
charged to the cardholders. Those sources may include:
- - Interchange
- - Bill pay fees
- - Domestic and International ATM transaction fees
- - Debit purchase and PIN decline fees
- - Monthly maintenance fees
These fees are debited on the card and recognized as revenue immediately.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
- ----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the acquirer to disclose the nature and financial effect of the
business combination. FAS 141(R) is effective for fiscal years beginning after
F-25
December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of
fiscal 2009 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
than the first quarter of fiscal 2009 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in the first quarter of fiscal 2008. The adoption
of SFAS No. 159 had no effect on our financial position and results of
operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158
is effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end of fiscal 2007. The
adoption of SFAS No. 158 did not have an effect on the Company's financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We adopted SFAS No. 157 in the first
quarter of fiscal 2008. There was no impact with the adoption of SFAS No. 157 on
our financial position and results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. We adopted FIN 48
effective first quarter of fiscal 2007. There was no impact on our financial
position and results of operations upon the adoption of FIN 48.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 22,500,000 shares of stock, for the acquisition of Merchant
Processing International, an entity who was owned by the majority stockholder of
the Company.
F-26
The company owes on a note a related party, its President $664,229 with interest
at 5% due over 48 months starting July 1, 2008.
The Company was obligated under a sub-lease arrangement with Berman Investment
Group, a related party for hardware and software which expired in November 2008.
Monthly terms approximate $1,800 a month. There were no expenses incurred during
the period.
The Company also sub-leased its rental space from Berman Investment Group, an
entity owned by a related party now for approximately $3,500 per month. During
the years ended December 31, 2008 and 2007 $82,161 and $77,592 was incurred
respectively and shown as related party expenses in the profit and loss
statement.
The Company has also engaged Berman Investment Group (BIG) as a consultant. The
Company is also required to reimburse BIG for costs incurred, however BIG has
not incurred any costs resulting from the consulting agreement and is currently
not seeking reimbursement.
NOTE 3 - BUSINESS COMBINATION
The Company has accounted for the acquisition of Merchant Processing, Inc. as a
business combination under common control on the amount paid for Merchant
Processing International in excess of its book value. The Company issued
22,500,000 shares of stock, valued at par, due to the related party interest, of
$22,500 and incurred a note payable for $750,000, the total of which was
$772,500. This amount exceeded the book value by $732,348 which was charged
against additional paid in capital.
NOTE 4 - ACCOUNTS RECEIVABLE
The Company has accounts receivable from Banks on the amounts transacted for the
previous month, consisting of processing fees and charges.
NOTE 5 - FIXED ASSETS
Furniture and Fixtures $ 8,648
Computers 3,682
Total 12,330
--------
Accumulated Depreciation (7,910)
Net Fixed Assets $ 4,420
Depreciation expense in 2008 and 2007 was $1,272 and $3,076 respectively.
NOTE 6 - NOTE PAYABLE
Related Party
- --------------
The Company is indebted to its main shareholder for the purchase of the
subsidiary for $664,229 payable over 41 months with interest at 5%. There was
accrued interest at December 31, 2008 of $2,768. The interest expense is also
included in the general and administrative expenses in the statement of
operations. Effective January 1, 2009, the interest rate was reduced to 3.25%.
F-27
NOTE 7 - COMMON STOCK TRANSACTIONS
During the first quarter 2008 the Company issued 33,000,000 shares of stock,
22,500,000 shares for the purchase of the subsidiary and the balance of
10,500,000 shares for $500,000 cash. Also during the quarter subscription
receivables of $114,163 were collected.
During the second quarter of 2008 the company issued 10,992,803 shares and
cancelled 500,000 shares for a net increase of 10,492,803 shares. Of the shares
issued 9,000,000 were issued for cash of $450,000, and 1,992,803 for services
totaling $188,732
During the third quarter of 2008 the company issued 10,600,000 shares and
returned to Treasury 127,500,000 shares. Of the shares issued 9,500,000 were
issued for cash of $475,000, and 1,100,000 for services totaling $126,000.
During the fourth quarter of 2008 the company issued 437,500 shares. Of the
shares issued, 187,500 were issued for cash of $4,688, and 250,000 for services
totaling $14,688.
NOTE 8 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carry forwards.
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 carry forward equal to approximately $700,000. The
deferred tax asset related to this carry forward has been reserved in full based
upon the weight of available evidence, that it is more likely than not that the
deferred tax assets will not be realized.
NOTE 9 - SUBSEQUENT EVENTS
In 2009 the Company's president reduced his salary approximately 70% commencing
February 1, 2009.
In 2009 the Company's executive vice president and vice-president reduced their
salaries approximately 30% and 28% respectively.
Also in 2009 the Company granted 5,000,000 warrants at an exercise price of .025
and 10,000,000 warrants were re- priced at .025.
In 2009 the Company received notice of a lawsuit alleging breach of a
contractual relationship involving shares of stock for services. The Company is
diligently defending this lawsuit and feels there is no merit to its action and
even in the event of an adverse outcome, such outcome would not have a material
effect on the business.
F-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
-----------------------------------------------------
Our management, including our Chief Executive and Principal Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of December 31, 2008. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is
recorded, processed, summarized, and reported, within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on this evaluation, our Chief
Executive and Principal Financial Officer concluded that our disclosure controls
and procedures were not effective as of December 31, 2008.
(b) Management's Report on Internal Control over Financial Reporting
-----------------------------------------------------------------------
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-a5(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP. Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use of disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer, our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria set
forth in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
our management has concluded that our internal control over financial reporting
was ineffective as of December 31, 2008 and there are material weaknesses in our
internal control over financial reporting. A material weakness is a deficiency,
or a combination of control deficiencies, in internal control over financial
reporting such that there is a reasonable possibility
Page 29
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis.
The material weaknesses relate to the limited number of persons responsible for
the recording and reporting of financial information, the lack of separation of
financial reporting duties, and the limited size of our management team in
general. We are in the process evaluating methods of improving our internal
control over financial reporting, including the possible addition of financial
reporting staff and the increased separation of financial reporting
responsibility, and intend to implement such steps as are necessary and possible
to correct these material weaknesses.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this Annual Report on Form 10-K. Our registered
public accounting firm will not be required to opine on internal controls until
fiscal 2010.
(c) Change in Internal Controls
------------------------------
There were no changes in our internal control over financial reporting during
the quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
Page 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
Bruce Berman 51 Chief Executive Officer,
Chairman of the Board of Directors,
and Principal Financial Officer
Robert Christiansen 47 Executive Vice President of Business
Development and Director
Rick Galasieski 34 Vice President, Secretary and Director
EXECUTIVE OFFICER AND DIRECTOR BIOS
BRUCE BERMAN: Chief Executive Officer, Chairman of the Board of Directors, and
Principal Financial Officer
In 2001, Mr. Berman founded Berman Investment Group LLC ("BIG"). From 2003 to
2007 at BIG, Mr. Berman led the development and marketing of over $20,000,000 in
financial empowerment books and CDs, including his book, "I Got Here. You Can
Too!"(R), a book on how to start, fund, and run companies that has approximately
500,000 copies in circulation, and 15 financial empowerment CD's with
approximately 3,000,000 copies in circulation targeted at a similar demographic
as Bank Freedom consisting of Credit and Debt Repair, Internet Marketing, Real
Estate, Sales, Negotiating, using eBay, Being Your Own Boss, and Residual
Income. He wrote, produced, performed, and aired ten TV commercials, twenty
radio commercials and was responsible for the purchasing and airing over 100,000
spots specifically targeted at a similar demographic.
Mr. Berman was nominated by Sprint(R) for the Ernst & Young "Entrepreneur of the
Year Award" for a technology development company he founded in 1999 and took
public in 2000.
During 1990 to 2000 Mr. Berman was a business consultant. Mr. Berman advised
companies on formation, capital raising, investor relations, mergers and
acquisitions, marketing growth and becoming public. Although he never held a
securities license, Mr. Berman was the beneficial owner of an NASD licensed
broker-dealer he started in 1999. Other Companies founded and headed by Mr.
Berman include
Page 31
TAEI, a pioneer in wind energy development in the US from 1983 to 1988, With
TAEI, he purchased several companies within the industry including a NASD
licensed broker dealer, a licensed construction company and a manufacturing
facility which in a few short years employed over 100 staff. Two years after the
federal and state tax credits financing wind energy expired in 1985, TAEI ended
up in chapter 11 bankruptcy in 1987. For approximately a year Mr. Berman was
the court-appointed trustee and negotiated the resolution of tens of millions of
dollars worth of contracts. Eventually the company went chapter 7. From 1980
to 1983, Mr. Berman co founded Cal American Leasing, an equipment leasing
company.
ROBERT CHRISTIANSEN: Executive Vice President of Business Development and
Director
In addition to serving as Chief Operating Officer of the Company, Mr.
Christiansen is vice president of BIG and Bank Freedom. Prior to joining Berman
Investment Group in June of 2006, Mr. Christiansen founded and operated
NightShift Design, an internet consulting firm focused on internet retail
properties while leveraging SEO, affiliate, and PPC marketing programs to drive
sales, from 2002 to 2006. In 2000, Mr. Christiansen launched the Southern
California operations of All Bases Covered, Inc, a professional consulting
company focused on small business technology services. From 2000 to 2002, Mr.
Christiansen grew the western region of All Bases Covered from 10 to over 400
employees in 10 western states, and revenues from $0 to $40 million in two years
through organic growth and acquisition. He developed and executed corporate
marketing plan and implemented national sales training and operational best
practices programs based on successes. From 1986 to 2000, Mr. Christiansen held
various positions including VP of Consulting Services for Artios Corporation, a
technology provider for then international paper industry.
RICK GALASIESKI: Vice President and Director
Rick Galasieski serves as Vice President and director of the Company. He
previously served as Vice President of Internet Marketing for Berman Marketing
Group, Inc. In 2002 Mr. Galasieski founded Epic Results, Inc., an interactive
internet marketing firm specializing in driving keyword targeted traffic to web
properties, which he ran until joining the Company in 2007. In 2000 he
co-founded EdgeFocus, Inc., which was acquired by Wireless Logic Group, a
leading supplier of Wi-Fi services to multi-dwelling units across the
Southwestern United States. From 2000 to 2002, he served as their Vice
President of Operations and Strategic Development.
In 1998 Mr. Galasieski co-founded Broadband Digital Group, Inc. From 1998 to
2000, he was instrumental in growing this company from its inception to over 200
employees, which was acquired by Winfire, Inc., and grew to the number six
broadband company in the United States at the time. The company had over 50,000
active DSL subscribers and over 500,000 desktop software clients when the
subscriber base was sold off to the regional bell operating companies. Mr.
Galasieski received his BS in Marketing from Arizona State University.
OTHER SIGNIFICANT EMPLOYEES AND CONSULTANTS
In addition to the above listed Executive Officers and Directors, we consider
the following non-executive officers to be instrumental to the conduct of our
business:
JOHN WEBER, JR.: Head of Accounting Advisory Board
Mr. Weber joined the Company on May, 26, 2008 and served as the Vice Present of
Finance and Vice President of Compliance for the Company and each of the
Company's subsidiaries until his resignation. He currently serves as Head of
the Company's Accounting Advisory Board. From 2002 until he joined
Page 32
the Company, Mr. Weber served as a Corporate Auditor / Investigator for Boeing.
At Boeing, he assessed the control environment around financial reporting,
compliance, and operations for various Boeing businesses. In addition, Mr.
Weber worked directly with Boeing Legal and Ethics divisions to investigate
allegations that potentially compromised the control environment and Corporate
Governance at Boeing. His responsibilities included the assessment of risk
around financial controls, compliance, operations and the effectiveness of the
Corporate Governance of the company. Mr. Weber was instrumental in executing
compliance measures with respect to the requirements of Sarbanes-Oxley,
including creating and monitoring Boeing's internal controls over financial
reporting, and verifying the truth and accuracy of financial statement
assertions. He also has extensive experience in auditing the preparation of
public company financial statements, including forecasts. From 2000 to 2002, he
was a Senior Financial Analyst for the Intermodal Services Division of GE
Capital, where he was responsible for forecasting, profit and loss statements,
analyzing actual results and providing analysis between forecast and actual.
Mr. Weber received a Masters of Business Administration in Finance from
Pepperdine University, and a Bachelor of Business Administration in Accounting
from Gonzaga University. He is a Certified Public Accountant in the State of
California.
We are currently in the process of renegotiating Mr. Weber's consulting
agreement. However there can be no assurances that we will be able to
successfully retain Mr. Weber's consulting services on acceptable terms. If we
are unable to successfully renegotiate Mr. Weber's agreement, we will not have
anyone under contract or employed qualified to assist us in timely filing our
periodic reports, and we will have to find a replacement.
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires our directors and officers, and persons who own more than ten percent
of the Common Stock to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC") and the American
Page 33
Stock Exchange. SEC regulations require reporting persons to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of the Forms 3, 4 and 5 and amendments
thereto furnished to us by the persons required to make such filings during
fiscal 2008 and our own records, we believe that Mr. Berman, Mr. Christiansen
and Mr. Galasieski each failed to file timely a Form 3 to report initial
beneficial ownership.
CORPORATE GOVERNANCE.
We have not adopted a code of ethics do date. We are in the process of
evaluating the standards of conduct necessary for the deterrence of malfeasance
and the promotion of ethical conduct and accountability, and will determine
whether a code of ethics is necessary based on our evaluation.
The Company does not have a standing Nominating Committee. There have been no
changes to the procedures whereby security holders may recommend nominees to the
registrant's board of directors.
The Company is not a "listed issuer" as defined by Rule 10A-3, and does not have
a standing Audit Committee. We do not have a financial expert serving on our
board of directors.
ITEM 11. 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."
Page 34
Name Corporate Office
------------------- -------------------------------
Bruce Berman Chief Executive Officer
and Principal Financial Officer
Robert Christiansen Executive Vice President
of Business Development
Rick Galasieski Vice President
Components of our Executive Compensation Program
- ------------------------------------------------
At this time, the primary elements of our executive compensation program are
base salaries and option grant incentive awards, although the board of directors
has the authority to award cash bonuses, benefits and other forms of
compensation as it sees fit.
We do not have any formal or informal policy or target for allocating
compensation between short-term and long-term compensation, between cash and
non-cash compensation or among the different forms of non-cash compensation.
Instead, we have determined subjectively on a case-by-case basis the appropriate
level and mix of the various compensation components. Similarly, we do not rely
extensively on benchmarking against our competitors in making compensation
related decisions, although we may consider industry compensation trends as one
of many factors in our case-by-case determination of proper compensation.
Base salaries
- --------------
Base salaries are used to recognize the experience, skills, knowledge and
responsibilities required of our named executive officers. Base salary, and
other components of compensation, 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. The Company has issued a total of 15,500,000 warrants to its
current employees.
We have issued 15,000,000 warrants to Rick Galasieski, an executive officer, in
three separate issuances of 5,000,000 warrants each. 5,000,000 warrants will
vest annually in three equal installments beginning in May, 2009, at an exercise
price of $0.025, and will terminate immediately upon termination of employment
for cause, or 5 years from vesting otherwise. 5,000,000 were issued pursuant to
an employment agreement on August 8, 2008; they vest on August 8, 2009 at an
exercise price $0.025 and are valid for 5 years after vesting date. The
exercise price and period of validity of the initial 10,000,000 warrants were
changed to their current levels on February 9, 2009, in consideration for Mr.
Galasieski agreeing to an increase in duties and temporary decrease in salary.
An additional 5,000,000 warrants were issued on February 9, 2009 after he was
named director & Vice President on February 3, 2009. These warrants vest on
February 3, 2010 at an exercise price $0.025 and are valid for 5 years after the
vesting date.
Page 35
We have also issued warrants to purchase 250,000 shares each to two of our
non-executive officer employees. The warrants vest after one year and are
exercisable for five years after vesting at an exercise price of $0.025. The
warrants vest immediately upon change in control of the Company.
During the year, the Company also issued 5,000,000 warrants each to John Weber,
Jr. and Ryan Guenthart, former executive officers who resigned during the year.
The vesting of these warrants was conditioned on their continued employment; the
warrants terminated prior to the vesting of any rights
The Company subsequently engaged Mr. Weber as a consultant, and issued 5,000,000
additional warrants to him pursuant to his consultation agreement with the
Company. The warrants to Mr. Weber will vest 1,000,000 upon the Company being
accepted to the OTCBB, and 500,000 for each timely filing of the next eight
periodic reports beginning with the quarterly report for the period ended
September 30, 2008. The Company had previously granted 5,000,000 warrants to
Mr. Weber contingent on his continued employment, but these warrants failed to
vest prior to his resignation.
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. Galasieski's
health care costs are paid by the company.
CURRENT EXECUTIVE COMPENSATION
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 current agreed annual
salary of each of the named executive officers.
Name Annual Salary*
------------------- ---------------
Bruce Berman $ 90,000
Robert Christiansen $ 90,000
Rick Galasieski $ 72,000
* Total Annual Salary paid to the named executives is subject to
the attainment of certain performance goals as more fully described
below.
Bruce Berman, Chief Executive Officer - The Company had previously agreed to pay
Mr. Berman an annual salary of $297,500, $24,970 monthly, beginning on January
1, 2009. Mr. Berman has agreed to reduce his monthly salary to $7,500 per month
beginning February 1, 2009. Upon the Company reaching an operational profit of
$100,000 with all undisputed accounts payable in a current status, Mr. Berman's
previous monthly salary will be reinstated. The company will need to negotiate
with Mr. Berman for the year 2010 and beyond.
Page 36
Robert Christiansen, Chief Operating Officer - The Company had previously agreed
to pay Mr. Christiansen an annual salary of $127,500, $10,625 monthly. Mr.
Christiansen has agreed to reduce his monthly salary to $7,500 per month
beginning February 1, 2009. Upon the Company reaching an operational profit of
$100,000 with all undisputed accounts payable in a current status, Mr.
Christiansen's previous monthly salary will be reinstated. The company will
need to negotiate with Mr. Christiansen for the year 2010 and beyond.
Rick Galasieski: Vice President - The Company had previously agreed to pay Mr.
Galasieski an annual salary of $100,000, $8,333 monthly. Mr. Galasieski has
agreed to reduce his monthly salary to $6,000 per month beginning February 1,
2009. Upon the Company reaching an operational profit of $100,000 with all
undisputed accounts payable in a current status, Mr. Galasieski's salary will be
increased to $127,500. The company will need to negotiate with Mr. Galasieski
for the year 2010 and beyond.
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2007
The Company currently does not participate in any equity award plan. During
fiscal 2008, 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 and Mr. Christiansen did not receive any
compensation for 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, 2008.
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. None of our officers serve on the board of directors of any other
entity whose executive officer serves on our board of directors.
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.
Page 37
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, 2008. 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 YEAR SALARY ($) BONUS ($) COMPENSATION STOCK OPTIONS PAYOUTS ALL OTHER
- ------------------- ---- ------------- ------------- ------------ ------------ ------------ ------- ---------
Bruce Berman 2007 0 0 0 0 0 0 0
2008 1 0 0 0 0 0 0
Robert Christiansen 2007 30,000(2) 0 0 0 0 0 0
2008 120,000 0 0 0 0 0 0
Rick Galasieski(1) 2008 87,985 0 0 0 0 0 0
<FN>
1. Mr. Galasieski began his employment on January 1, 2008.
2. Mr. Christiansen began his employment in October, 2007. He was paid a pro rata portion of his agreed $120,000 annual salary.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
The following table sets forth information regarding the outstanding warrants held by our named officers as of December
31, 2008.
OPTION AWARDS(1)
-------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF EQUITY INCENTIVE PLAN AWARDS: OPTION
SECURITIES UNDERLYING SECURITIES UNDERLYING NUMBER OF SECURITIES EXERCISE OPTION
UNEXERCISED OPTIONS UNEXERCISED OPTIONS UNDERLYING UNEXERCISED PRICE EXPIRATION
NAME (#) EXERCISABLE (#) UNEXERCISABLE UNEARNED OPTIONS ($) DATE
- --------------- --------------------- --------------------- ----------------------------- --------- ---------------
Rick Galasieski - 1,666,667 - 0.025 May 5, 2014
1,666,667 0.025 May 5, 2015
1,666,666 0.025 May 5, 2016
5,000,000 0.025 August 15, 2014
<FN>
1. Mr. Christiansen holds warrants to purchase up to 63,750,000 shares of common stock. These warrants were issued by
Mr. Berman and not by the Company.
Page 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership of our common stock as of
March 26, 2009. 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 March 26, 2009;
(2) each of the Company's Directors and Executive Officers; and
(3) all of its Directors and Executive Officers as a group.
AMOUNT OF SHARES PERCENT OF SHARES
IDENTITY OF BENEFICIALLY BENEFICIALLY
PERSON OR GROUP OWNED OWNED(1,4) CLASS
------------------- ----------------- ------------------ ------
Bruce Berman 297,325,000(3) 73.6% Common
CEO and Chairman
Robert Christiansen 85,000,000(2,3) 21.0% Common
EVP and Director
Rick Galasieski 0
VP and Director
All Directors and 318,575,500 78.8% Common
Officers as a Group
(1) The percentage of shares owned is based on 403,903,870 shares being
outstanding as of March 26, 2009. Where the beneficially owned shares of any
individual or group in the following table includes any options, warrants, or
other rights to purchase shares in the Company's stock, the percentage of shares
owned includes such shares as if the right to purchase had been duly exercised.
(2) Includes 21,250,000 shares and options to purchase up to 63,750,000 shares
held by Mr. Berman. Mr. Berman had issued an option to Mr. Christiansen to
purchase up to 127,500,000 shares of his stock, which was reduced to 106,250,000
on July 28, 2008. As of July 29, 2008, these options are exercisable on the
following schedule: (a) 42,500,000 shares once the Company has 30,000 activated
cards (these options were exercised on May 27, 2008); (b) an additional
42,500,000 shares (reduced to 21,250,000 on July 28, 2008) once the Company has
70,000 issued cards and the Company's revenues exceed $500,000 per month; and
(c) an additional 42,500,000 shares once the company has 120,000 issued cards
and the Company's revenues exceed $825,000 per month. Mr. Christiansen may
exercise those options upon reaching those milestones upon payment to Mr. Berman
of an exercise price of $.0001 per share for the options. If the conditions are
not met, the warrants referred to in (b) above expire August 1, 2011, and the
warrants referred to in (c) above expire August 1, 2012.
(3) On July 28, 2008, senior management of the Company agreed to cancel and
return to treasury a total of 127,500,000 shares of the Company's common stock.
Bruce Berman agreed to cancel 106,250,000 of his shares, and Robert Christiansen
agreed to cancel 21,250,000 of his shares.
In addition, Mr. Christiansen agreed to restructure his option agreement with
Mr. Berman. The total number of options to purchase shares held by Mr. Berman
was been reduced by 21,250,000, and the remaining options have been made
conditional on additional Company performance milestones.
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42,500,000 options conditional on the issuance of 70,000 cards have been reduced
to 21,250,000, and made conditional also on the Company's revenues exceeding
$500,000 per month. 42,500,000 options conditional on the issuance of 120,000
cards have been made conditional also on the Company's revenues exceeding
$825,000 per month.
As a result of the cancellation, the Company's amount of common stock
outstanding was reduced from 524,466,390 to 396,966,390, a drop of 24.3%.
Proportionate ownership by all shareholders will increase by 32.1%.
(4) BENEFICIAL OWNERSHIP OF SECURITIES: Pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, involving the determination of beneficial
owners of securities, a beneficial owner of securities is person who directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise has, or shares, voting power and/or investment power with respect to
the securities, and any person who has the right to acquire beneficial ownership
of the security within sixty days through means including the exercise of any
option, warrant or conversion of a security.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
BERMAN INVESTMENT GROUP LLC
Bruce Berman, the Company's Chief Executive officer, owns Berman Investment
Group LLC ("BIG"). BIG allowed 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
paying the hosting cost of equipment which is approximately $1,800 per month.
This agreement expired in November 2008. The agreement also required the
Company to reimburse BIG for costs incurred, however BIG did not incur any costs
resulting from the lease agreement.
The Company has also engaged BIG as a consultant. The Company is also required
to reimburse BIG for costs incurred, however BIG has not incurred any costs
resulting from the consulting agreement and is currently not seeking
reimbursement.
MERCHANT PROCESSING INTERNATIONAL, INC. DBA BANK FREEDOM
Prior to March 8, 2008, Bruce Berman, the Company's Chief Executive Officer,
owned Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom").
Bank Freedom is a registered Independent Sales Organization ("ISO") with
Columbus Bank and Trust and is authorized by Visa and MasterCard as a merchant
account provider that specializes in all areas of bankcard processing. Bank
Freedom has been approved by a sponsoring bank as well as MasterCard and Visa to
issue prepaid debit cards.
Bank Freedom had an exclusive agreement with BMG to pay BMG 80% of the gross
revenue it receives for all debit card issued. Because of the purchase of MPI,
this agreement is canceled.
Bank Freedom received approval to issue cards from a bank, Visa and MasterCard.
Bank Freedom is marketing its Bank Freedom Prepaid MasterCard(R) card and had
shipped a total of 76,877 cards through August 4, 2008.
Effective January 25, 2008, the Company entered into an Acquisition and Stock
Purchase Agreement to purchase all 600 shares of Bank Freedom, representing 100%
of the issued and outstanding common
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stock, from Mr. Berman. In consideration for the controlling stake in Bank
Freedom, the Company issued Mr. Berman 22,500,000 shares of common stock, and
executed a note in the amount of $750,000, payable in monthly installments over
two years with a simple interest rate of 7.25%. This agreement was approved by
a majority of disinterested shareholders of the Company. Following the
transaction, the Company filed a dba to do business as "Bank Freedom." The
Company has recently filed in California to change the name of Merchant
Processing International, Inc., dba Bank Freedom to Bank Freedom, Inc.
On July 3, 2008, the Company restructured the note owed to Mr. Berman. The term
of the note was increased from two years to four years, the interest rate was
changed from a fixed 7.25% to prime, not to exceed 7.25%, and reduced fixed
payments from $31,250 of principal plus interest to $17,272, which includes both
principal and interest. The prime rate is currently 5%. A majority of the
directors not including Mr. Berman has determined this restructuring to be in
the best interest of the Company and its shareholders. In January of 2009 the
interest rate on the note was dropped to 3.25% which creates a payment of
$16,764.69. The company is currently in default of the note and has not made its
January , February or March payments totaling $50,800.95.
LEASED PROPERTY
The Company previously operated at 18500 Von Karman Suite 530, Irvine, CA
92612. BMG, the Company's wholly owned operating subsidiary, rented this space
on a sublease from BIG under a lease from The Irvine Company. The lease expired
December, 2008.
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, Rick
Galasieski and Robert Christiansen, none of whom are independent.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees paid to Gruber & Company LLC, the
Company's independent public accounting firm, for the fiscal years ended
December 31, 2008 and 2007.
2008 2007
------- -------
Audit fees $15,000 $15,000
Audit-related fees - -
Tax fees* 5,000 5,000
All other fees - -
------- -------
TOTAL $20,000 $20,000
* Fees for preparation of tax returns
AUDIT COMMITTEE PRE-APPROVAL OF SERVICES OF PRINCIPAL ACCOUNTANTS
The Company does not have a standing audit committee. The Board as a whole has
the authority and responsibility to select, evaluate, determine the compensation
of, and, where appropriate, replace the independent auditor. After determining
that providing the non-audit services is compatible with maintaining the
auditor's independence, the board pre-approves all audits and permitted
non-audit services to be performed by the independent auditor, except for de
minimus amounts. If it is not practical
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for the board to meet to approve fees for permitted non-audit services, the
board has authorized its chairman, currently Mr. Berman, to approve them and to
review such pre-approvals with the Board at its next meeting.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SCHEDULES.
The following consolidated financial statements of Prepaid Card Holdings, Inc.
and Subsidiaries are included herein by reference to the pages listed in "Item
8. Financial Statements and Supplementary Data":
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the years ended December 31,
2008, and 2007
Consolidated Statements of Changes in Shareholders' Interest for the
years ended December 31, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31,
2008 and 2007
Notes to Consolidated Financial Statements
EXHIBITS
The following Exhibits are included herein:
31.1 Certification of the Principal Executive and Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)
or Rule 15d-14(a)).
32.1 Certification by the Principal Executive and Principal Financial Officer of
Prepaid Card Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREPAID CARD HOLDINGS, INC.
(the registrant)
By \s\ Bruce Berman
----------------
Bruce Berman
Chairman, Chief Executive Officer, and
Principal Financial Officer
Date: March 26, 2009
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