<PAGE>
As filed with the Securities and Exchange Commission on October 22, 1999
Registration No. 333-86643
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRECIS SMART CARD SYSTEMS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
OKLAHOMA 5045 73-1494382
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
11032 QUAIL CREEK ROAD, SUITE 108 LARRY E. HOWELL
OKLAHOMA CITY, OKLAHOMA 73120 CHIEF EXECUTIVE OFFICER
(405) 752-5550 PRECIS SMART CARD SYSTEMS, INC.
11032 QUAIL CREEK ROAD, SUITE 108
OKLAHOMA CITY, OKLAHOMA 73120
(Address and telephone number, including area code, of (405) 752-5550
registrant's principal executive offices) (Name, address and telephone number,
of agent for service)
------------------------
Copies To:
MICHAEL E. DUNN, ESQ. BERT L. GUSRAE, ESQ.
DUNN SWAN & CUNNINGHAM DAVID A. CARTER, P.A.
2800 OKLAHOMA TOWER 2300 GLADES ROAD
210 PARK AVENUE SUITE 210, WEST TOWER
OKLAHOMA CITY, OKLAHOMA 73102-5604 BOCA RATON, FLORIDA 33431
TELEPHONE NUMBER: (405) 235-8318 TELEPHONE NUMBER: (561) 750-6999
FACSIMILE NUMBER: (405)235-9605 FACSIMILE NUMBER: (561) 367-0960
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. | | __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | | __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | | __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
WE WILL AMEND AND COMPLETE THE INFORMATION CONTAINED IN THIS PROSPECTUS.
ALTHOUGH WE ARE PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE
SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO
BUY THEM UNTIL DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES
HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
PRELIMINARY PROSPECTUS
October 22, 1999
1,000,000 SHARES OF COMMON STOCK
PRECIS SMART CARD SYSTEMS, INC.
11032 Quail Creek Road, Suite 108
Oklahoma City, Oklahoma 73120
Telephone: (405) 752-5550
This is our initial public offering, and no public market exists for our
common stock. The offering price of our common stock may not reflect the
market price after the offering.
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<CAPTION>
===============================================================================
PER SHARE TOTAL
<S> <C> <C>
- -------------------------------------------------------------------------------
Public offering price................................ $6.00 $6,000,000
- -------------------------------------------------------------------------------
Underwriting Discounts and Commissions............... $ .60 $ 600,000
- -------------------------------------------------------------------------------
Proceeds to Precis................................... $5.40 $5,400,000
</TABLE>
Barron Chase Securities is offering our common stock on a firm commitment basis.
We have granted Barron Chase Securities a 45-day option to purchase up to
150,000 additional shares of our common stock to cover over-allotments. If
exercised in full, the total public offering price, underwriting discounts
and commissions, and proceeds to Precis will be $6,900,000, $690,000 and
$6,210,000, respectively.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION.
YOU SHOULD ONLY PURCHASE SHARES IF YOU CAN AFFORD A COMPLETE LOSS. BEFORE
INVESTING, YOU SHOULD CAREFULLY READ THIS PROSPECTUS AND ANY SUPPLEMENT,
PAYING PARTICULAR ATTENTION TO THE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
BARRON CHASE
SECURITIES
<PAGE>
CAUTIONARY STATEMENT RELATING TO
FORWARD LOOKING INFORMATION
We have included some forward-looking statements in this prospectus
regarding our expectations after completion of this offering. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, levels of activity,
performance or achievements, or industry results, to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Some of these
forward-looking statements can be identified by the use of forward-looking
terminology including "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategies that involve risks
and uncertainties. You should read statements that contain these words
carefully because they:
- - discuss our future expectations;
- - contain projections of our future operating results or of our future
financial condition; or
- - state other "forward-looking" information.
We believe it is important to communicate our expectations to you, but
events may occur in the future over which we have no control and which we are
not accurately able to predict.
------------------------
"Precis Health Card System-TM-" is our trade mark for which trade mark
applications are pending. "PrecisCache," "PrecisReserve," and "PrecisPersona"
are trade marks we use, but we have not made trade mark applications for
their protection. This prospectus also contains the trademarks and service
marks of other companies which are the property of their respective owners.
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TABLE OF CONTENTS
PAGE
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<S> <C>
Prospectus Summary............................................................................................. 1
Precis Smart Card Systems, Inc......................................................................... 1
The Offering........................................................................................... 1
Summary Financial Information.......................................................................... 2
Risk Factors................................................................................................... 3
Use of Proceeds................................................................................................ 12
Dividend Policy................................................................................................ 12
Dilution....................................................................................................... 12
Capitalization................................................................................................. 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................................. 14
Results of Operations.................................................................................. 14
Liquidity and Capital Resources........................................................................ 16
Business....................................................................................................... 17
Management..................................................................................................... 27
Directors and Executive Officers....................................................................... 27
Executive Officer Compensation......................................................................... 28
Stock Option Plan...................................................................................... 29
Director Liability and Indemnification................................................................. 30
Lack of Employment Arrangements
and Keyman Insurance............................................................................... 30
Certain Transactions........................................................................................... 30
Security Ownership of Certain Beneficial
Owners and Management...................................................................................... 31
Description of Securities...................................................................................... 31
Common Stock........................................................................................... 31
Preferred Stock........................................................................................ 32
Transfer Agent and Registrar........................................................................... 32
Outstanding Stock Options.............................................................................. 32
Shareholder Action..................................................................................... 32
Anti-Takeover Provisions............................................................................... 33
Shares Eligible for Future Sale................................................................................ 34
Lock-Up Agreements..................................................................................... 35
State Imposed Escrow Arrangement.........................................................................35
Underwriting................................................................................................... 35
Legal Matters.................................................................................................. 38
Experts........................................................................................................ 38
Where You Can Find Additional Information...................................................................... 38
Index to Financial Statements...................................................................................F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS OR MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY. FOR
ADDITIONAL INFORMATION, SEE "WHERE YOU CAN FIND ADDITIONAL INFORMATION."
WE CALL THIS DOCUMENT A PROSPECTUS. IT COVERS THE SHARES OF OUR COMMON
STOCK WHICH ARE OFFERED BY US TO YOU AND OTHERS. THIS OFFERING TO YOU AND
OTHERS IS REFERRED TO AS THE OFFERING. THESE SHARES OF OUR COMMON STOCK HAVE
BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
GIVES EFFECT TO AND ASSUMES THE FOLLOWING:
- - THE SALE OF 1,000,000 SHARES OF OUR COMMON STOCK FOR THE INITIAL PUBLIC
OFFERING PRICE OF $6.00 PER SHARE AND OUR RECEIPT OF NET PROCEEDS OF
$5,050,000 FROM THE OFFERING; AND
- - BARRON CHASE SECURITIES DOES NOT EXERCISE ITS OVER-ALLOTMENT OPTION TO
SELL AN ADDITIONAL 150,000 SHARES OF OUR COMMON STOCK.
WE RECOMMEND THAT YOU ESPECIALLY CONSIDER THE INFORMATION CONTAINED IN "RISK
FACTORS" (PAGE 4). ALL REFERENCES IN THIS PROSPECTUS TO FISCAL YEARS ARE TO
THE 12 MONTHS ENDED DECEMBER 31 OF THE PARTICULAR YEAR.
PRECIS SMART CARD SYSTEMS, INC.
We at Precis Smart Card Systems, Inc. are a development stage company.
We develop and market commercial software products used with a technology
commonly referred to as "smart cards." The smart card contains an embedded
microchip that serves as an information storage device that performs limited
computer functions. This smart card technology enables electronic commerce
for point-of-sale transactions and can serve as an information storage device
for personal healthcare and emergency medical treatment.
Our products include the following:
- - Precis Health Card System -- personal medical history and information are
stored on the care smart card for use by healthcare providers and
emergency response personnel;
- - PrecisCache -- an amount of money value is stored on a disposable smart
card that may be used to purchase products or services typically in
closed areas including stadiums, arenas, campuses, and events and
specific retail sites;
- - PrecisReserve -- a reusable smart card system on which an amount of money
value is initially stored and additional amounts may be added to
replenish the money value and may be used to purchase products or
services; and
- - PrecisPersona -- a smart card system designed for use by marketers,
retailers, distributors and manufacturers to track customer purchasing
preferences and patterns and reward customer loyalty through discounts,
refunds and other complementary gifts.
These products are in various stages of development.
During the six months ended June 30, 1999 and the years ended December
31, 1998 and 1987, we
- - had product and service revenue of $25,000, $322,483 and $40,856,
respectively, and
- - incurred a net loss of $448,741, $671,330 and $1,150,160, respectively.
Our principal executive offices are located at 11032 Quail Creek Road,
Suite 108, Oklahoma City, Oklahoma 73120, and our telephone number is (405)
752-5550.
THE OFFERING
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Common stock offered............................... 1,000,000 shares.
Common stock outstanding after the offering........ 2,200,000 shares.
-1-
<PAGE>
Use of proceeds.................................... We expect to have net proceeds of approximately
$5,050,000 after payment and deduction of the expenses of
the offering. We plan to use the net proceeds as follows:
- $323,900 (6.4% of net proceeds) for payment
of accounts payable;
- $277,550 (5.5% of net proceeds) for payment of
long-term debt;
- $329,650 (6.5% of net proceeds) for repayment of
shareholder loans;
- $700,000 (13.9% of net proceeds) for further
development of our smart card products and technology;
- $2,810,900 (55.7% of net proceeds) for marketing
of our smart card products and systems;
- $108,000 (2.1% of net proceeds) for prepayment
of financial advisory fee to Barron Chase Securities, and
- $500,000 (9.9% of net proceeds) for working
capital.
The allocation of net proceeds to these uses is our best estimate.
We have the discretion to determine the use of a substantial portion of
the net proceeds of the offering.
Proposed Nasdaq SmallCap symbol of common stock:
</TABLE>
-2-
<PAGE>
SUMMARY FINANCIAL INFORMATION
You should read the following selected financial data in conjunction
with our financial statements and related notes of Precis, together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (page 14). The selected financial data as of and for the years
ended December 31, 1998 and 1997, are derived from our audited financial
statements. The selected financial data as of and for the six months ended
June 30, 1999 and 1998, are derived from our unaudited financial statements.
In our opinion, the financial information presented for the six months ended
June 30, 1999 and 1998, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of this information.
All of this financial information is presented elsewhere in this prospectus
The results of operations during years and periods presented are not
necessarily indicative of our future operations.
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<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ----------------------------
1998 1997 1999 1998
---------- ------------- ------------ ----------
<S> <C>> <C> <C> <C>
STATEMENT OF INCOME DATA:
Product and service revenue....................... $ 322,483 $ 40,856 $ 25,000 $ 34,404
---------- ----------- --------- ---------
Operating expenses--
Product deployment and
research and development.................. 389,586 542,203 134,462 193,799
Sales and marketing........................... 147,411 148,885 79,321 74,418
General and administrative.................... 399,756 472,320 217,124 163,544
---------- ----------- --------- ---------
Total expenses........................ 936,753 1,163,408 430,907 431,761
---------- ----------- --------- ---------
Operating loss........................ (614,270) (1,122,552) (405,907) (397,357)
---------- ----------- --------- ---------
Other expense (income)--
Interest expense.............................. 59,196 29,890 42,834 24,079
Interest income............................... (2,136) (2,282) -- (1,364)
---------- ----------- --------- ---------
57,060 27,608 42,834 22,715
---------- ----------- --------- ---------
Net loss -- Deficit accumulated
during development state...................... $( 671,330) $(1,150,160) $(448,741) $(420,072)
========== =========== ========= =========
Weighted average number of common
shares outstanding........................ 900,000 900,000 1,002,083 900,000
========== =========== ========= =========
Per share..................................... $ (0.75) $ (1.28) $ (0.45) $ (0.47)
========== =========== ========= =========
DECEMBER 31, JUNE 30, 1999
---------------------------- ---------------------------
1998 1997 ACTUAL AS ADJUSTED(1)
----------- ----------- ------------ --------------
BALANCE SHEET DATA:
Current assets.................................... $ 10,035 $ 45,864 $ 374,672 $4,634,145
Working capital (deficit)......................... (757,441) (551,188) (716,844) 4,473,656
Total assets...................................... 74,253 206,139 389,734 4,639,207
Total current liabilities......................... 767,476 597,052 1,091,516 160,489
Long-term debt, net of current portion............ 41,570 273,669 4,558 4,558
Stockholders' equity (deficit).................... (734,793) (664,582) (706,340) 4,340,660
</TABLE>
- ------------------------
(1) Adjusted to give effect to the sale of (i) 75,000 shares of our common
stock for net proceeds of $130,500 and (ii) the sale of 1,000,000 shares
of our common stock from the offering, receipt of estimated net proceeds
of $5,050,000 and the application of the net proceeds as anticipated.
-3-
<PAGE>
RISK FACTORS
THE PURCHASE OF THE SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS, YOU SHOULD CONSIDER THE FOLLOWING FACTORS AND THE MATTERS
DISCUSSED ELSEWHERE IN THIS PROSPECTUS WHEN EVALUATING AN INVESTMENT IN OUR
COMMON STOCK. MANY OF THE FACTORS DISCUSSED BELOW ARE NOT WITHIN OUR CONTROL.
WE PROVIDE NO ASSURANCE THAT ONE OR MORE OF THESE FACTORS
- - WILL NOT ADVERSELY AFFECT
- THE MARKET PRICE OF OUR COMMON STOCK
- OUR FUTURE OPERATIONS AND
- OUR BUSINESS, FINANCIAL CONDITION, OR
- RESULTS OF OPERATIONS
- - REQUIRING SIGNIFICANT REDUCTION OR DISCONTINUANCE OF OUR OPERATIONS,
- - REQUIRING US TO SEEK A MERGER PARTNER OR
- - REQUIRING US TO SELL ADDITIONAL STOCK ON TERMS THAT ARE HIGHLY DILUTIVE
TO OUR SHAREHOLDERS.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE MAY NOT BE ABLE TO
SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE PROFITABILITY.
We are a development stage company. We have a limited operating history
upon which you can base your evaluation of our prospects and the potential
value of our common stock. Previously, we have engaged principally in
research and development of our proprietary smart card technology and
software. Accordingly, we have incurred substantial operating losses. Now, we
face the uncertainties, expenses, delays and difficulties associated with
shifting from development to commercialization and marketing of our smart
card products and technologies.
WE HAVE HAD VERY LIMITED REVENUE AND OUR REVENUE GROWTH IS DEPENDENT UPON
MARKET ACCEPTANCE OF OUR SMART CARD PRODUCTS.
During the six months ended June 30, 1999, and the years ended December
31, 1998 and 1997, we had total revenues of $25,000, $322,483, and $40,856,
respectively. We have generated limited revenues to date compared to our
expenditures. Significant increases in our revenues to achieve profitability
is dependent upon market acceptance of our smart card products and systems.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES WHICH
WILL INCREASE OUR ACCUMULATED DEFICIT.
We incurred significant losses from operations resulting in an
accumulated deficit at June 30, 1999 of $3,418,985. We will continue to have
a high level of operating expenses. We also will be required to make
significant expenditures in further development and marketing of our smart
card products and systems. Consequently, we anticipate continuing to incur
significant and increasing losses in the foreseeable future until the time,
if ever, that we are able to generate sufficient revenues to support our
development and marketing activities.
WE MAY NOT OBTAIN PROFITABILITY WHICH MAY REQUIRE SUSPENSION OF OUR
OPERATIONS, SEEK A MERGER PARTNER OR OBTAIN ADDITIONAL EQUITY CAPITAL WHICH
MAY BE DILUTIVE TO OUR SHAREHOLDERS.
We cannot assure you that
- - our smart card products and systems will gain market acceptance,
- - we will be able to successfully implement our business strategy, or
- - we will be able to generate meaningful revenues or achieve profitable
operations.
If we do not achieve or sustain profitable operations, we could be required
to reduce significantly or suspend our operations, including research and
development activities, seek a merger partner or sell additional securities
on terms that are highly dilutive to the purchasers of our common stock under
the offering.
WE HAVE A SUBSTANTIAL DEFICIT WORKING CAPITAL AND DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH RESULT IN DISCONTINUANCE OF OUR OPERATIONS
AND LOSS TO OUR SHAREHOLDERS.
Our financial statements included in this prospectus were prepared on
the assumption that we will continue as a going concern. The report of our
independent accountants with respect to our financial statements for 1998 and
1997 notes that we have suffered losses from operations in 1998 and 1997 and
had an accumulated deficit at December 31, 1998. The report indicated that
these factors raised substantial doubt regarding our ability to continue as a
going concern. Unless our marketing efforts successfully result in
profitability, our losses will
-4-
<PAGE>
consume our capital resources and eventually require us to discontinue
operations. If this occurs, our shareholders will lose their investment in
our common stock.
BECAUSE OUR PRODUCTS ARE BASED ON SMART CARD TECHNOLOGY, WE LACK PRODUCT AND
REVENUE SOURCE DIVERSIFICATION; THEREFORE, OUR BUSINESS SUCCESS AND
PROFITABILITY ARE TOTALLY DEPENDENT UPON MARKET ACCEPTANCE OF OUR SMART CARD
PRODUCTS.
Our smart card products and technology are expected to provide most if
not all of our sales and revenues in the foreseeable future. Our operating
results will therefore depend on
- - continued and increased market acceptance of our smart card products and
technology and
- - our ability to modify our products and technology to meet the needs of
our customers.
Any reduction in demand for, or increasing competition with respect to, these
products will result in loss of or the potential for revenue from smart card
sales. This lack of revenues will adversely affect potential profitability,
may result in additional losses, increase our accumulated deficit, and
possibly result in discontinuance of our operations.
SO FAR THE MARKETING AND MARKET ACCEPTANCE OF OUR SMART CARD TECHNOLOGY IS
VERY LIMITED; THEREFORE MARKET ACCEPTANCE OF OUR PRODUCTS AND TECHNOLOGY ON A
BROAD BASIS IS UNPROVEN.
Market acceptance of our smart card products and technology requires
convincing governmental authorities, commercial enterprises and other
potential system sponsors or users to adopt a smart card system. It will be
necessary for the smart card system come to be used instead of magnetic
stripe card and paper-based systems, and would change the way traditional
transaction and information processing tasks are accomplished.
Due to the large capital and infrastructure investment made by debit and
credit card issuers and significantly lower costs associated with the use of
magnetic stripe cards, there is no assurance that our smart card technology
will be economically viable for a sufficient number of sponsors and users.
Consequently, potential system sponsors or users may be reluctant to convert
to smart card technology. Accordingly, there is no assurance that significant
market opportunities will develop for smart card systems in the United States
or that the acceptance of smart card-based systems in other countries will be
sustained.
ERRORS IN OUR SOFTWARE PRODUCTS MAY ADVERSELY AFFECT MARKET ACCEPTANCE OF OUR
PRODUCTS.
Our software products may contain errors or failures when installed,
updated or enhanced. There is no assurance that, despite testing, errors will
not be found in our products after the delivery. If errors occur, these
errors or failures may result in loss of or delay in market acceptance.
BECAUSE WE DO NOT MANUFACTURE SMART CARD HARDWARE, WE ARE DEPENDENT UPON
INDEPENDENT THIRD PARTIES FOR THE MANUFACTURE AND SUPPLY OF THE SMART CARD
HARDWARE.
We obtain all of the hardware components utilized in conjunction with
our smart card software technology from manufacturers and suppliers. We
believe that these components are generally available from several suppliers.
We do not, however, have any long-term supply contracts. Also, although a
component may be available from more than one supplier, we could incur delays
in switching suppliers, which could result in loss or delay of sales and
reduced revenues, thus having an adverse effect on results of operations.
IF WE DEVELOP MARKETS FOR OUR PRODUCTS INTERNATIONALLY AS EXPECTED, WE WILL
BE CONFRONTED WITH THE LEGAL, FINANCIAL AND MANAGEMENT CHALLENGES OF FOREIGN
OPERATIONS WHICH MAY BE BEYOND OUR ABILITY TO SUCCESSFULLY MANAGE.
We intend to market our smart card technology in Mexico and Canada. In
order to successfully expand internationally, we will be required to
establish foreign operations and hire additional personnel. This will require
significant management attention and financial resources and could materially
adversely affect our operating margins and profitability, especially if such
operations are not profitable. International sales and operations are subject
to numerous risks, including:
- - unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers,
- - difficulties in staffing and managing foreign operations,
- - difficulties in protecting intellectual property rights,
- - longer payment cycles and problems in collecting
-5-
<PAGE>
accounts receivable,
- - political instability,
- - fluctuations in currency exchange rates and implementation of foreign
exchange controls, and
- - potentially adverse tax consequences.
We provide no assurance that one or more of these factors will not have a
material adverse effect on our future international operations which may
affect our ability to sell and distribute our products and, consequently, on
our business, financial condition and results of operations.
AS PART OF OUR MARKETING, WE INTEND TO OBTAIN GOVERNMENT CONTRACTS, WHICH MAY
EXPOSE US TO THE SPECIAL RISKS ASSOCIATED WITH GOVERNMENT CONTRACTS.
As part of our strategy, we may market our smart card systems to
government agencies in the United States and internationally. In this event,
we will become subject to the special risks including
- - delays in funding,
- - lengthy review processes for awarding contracts,
- - non-renewal, delay, termination at the convenience of the government,
- - reduction or modification of contracts in the event of changes in the
governmental policies or as a result of budgetary constraints, and
- - increased or unexpected costs resulting in losses.
Any or all of the foregoing could have a material adverse effect on the
profitability of these contracts and consequently our business, financial
condition and results of operations.
Furthermore, we may also be required to obtain any potential government
contracts through the competitive bidding process. The competitive bidding
process is typically lengthy and often results in the expenditure of
financial and other resources in connection with bids that are not accepted.
BECAUSE THE NUMBER OF MARKETING COMPANIES WITH EXPERIENCE IN MARKETING SMART
CARD PRODUCTS IS VERY LIMITED, WE MAY NOT SUCCESSFULLY FIND THIRD PARTY
MARKETERS TO ASSIST US, WHICH WILL INCREASE THE POSSIBILITY THAT OUR
MARKETING ACTIVITIES WILL NOT BE SUCCESSFUL.
Achieving market acceptance of our products and systems requires
significant efforts and expenditures to create awareness, demand and interest
by potential system sponsors and users, and others. We expect to rely on
unrelated third parties to assist in marketing our smart card products and
technology. We believe that companies with smart card marketing experience
are very limited. Although we are in discussions with a third-party marketing
company, we have not entered into any contractual arrangements for such
assistance. Therefore, we may not be able to find companies to assist us.
Without this assistance, our product marketing will be limited to our
internal marketing staff. This may increase the possibility that our
marketing activities will be unsuccessful.
OUR CAPITAL RESOURCES AVAILABLE FOR PRODUCT MARKETING MAY BE LIMITED TO THIS
OFFERING, UNLESS REVENUE SOURCES DEVELOP FROM SUCH MARKETING ACTIVITIES, AND
IF EXHAUSTED MAY LEAD TO DISCONTINUANCE OF OPERATIONS AND LOSS TO OUR
SHAREHOLDERS.
Following the offering, we will have limited financial, personnel and
other resources to undertake extensive marketing activities. Unless our
initial marketing activities result in revenues and cash flows, we may
exhaust our capital resources before achieving significant levels of revenue
and obtaining profitability. If this occurs, we may be required to
discontinue operations which would result in loss to our shareholders.
BECAUSE OUR SMART CARD PRODUCTS AND TECHNOLOGY ARE OUR SOLE SOURCE OF
REVENUES, OBSOLESCENCE OF OUR TECHNOLOGY AND PRODUCTS WILL RESULT IN LOSS OF
REVENUE SOURCE AND MAY REQUIRE US TO DISCONTINUE OPERATIONS.
The computer application software market is subject to
- - rapid technological change,
- - frequent new product introductions, and
- - evolving technologies and industry standards
that may render our products and technology obsolete.
Furthermore, our product research and development efforts are subject to
the risks
- - that our products and systems will satisfactorily perform the functions
for which they are designed,
- - that our products and systems will meet applicable price or performance
objectives, or
- - that unanticipated technical or that other problems
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<PAGE>
will not occur which would result in increased costs or material delays in
development.
Because of the rapid pace of technological change in the application
software industry, any developed market position in the smart card industry
or other markets that we may enter could be eroded rapidly by product
advancements. Our software applications rely primarily on internally
developed software tools and applications. If alternative software
development tools and applications were to be redesigned and generally
accepted in the marketplace, we could be at a competitive disadvantage
relative to companies employing alternative developmental tools and
applications. Our smart card products and systems must keep pace with
- - technological developments,
- - conform to evolving technologies and standards, and
- - must address increasingly sophisticated client needs.
We can not provide any assurance that
- - we will have sufficient resources to make the necessary research and
development investments,
- - we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products,
- - the new products and product enhancements will meet the requirements of
the marketplace and achieve market acceptance, or
- - our current or future products will conform to industry requirements.
If our products and technology become obsolete, we will required to develop
alternative sources of revenues or discontinue operations which would result
in loss of our shareholders' investment in our common stock.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
Our success to date has been largely dependent upon the skills and
efforts of our directors, executive officers and other key employees. In
particular our success depends on the continued efforts of our chairman of
the board Kent H. Webb, our chief executive officer and director Larry E.
Howell, and our president and chief operating officer Donald A. Cunningham,
with whom we do not have employment agreements. The loss of services of any
of our chairman, executive officers or key technology personnel could have an
adverse effect on the management of our operations and our product
development and technology.
BECAUSE OUR MARKETING EXPERIENCE IS VERY LIMITED AND OUR REVENUE GROWTH AND
POSSIBLE PROFITABILITY IS DEPENDENT UPON MARKET ACCEPTANCE OF OUR SMART CARD
TECHNOLOGY, OUR BUSINESS PLAN IS NOT PROVEN AND MAY BE UNSUCCESSFUL.
The successful implementation of our business plan will be largely
dependent on the effectiveness of our efforts to market our smart card
technology. This will on our ability to
- - enter into marketing and licensing or other arrangements on a timely
basis and on favorable terms;
- - establish satisfactory arrangements with sales representatives and
marketing consultants;
- - hire and retain skilled management as well as financial, technical,
marketing and other personnel;
- - manage successfully our growth (including monitoring operations,
controlling costs and maintaining effective quality, inventory and
service controls); and
- - obtain adequate financing when and as needed.
There is limited information available concerning the performance of our
technologies or market acceptance of our products. We provide no assurance
that
- - we will be successful in implementing our business plan or
- - that unanticipated expenses or problems or technical difficulties will
not occur which would result in material implementation delays, or
- - we will have sufficient capacity to satisfy any increased demand for our
smart card products and technologies resulting from implementation of our
plan of operation.
OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE COMPLETE DISCRETION OVER THE
APPLICATION OF THE PROCEEDS OF THIS OFFERING.
We anticipate that a substantial portion of the proceeds of this
offering will be allocated to the payment of debts, including repayment of
shareholder
-7-
<PAGE>
loans, and working capital for general corporate purposes. The application of
the net proceeds of the offering will be in the sole discretion of our
management. Our shareholders will have no input or control over decisions
regarding application or use of the net proceeds. Two or our shareholders,
including Kent H. Webb, our chairman of the board, hold notes in the
aggregate amount of $329,643, bearing interest at 15% to 25% per year (see
Note 3 of our financial statements, page F-8). These notes become due 30 days
following completion of the offering. We intend to repay the notes from the
proceeds of the offering. If our management elects not to repay these
shareholder notes as anticipated, the holders of the outstanding principal
amounts of these notes will continue to be entitled to receive the interest
on these notes until paid. If not paid within 30 days following completion of
the offering, these notes begin bearing interest at 30% per year until paid.
FOLLOWING THE OFFERING, WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL RESOURCES
TO CONTINUE OUR OPERATIONS AND THE TERMS OF THE ADDITIONAL CAPITAL MAY BE
DETRIMENTAL TO OUR SHAREHOLDERS.
Our capital requirements have been and will continue to be significant.
Our future capital requirements will depend on many factors. These factors
include
- - the our debt repayment history, possibly including our current default in
repayment of our $277,522 long-term debt,
- - the extent and timing of acceptance of our products,
- - the progress of our research and development,
- - the cost of increasing our sales and marketing activities,
- - our operating results, and
- - the status of competing products.
Also, further development of our smart card products to meet the requirements
and specifications of a particular customer may require significant
investment in research and development. This investment may be much in
advance of the actual installation and commencement of revenues from the
installation.
We cannot accurately predict our timing or amount of capital
requirements. If and when needed, we may not be able to obtain additional
capital resources or if available the additional capital will be on terms
satisfactory or advantageous to our shareholders. If needed, our inability to
obtain additional financing could require significant reduction or suspend of
our operations, including our research and development activities, or require
us to seek a merger partner both of which could result in significant losses
to our shareholders. Alternatively, we may sell additional shares of our
stock on terms that are dilutive to our shareholders and superior to the
rights of our shareholders.
BECAUSE THE PERIOD FROM INITIATION TO COMPLETION OF A SALE AND INSTALLATION
IS LENGTHY, WE MAY HAVE FLUCTUATIONS IN REVENUE, WHILE MOST OF OUR OVERHEAD
COST ARE FIXED, WHICH MAY RESULT SIGNIFICANT FLUCTUATIONS IN OF OUR RESULTS
OF OPERATIONS FROM PERIOD TO PERIOD.
The purchase of a smart card system generally involves a significant
commitment of capital with attendant delays frequently associated with large
capital expenditures and implementation procedures within an organization.
Accordingly, our product sales cycle varies by customer and industry, and may
extend for periods of 12 months or more. Also, our sales cycles are subject to
- - customers' or clients' budgetary constraints,
- - internal acceptance reviews,
- - competition,
- - hardware and software vendors' inability promptly to provide quality
products and services,
- - technological factors, and
- - market acceptance.
We have limited or no control of these risks. Because we determine our
expenditure levels in advance of each quarter, our ability to reduce costs
quickly in response to an unforeseen revenue shortfall is limited. Therefore,
- - our quarterly operating results are likely to vary significantly in the
future,
- - period-to-period comparisons of our results of operations may not
necessarily be meaningful, and
- - in any event, period-to-period comparisons may not be indicative of
future performance.
It is also likely that in some future quarter our operating results will be
below the expectations of public market analysts and investors, which, in
turn,
-8-
<PAGE>
could have a severe adverse effect on the price of our common stock.
BECAUSE WE ARE MOVING FROM DEVELOPMENT INTO MARKETING OF OUR SMART CARD
TECHNOLOGY, AS WE GROW, WE MAY NOT BE ABLE SUCCESSFULLY TO MANAGE OUR GROWTH.
If we experience substantial growth, this growth will
- - challenge our management and operating resources,
- - require us to hire more technical, sales and marketing, support and
administrative personnel,
- - require us to expand customer service capabilities, and
- - require us to expand management information systems.
There can be no assurance that we will
- - attract and retain the necessary personnel to accomplish our growth
strategies or
- - not experience constraints that will adversely affect our ability to
satisfy customer demand in a timely fashion or to satisfactorily support
our customers.
If we are unable to manage growth effectively, expected levels of product
sales and revenues may not be obtained or maintained. If this happens our
results of operations will be materially and adversely affected.
BECAUSE THE COMPETITION FOR QUALIFIED EMPLOYEES IS INTENSE, WE MAY NOT BE
ABLE TO ATTRACT, MOTIVATE AND RETAIN PERSONNEL WITH THE SKILLS AND EXPERIENCE
NEEDED TO SUCCESSFULLY MANAGE AND GROW OUR BUSINESS AND OPERATIONS.
Our success and growth will continue to depend in large part on our
ability to attract and retain talented and qualified employees, including
highly skilled management personnel. Competition in the recruiting of
highly-qualified personnel is intense. We may experience difficulty in
recruiting talented and qualified employees, particularly for further
development of out smart card technology. We provide no assurance that we
will hire, motivate and retain personnel with the skills and experience
needed to successfully manage our business and operations.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.
We do not currently believe that we will experience any significant
adverse effects or material unbudgeted costs resulting from the inability of
our current computer technology to change the year 2000. Nevertheless, we
cannot provide assurance that the change to the year 2000 will not result in
computer system failures, delays or miscalculations causing disruptions to
our operations.
WE HAVE MANY COMPETITORS AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY WHICH MAY
LEAD TO LACK OF REVENUES AND DISCONTINUANCE OF OUR OPERATIONS.
We compete with numerous well-established companies that design,
manufacture and/or market smart card systems. Some of our competitors may be
developing technologies or products that are functionally similar or superior
to our products. Most of our competitors possess substantially greater
financial, marketing, personnel and other resources than us. They may also
have established reputations relating to the design, development, marketing
and service of smart card systems.
Due to competitive market forces, we may experience price reductions,
reduced gross margins and loss of market share in the future, any of which
will result in decreases in sales and revenues. These decreases in revenues
will adversely affect our business and results of operations and could lead
to discontinuance of operations. There can be no assurance that
- - we will be able to compete successfully,
- - our competitors will not develop technologies or products that render our
products obsolete or less marketable, or
- - we will be able to successfully enhance our products or develop new
products and technologies when necessary.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND MAY BECOME
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Protection of our smart card software technology is critical to our
business. In protection of our software, we rely
- - on our customer and sponsor license agreements which contain provisions
protecting against the unauthorized use, copying and transfer of our
licensed software, and
- - on a combination of trade secret, copyright and trademark laws, and
non-disclosure agreements.
-9-
<PAGE>
There is no assurance that these measures are adequate to protect our
proprietary technology.
There is no assurance that a claim will not be asserted against us for
violating the person's technology property rights. If properly asserted or
not, we may enter into royalty arrangements, engage in extensive and costly
litigation, or cease in further marketing our products. Furthermore, the
intellectual property issues relating to our products in general have not
been addressed by judicial authorities in many instances.
Our product sales and revenues, and business may be adversely affected
by unauthorized copying or duplication of our software or by infringement
claims. Reduced product sales and revenues or increased expenses will
adversely affect our results of operation and financial condition.
IF YOU PURCHASE OUR COMMON STOCK, YOU WILL SUFFER AN IMMEDIATE AND
SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR SHARES OF COMMON STOCK.
Based upon our pro forma net tangible book value at June 30, 1999, you
and the other purchasers of our common stock will suffer an immediate and
substantial dilution of your investment in our common stock. On a per share
basis, you will suffer dilution of $4.03 per share or 67% of the initial
public offering price of our common stock.
THE OFFERING PRICE OF OUR COMMON STOCK MAY NOT REPRESENT ITS PUBLIC MARKET
VALUE AND THE PUBLIC MARKET PRICE MAY BE FLUCTUATE WIDELY.
The initial public offering price of our common stock
- - was determined solely by negotiations between us and Barron Chase
Securities, the underwriter of the offering,
- - does not necessarily bear any relationship to our assets, book value,
earnings or other established criteria of value, and
- - does not necessarily reflect the market price of the common stock after
the offering.
The market price of our common stock after the offering may be subject to
significant fluctuations in response to, and may be adversely affected by
- - variations in quarterly operating results,
- - changes in earnings estimates by analysts,
- - developments in the computer software industry generally and more
particularly the smart card industry and the industries served thereby,
- - adverse earnings or other financial announcements of our customers or
clients,
- - announcements and introductions of product or service innovations or new
contracts by us or our competitors, and
- - general stock market conditions.
IF WE FAIL TO MEET THE MINIMUM REQUIREMENTS, OUR COMMON STOCK WILL BE
DELISTED BY NASDAQ AND WILL BECOME TRADABLE ON THE OVER-THE-COUNTER MARKET,
WHICH WILL ADVERSELY AFFECT THE SALE PRICE OF OUR COMMON STOCK.
In order to continued inclusion of our common stock on Nasdaq minimum
listing requires must be met. In the event these minimum requirements for
inclusion are not met, our common stock
- - will be delisted and no longer included on the Nasdaq SmallCap Market,
- - will then be traded in the over-the-counter market, and
- - may become subject to the "penny stock" trading rules.
The over-the-counter market is volatile and characterized as follows:
- - the over-the-counter securities are subject to substantial and sudden
price increases and decreases,
- - at times the price (bid and ask) information for the securities may not
be available,
- - if there is only one or two market makers, there is a risk that the
dealers or group of dealers may control the market in our common stock
and set prices that are not based on competitive forces, and
- - the available offered price may be substantially below the quoted bid
price.
Consequently, the market price of our common stock will be adversely affected
if it ceases to be included on the Nasdaq SmallCap Market.
IF OUR COMMON STOCK BECOME SUBJECT TO "PENNY STOCK" RULES, THE MARKET PRICE
OF OUR COMMON STOCK WILL BE ADVERSELY AFFECTED.
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<PAGE>
If our common stock is delisted from the Nasdaq SmallCap Market and does
not trade on another national securities exchange, our common stock may
become subject to the "penny stock" rules. A "penny stock" is generally a
stock that
- - is only listed in "pink sheets" or on the NASD OTC Bulletin Board,
- - has a price per share of less than $5.00 and
- - is issued by a company with net tangible assets less than $2 million.
The penny stock trading rules will impose additional duties and
responsibilities upon broker-dealers and salespersons recommending the
purchase a penny stock or the sale of a penny stock. Required compliance with
these rules will
- - materially limit or restrict the ability to resell our common stock, and
- - the liquidity typically associated with other publicly traded stocks may
not exist.
WE MAY ISSUE ADDITIONAL COMMON STOCK AT PRICES AND ON TERMS DETERMINED BY OUR
BOARD OF DIRECTORS WITHOUT YOUR CONSENT OR APPROVAL.
Following completion of the offering, we will have 5,800,000 shares of
our common stock and 2,000,000 shares of preferred stock available for
issuance. We have the right to offer these shares at an offering price to be
determined in sole discretion of our board of directors. The sale of these
shares may result in substantial dilution. Also the preferred stock may have
rights superior to those of our common stock, which may adversely affect the
market price of our common stock.
IT IS DIFFICULT FOR A THIRD PARTY TO ACQUIRE US DUE TO PROVISIONS IN OUR
CHARTER, BYLAWS AND OKLAHOMA LAWS, WHICH MAY PREVENT OUR COMMON STOCK PRICE
REFLECTING POSSIBLE TAKEOVER.
Provisions of our certificate of incorporation and the Oklahoma
corporate law may make it difficult to effect a change in shareholder control
and to replace our incumbent management. Also, these provisions may limit the
price that a person will pay in the future for our common stock. Furthermore,
our certificate of incorporation authorizes us to issue preferred stock in
classes or series. Our board of directors is authorized to set and determine
voting, redemption and conversion rights and other rights related to the
class or series of preferred stock. In some circumstances, the preferred
stock could be issued to prevent a merger, tender offer or other takeover
attempt that our board of directors opposes.
At some time in the future, we may also become subject to the
anti-takeover provisions of Oklahoma corporate law that discourage a person
from making a control share acquisition (generally an acquisition of voting
stock having more than 20% of all voting power in the election of directors)
without shareholder approval.
All of these things may affect the market price of our common stock
should a takeover rumor develop or an actual takeover attempt occur.
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<PAGE>
USE OF PROCEEDS
From sale of the 1,000,000 shares of our common stock under to the
offering, we will receive estimated net proceeds of $5,050,000 ($5,833,000 if
Barron Chase Securities Inc. elects to sell an additional 150,000 shares of
our common stock). We anticipate that the $5,050,000 estimated net proceeds
will be expended as follows:
<TABLE>
<CAPTION>
USE OF ESTIMATED NET PROCEEDS AMOUNT PERCENT
----------------------------- ------ -------
<S> <C> <C>
Payment of accounts payable as of June 30, 1999..................................... $ 323,900 6.4%
Enhancement and further development of smart card products and technology........... 700,000 13.9
Marketing development costs......................................................... 2,810,900 55.7
Repayment of currently due long-term debt, bearing interest at 10% per year......... 277,550 5.5
Repayment of $329,650 shareholder unsecured loans becoming due 30 days following
completion of the offering:
Bearing interest at 25% per year........................................... 99,900 2.0
Bearing interest at 15% per year........................................... 229,750 4.5
Prepayment of the financial advisory fee to Barron Chase Securities................. 108,000 2.1
Working capital..................................................................... 500,000 9.9
---------- -----
Total estimated net proceeds of the offering.............................. $5,050,000 100.0%
========== =====
</TABLE>
The foregoing represents our best estimate of the allocation of the
proceeds of the offering based upon the present state of our business,
operations and plans, and current business conditions. We will have broad
discretion to determine the use of a substantial portion of the proceeds of
the offering. Conditions may develop which could cause us to reallocate
proceeds from the categories listed above. These conditions include
difficulties encountered in further development of our smart card products and
technology and marketing of these products, and changes in economic climate.
The occurrence of these conditions is unpredicted with any degree of
certainty. Any reallocation will be at the discretion of our board of
directors.
We believe that the net proceeds of the offering, combined with the cash
and cash equivalents, will be sufficient to fund our budgeted capital and
operating requirements for the next 12 months. Pending use of the net
proceeds, we will invest the net proceeds in federally insured or guaranteed
securities.
DIVIDEND POLICY
We do not intend to pay and you should not expect to receive cash
dividends on our common stock. Our dividend policy is to retain earnings to
support the expansion of our operations. If we were to change this policy, any
future cash dividends will depend on factors deemed relevant by our board of
directors. These factors will generally include future earnings, capital
requirements and our financial condition. No dividends may be paid on our
outstanding common stock until all dividends then due on our outstanding
preferred stock have been paid.
DILUTION
The pro forma net tangible book value of our common stock, at June 30,
1999, was $(686,534), or $(.58) per share. This pro forma net tangible book
value gives effect to completion of our private placement of 300,000 shares of
our common stock in July 1999 and receipt of estimated net proceeds of
$497,000. Without taking into account changes in pro forma net tangible book
value after June 30, 1999, other than completion of the private placement and
to assume the sale of 1,000,000 shares of our common stock at the public
offering price of $6.00 per share and our receipt of approximately $5,050,000
in net proceeds from the offering, our pro forma net tangible book value at
June 30, 1999, would have been $4,363,466, or $1.97 per share. This represents
an immediate increase in the pro forma net tangible book
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<PAGE>
value of $2.55 per share to existing shareholders and an immediate dilution in
pro forma net tangible book value of $4.03 per share of common stock to the
purchasers of our common stock under the offering. Pro forma net tangible book
value per share is determined by dividing the pro forma net tangible book
value (tangible assets less liabilities) by the number of shares of common
stock outstanding at that date on a pro forma basis. The following table
illustrates the pro forma per share dilution to purchasers of our common stock
under the offering as of June 30, 1999:
<TABLE>
<CAPTION>
PERCENTAGE
OF PUBLIC
OFFERING PRICE
--------------
<S> <C> <C> <C>
Public offering price........................................................ $6.00 100.0%
Pro forma net tangible book value per share as of June 30, 1999.......... $(0.58)
Increase in pro forma net tangible book value attributable
to existing shareholders............................................. 2.55
------
Pro forma net tangible book value per share after the offering............... 1.97 33.0
----- ------
Dilution to new investors.................................................... $4.03 67.0%
===== ======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1999,
the number of shares of our common stock purchased for cash, the total
consideration paid and the average cash price per share paid by our current
shareholders and by the purchasers of our common stock under the offering
before deduction of underwriting discounts and other estimated offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Our current shareholders............................... 1,200,000 (1) 59.5% $2,732,451 (1) 31.2% $2.27
The purchasers of our common stock..................... 1,000,000 45.5% 6,000,000 68.8% $6.00(2)
--------- ----- ---------- -----
Total.......................................... 2,200,000 100.0% $8,719,645 100.0%
========= ===== ========== =====
</TABLE>
- ------------------------
(1) The amount is based upon total stockholders' equity plus the accumulated
deficit as contained in our financial statements included elsewhere in this
prospectus, adjusted to give effect to completion of our private placement
of 300,000 shares of our common stock in July 1999 and receipt of estimated
net proceeds of $497,000.
(2) The average price per share is the $6.00 public offering price of our
common stock.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999
and as adjusted to give effect to the offering and completion of our private
placement of 300,000 shares of our common stock in July 1999. You should read
the following table in conjunction with our unaudited financial statements
and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1999 AS ADJUSTED(1)
-------------- --------------
<S> <C> <C>
Mezzanine debt.................................................................... $ 329,643 $ --
Current portion of long-term debt................................................. 340,026 340,026
Long-term debt, net of current portion............................................ 4,558 4,558
------------ ------------
Stockholders' equity:
Common Stock.................................................................... 11,757 22,000
Additional paid-in capital...................................................... 2,701,070 7 760,451
Deficit accumulated during development stage.................................... (3,418,985) (3,418,985)
------------ ------------
Total stockholders' equity.................................................... (706,340) 4,363,466
------------ ------------
Total capitalization (deficit).................................................... $ (32,113) $ 4,708,050
=========== ============
</TABLE>
- ------------------------
(1) Adjusted to give effect to completion of (i) our private placement of
300,000 shares of our common stock in July 1999 and receipt of estimated
net proceeds of $497,000, (ii) the sale of 1,000,000 shares of our common
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<PAGE>
stock under the offering and receipt of estimated net proceeds of
$5,050,000, and (iii) the repayment of our mezzanine and long-term debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
financial statements and notes thereto appearing elsewhere in this
prospectus. The results of our operations as discussed below are not
necessarily indicative of our operations following completion of the offering.
RESULTS OF OPERATIONS
The following table sets forth selected results of our operations for
(i) the years ended December 31, 1998 and 1997, and (ii) the six months ended
June 30, 1999 and 1998. We took the information from our financial statements
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------- -----------------------------------
1998 1997 1999 1998
------------------ ----------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product and service revenues........ $ 322,483 100 % $ 40,856 100 % $ 25,000 100 % $ 34,404 100 %
---------- ----- ---------- ----- --------- ----- --------- -----
Operating expenses:
Product deployment and research
and development................. 389,586 121 542,203 1327 134,462 538 193,799 563
Sales and marketing............... 147,411 46 148,885 364 79,321 317 74,418 216
General and administrative........ 399,756 124 472,320 1159 217,124 868 163,544 475
---------- ----- ---------- ----- --------- ----- --------- -----
Total expenses.................. 936,753 290 1,163,408 2847 430,907 1723 431,761 1255
---------- ----- ---------- ----- --------- ----- --------- -----
Operating loss.................. (614,270) (190) (1,122,552) (2747) (405,907) (1624) (397,357) (1155)
---------- ----- ---------- ----- --------- ----- --------- -----
Other expenses (income)
Interest expense.................. 59,196 18 29,890 73 42,834 171 24,079 70
Interest income................... (2,136) (1) (2,282) (5) -- -- (1,364) (4)
---------- ----- ---------- ----- --------- ----- --------- -----
57,060 18 27,608 68 42,834 171 22,715 66
---------- ----- ---------- ----- --------- ----- --------- -----
Net loss - deficit accumulated during
development stage................. $(671,330) (208)% $(1,150,160) (2815)% $(448,741) (1795)% $(420,072) (1221)%
========== ===== ========== ===== ========= ===== ========= =====
</TABLE>
COMPARISON OF SIX-MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998
Revenue during the six months ended June 30, 1999, decreased $9,404 , a
27.3% decrease, to $25,000 from $34,404 during the six months ended June 30,
1998. This decrease was attributable to our lack of financial resources to
support marketing of our products during the 1999 six-month period.
Consequently, we did not replace the revenue from implementation of the
PrecisCache-TM- system for the 1998 PGA Championship and the Kiel Center
Arena, home of the National Hockey League's St. Louis Blues, during the 1998
six-month period.
Operating expenses during the 1999 six-month period decreased $854 to
$430,907 from $431,761 during the 1998 six-month period. Increases in general
and administrative and sales and marketing expenses were offset by a decrease
in product deployment and research and development costs. The $53,580
increase in general and administrative expenses to $217,124 during the 1999
six-month period from $163,544 during the 1998 six-month period was primarily
attributable to increase in insurance costs, legal costs and depreciation
expense. Also, sales and marketing expenses increased $4,903 to $79,321
during the 1999 six-month period from $74,418 during the 1998 six-month
period. The increase in sales and marketing expenses was attributable to the
increased focus on marketing activities. Offsetting the increase in general
and administrative expenses and sales and marketing expenses, product
deployment and research and development expenses decreased $59,337 to
$134,462 during the 1999 six-month period from $193,799 during the 1998 six
month period. This decrease was attributable to the maintenance in 1998 of
the Chicago White Sox project test that was implemented for the 1997 and 1998
seasons, as well as product deployment and research and development expenses
and sales and marketing expenses associated with the above-mentioned
implementations of the PrecisCache system. We incurred operating losses of
$405,907 and $397,357 during the 1999 six-month period and 1998 six-month
period, respectively. The $8,550 increase
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<PAGE>
in the 1999 six-month period operating loss was attributable to the decrease
in product and service revenues.
Other expenses (income) increased by $20,119 or 89% to a net expense of
$42,834 during the 1999 six-month period from $22,715 in the 1998 six-month
period. This increase was principally due to the increase in interest
expense, which increased from $24,079 during the 1998 six-month period to
$42,834 during the 1999 six-month period. The increase in interest expense
was attributable to increase in our outstanding debt during the 1999
six-month period compared to the 1998 six-month period. During the 1999
six-month period we had a $448,741 net loss, while during the 1998 six-month
period we had a net loss of $420,072, an increase of $28,669.
COMPARISON OF 1998 AND 1997
Product and service revenues during the year ended December 31, 1998,
increased by $281,627 (a 689% percent increase) to $322,483 from $40,856
during the year ended December 31, 1997. The increase was principally
attributable to implementation of the PrecisCache system for NationsBank in
Ericsson Stadium (home of the National Football League's Carolina Panthers),
National Hockey League's St. Louis Blues, and the 1998 PGA Championship
during 1998.
Operating expenses during 1998 decreased $226,655, a 19.5% decrease, to
$936,753 from $1,163,408 during 1997. This decrease was principally
attributable to the decrease of $152,617 decrease, a 28.1% decrease, in
product deployment and research and development to $389,586 from $542,203
during 1997 and the $72,564 decrease (a 15.4% decrease) in general and
administrative expense to $399,756 from $472,320 during 1997. The decrease in
product deployment and research and development was attributable to the
decrease in expenses associated with maintenance and implementation of the
Chicago Whit Sox project test with was implemented for the 1997 and 1998
seasons. The largest portion of the costs associated with this project test
was incurred in 1997. The reduction in general and administrative expense was
attributable to a write-off of approximately $126,000 of previously
capitalized start-up costs as a result of our adoption of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," issued by the
American Institute of Certified Public Accountants. This statement requires
that the costs of start-up activities and organization costs be expensed as
incurred. This write-off was offset by an increase of $28,092 in depreciation
expense to $103,594 from $75,502 during 1997, and a general increase in other
office and overhead expenses associated with our increased activity during
1998 compared to 1997. Sales and marketing expenses remained constant with a
$1,474 decrease to $147,411 in the 1998 from $148,885 during 1997. We
incurred an operating loss of $614,270, a $508,282 decrease, in 1998 compared
to a $1,122,552 operating loss in 1997.
Other expenses (income) increased by $29,452 or 107% to a net expense of
$57,060 during the 1998 from $27,608 in 1997. This increase was due to the
increase in interest expense to $59,196 during 1998 from $29,890 during 1997.
This increase was due to the increase in outstanding, interest-bearing debt
during 1998 compared to 1997. During 1998 we had a net loss of $671,330,
compared to a net loss of $1,150,160 during 1997.
PRO FORMA EFFECT OF
STOCK-BASED COMPENSATION
We have historically used stock options to retain and compensate its
officers, directors, employees and others. During 1998 and 1997, we granted
stock options for the purchase of our common stock to our officers,
directors, employees and others. In accordance with Accounting Principles
Board Opinion No. 25, the compensation cost of these stock options is not
recognized in our financial statements. The outstanding stock options granted
in 1998 and 1997 had an estimated fair value at the date of grant of the
options of $116,278 and 209,718, respectively, utilizing the methodology
prescribed under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. After
giving effect to the estimated fair value of these options, we had pro forma
net loss of $787,608 ($0.87 per common share) for the year ended December 31,
1998, and had pro forma net loss of $1,359,878 ($1.51 per common share) for
the year ended December 31, 1997.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
Some of our computer systems were developed employing six digit date
structures. Where date logic requires the year 2000 or beyond, these
structures may produce inaccurate results. We have completed the
implementation of a program to comply with year
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2000 requirements on a system-by-system basis including information
technology and non- information technology systems, including micro
controllers. Our information and non-information technology systems are
certified as year 2000 compliant. Accordingly, we believe that
- - the costs of our year 2000 compliance have not been material to our
financial position or results of operations and
- - the year 2000 compliance issue has not and will not pose significant
operational problems.
If our software were not year 2000 compliant, the customers at Ericsson
Stadium would not be able to use their smart cards to purchase items or the
transaction data reported to Bank of America (formerly NationsBank) would be
inaccurate. Based on progress to date and the limited instances of date
sensitive calculations, we have concluded that development of a contingency
plan is unnecessary.
The most likely risk to us from year 2000 compliance is external, due to
the difficulty of validating all key third parties' readiness for the year
2000. Although our software is year 2000 compliant, our smart card technology
is utilized in conjunction with computer hardware systems and other software
that may not be compliant. We have sought and will continue to seek
confirmation of the compliance and seek relationships with subcontractors,
suppliers, vendors, customers and service providers that interface with our
software and that are year 2000 compliant. Tangent Associates one of the
vendors of the Ericsson Stadium smart card system, has not responded to our
enquires. We have been informed that our subcontractors, suppliers, other
vendors, customers and service providers are year 2000 compliant.
RECENTLY ANNOUNCED ACCOUNTING
PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-2, Software Revenue Recognition ("SOP 97-2"), which supercedes
Statement of Position 91-1, Software Revenue Recognition. SOP 97-2 focuses on
when and the amount of revenue that should be recognized for licensing,
selling, leasing or otherwise marketing computer software and is effective
for transactions enter into in fiscal years beginning after December 15,
1997. In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-4, Deferral of the Effective Date of Provision of
SOP 97-2, Modification of SOP 97-2, Software Revenue Recognition ("SOP
98-4"). SOP 98-4 defers for one year specific provision of SOP 97- 2. In
December 1998, the Accounting Standards Executive Committee issued Position
98-9, Modification of SOP 97-2, Software Revenue Recognition, with respect to
Certain Transactions ("SOP 98-9"). SOP 98-9 also amended specific provisions
of SOP 98-4 through fiscal years beginning on or before March 15, 1999. We
believe that the adoption of SOP 97-2, as amended, will not have a material
effect on our financial position and results of operations.
INCOME TAX PROVISION (BENEFIT)
Statement of Financial Accounting Standards 109, Accounting for Income
Taxes, requires the separate recognition, measured at currently enacted tax
rates, of deferred tax assets and deferred tax liabilities for the tax effect
of temporary differences between the financial reporting and tax reporting
bases of assets and liabilities, and net operating loss carryforwards for tax
purposes. A valuation allowance must be established for deferred tax assets
if it is "more likely than not" that all or a portion will not be realized.
At December 31, 1998 and 1997, we had the benefit of net operating loss
carryforwards of $743,300 and $488,100, respectively. The tax benefit was
attributable to the net operating loss carryforwards of approximately
$1,860,000 which if not realized, will expire at various dates through 2013.
The cumulative net deferred tax asset at December 31, 1998, after the
valuation allowance, had no value.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed operations and capital expenditures
through private placements and sales of debt and equity securities together
with cash from operations and loans from shareholders. At June 30, 1999, we
had a deficit working capital of $716,844. Other than possible loans from our
shareholders and the proceeds of the offering, we do not have any capital
resources other those provided by operations. At June 30, 1999, the aggregate
outstanding principal balance of the shareholder loans was $329,643 bearing
interest at 15% to 25% per annum, with maturity dates 30 days following
completion of the offering. In 1997, 1998 and 1999, we were unable to borrow
funds from lending
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institutions because of our lack of revenues and accordingly apparent
inability to repay. To obtain funds for continuing operations during these
years, two of our shareholders loaned us substantial amounts. Based upon our
financial condition and results of operations, these shareholders demanded
the 25% per interest rate, which our board of directors approved, concluding
that we did not have any other capital resources alternative sources. On
September 30, 1999, the holder of $50,000 of these shareholder loans did not
agree to reduce the interest rate from 25% to 15%.
We are in default in the payment of our long-term debt, which was
$277,522 at June 30, 1999. This debt bears interest at 10% per annum. We have
orally agreed with the holders to pay this debt in full from the proceeds of
the offering.
Following repayment of the shareholder loans and long-term debt, we may
reborrow amounts but from different lenders. As of the date of this
prospectus, we have not established any banking or institution lending
relations or arrangements for future borrowings. Therefore, there is no
assurance that bank or institutional borrowings will be obtained in the
future, possibly as a result of the default on our long-term debt, or, if
available, that the terms will be acceptable to us.
Operating activities for the six months ended June 30, 1999, used net
cash of $281,024 as the result of a net loss of $448,741, reduced by
depreciation of $56,992 and increased by changes in accounts payable and
accrued liabilities of $110,725. In 1998, our operating activities used net
cash of $420,674 as the result of the net loss of $671,330, offset by
depreciation of $103,594, a decrease in inventory of $34,123, and an increase
in accounts payable and accrued liabilities of $112,939. During the six
months ended June 30, 1999, and the year ended December 31, 1998, we used
cash of $7,836 and $7,537, respectively, for investing activities by purchase
of property and equipment. During the six months ended June 30, 1999 and the
year ended December 31, 1998, net cash provided by financing activities was
$653,497 and $426,505, respectively. During the 1999 six-month period we sold
our common stock for gross proceeds of $515,000 ($477,194 net) and borrowed
$226,643 on a short-term basis. During this period, we paid overdraft and
long-term debt of $50,340. During 1998, we sold our preferred stock for net
proceeds of $601,199, borrowed on a short-term basis $78,000 and had a book
overdraft of $27,513. Also, during 1998, we made long-term debt reduction of
$280,127.
We currently have no commitments for capital expenditures in material
amounts. In July 1999 we completed a private offering of 300,000 shares of
our common stock and received gross proceeds of $600,000 ($515,000 was
received during the six months ended June 30, 1999) and net proceeds of
approximately $497,000. We believe that our existing cash and cash from
operations, together with the proceeds of the offering, will be sufficient to
fund our operations for more than the next 12 months. Because our capital
requirements cannot be predicted with certainty, there is no assurance that
we will not require additional financing before expiration of the 12-month
period. There is no assurance that any additional financing will be available
on terms satisfactory to us or advantageous to our shareholders, including
those that purchase shares of our common stock in the offering.
Our business plan is to use more than $2.8 million of the offering net
proceeds to market our products and technology. We believe that through our
marketing efforts we will obtain significant revenue growth and obtain
profitability. Historically, we have devoted our financial resources
principally to development of our smart card technology. We believe that with
the net proceeds of the offering, we will have the financial resources to
develop market acceptance of our smart card technology. However, there is
limited information available concerning the performance of our technologies
or market acceptance of our products. Also, our marketing experience is very
limited. Thus, we provide no assurance that
- - we will be successful in implementing our business plan or
- - that unanticipated expenses or problems or technical difficulties will
not occur which would result in material implementation delays, or
- - we will have sufficient capacity to satisfy any increased demand for our
smart card products and technologies resulting from implementation of our
plan.
Any one of these will adversely affect our ability to become profitable. See
"Business."
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BUSINESS
AT PRECIS SMART CARD SYSTEMS, INC. WE DEVELOP AND DESIGN COMPUTER SOFTWARE
APPLICATIONS AND PRODUCTS UTILIZING OUR SMART CARD TECHNOLOGY.
We were organized in 1996 as an Oklahoma corporation and successor to
MediCard Plus-ADS, LLP, an Oklahoma limited partnership which was formed in
March 1994. At Precis, we design, market, implement and service custom memory
and microprocessor card products, known as smart cards, on which information
and software can be stored. This information can be easily, securely and
accurately accessed and manipulated by electronic data processing equipment
Our software offers solutions for creating and processing data and ensuring
secure electronic transactions. Through our research efforts, we have
developed a library of reusable computer software components for a variety of
personal computer and embedded applications all centered on smart card
technology. Our technology enables electronic commerce in closed-system
environments for point-of-sale transactions and other uses. Our products
includes the Precis Health Card System-TM-, a healthcare smart card system;
PrecisCache-TM-, a fixed-value smart card system; PrecisReserve-TM-, a
reloadable stored-value smart card system; and PrecisPersona-TM-, a
smart-card based customer loyalty and rewards system.
Our near-term marketing efforts are focused on using the success of our
initial smart card system installations in several key market niches to
further solidifying our market position in these markets and as the
foundation for expansion additional markets.
Our products and services include full service hardware integration and
software development and implementation from the point-of-sale to back-end
processing for electronic commerce. We believe that we can become a leading
developer and marketer of integrated smart card software systems and that we
are positioned to provide customers with sophisticated smart card business
solutions across a wide range of applications.
WHAT IS A SMART CARD AND ITS USES?
A smart card is a credit card-sized plastic card in which an integrated
circuit, usually containing a reusable memory chip, is embedded. In their
simplest form, smart cards provide memory storage capabilities, including
fixed-value cash cards, in which the card is discarded after the value stored
on the card is depleted. This microchip acts as a storage device and can be
programmed to perform many of the functions of a computer. The data on the
cards can be read and updated when the card is inserted into a terminal or,
in some cases, simply placed in the proximity of a radio-frequency based
smart card device.
There are two basic types of cards that are often called smart cards and
some are smarter than others. The first is a simple memory card that, like a
magnetic stripe card, stores data. Unlike a 'mag-stripe' card, the smart card
can be over-written with new data many times and can store, depending on the
card, up to 32 Kbytes of information. Because of its versatile nature, our
smart card technology is adaptable for use over a variety of applications.
These applications are generally categorized as payment vehicles, access and
security keys, and information management.
PAYMENT VEHICLE CARDS -- The most familiar of these cards are the
stored-value payment vehicles, commonly known as electronic purse or wallet
cards, credit, debit and automated teller machine cards, which are disposable
or value reloadable. Some library applications use the same structure using
tokens or units instead of a monetary value.
ACCESS AND SECURITY KEY CARDS -- These cards are used to store and
access identification and authentication information, including biometrics
and encryption technology, including digital certificates, for control of
physical access, online access and for facilitating secured commerce on
intranets and the Internet.
INFORMATION MANAGEMENT CARDS -- These cards enable the storage and
manipulation of data of all kinds, including emergency information, medical
history, account management information, expense tracking and various loyalty
programs. These cards may be used to track and cross-reference consumer
purchasing habits to provide marketing information to retailers, distributors
and manufacturers of various products and services.
To provide smart card applications for some clients, we develop
customized software and integrate appropriate hardware technology to adapt
the card to the customer's needs. We believe that our engineers have
sufficient expertise in hardware technology and
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computer programming languages necessary for these development efforts.
The manufacturing cost of a card varies from less than $1 to
approximately $10 depending on the amount of information the card holds and
the complexity of the microchip or its operating system. Similarly, the cost
of a reader device can vary from $50 to $2,000, depending on the complexity
and functionality of the terminal.
WHAT IS THE HISTORY OF THE SMART CARD INDUSTRY?
Smart cards were first developed in the late 1960's in France. At
present smart card technology is established and extensively used in Europe
and Asia. According to Ovum Ltd., the market for smart card units will reach
2.7 billion by 2003. The largest markets will be in the prepayment
applications, followed by access control, and electronic cash applications.
According to a recent study from Dataquest, the overall market for memory and
microprocessor-based cards will grow from 544 million units in 1995 to 3.4
billion units by 2001. Of that figure, microprocessor-based smart cards,
which accounted for only 84 million units in 1995 will grow to 1.2 billion
units in 2001. (Source: Microsoft Corporation:
HTTP://WWW.MICROSOFT.COM/WINDOWSCE/SMARTCARD/BACKGROUND.ASP.) According to
research firm, SJB Research, the smart card market is growing at a rate close
to 50% a year, with three to four billion cards expected to be issued in
2000. (Source: Smart Card Central:
HTTP://WWW.SMARTCARDRESEARCH.COM/REPORTS/SJB.HTML.) Furthermore, Killen &
Associates, Inc., also a research firm, projects that the smart card market
will grow from a world wide total of 250 million transactions in 1996 to 25
billion in 2005. (Source: Killen Associates, Inc., quoted in the SMART CARD
FORUM, HTTP://WWW.SMARTCRD.COM/INFO/MORE/FACTOID.HTM.) The smart card market
in North America totaled 13 million cards in 1996 and is expected to grow to
273 million by 2001 and the projection for 2005 is an estimated 543 million
cards in North America. (Source: Schlumberger Public Relations Department,
"Schlumberger Electronic transactions," quoted in SMART CARD FORUM,
HTTP://WWW.SMARTCRD.CWOM/INFO/MORE/FACTOID.HTM.)
At first mainly installed in pay telephones, smart cards are now being
used for transportation, car parking, arcade games and vending machines. Any
coin operated machine can be converted to a smart card format. Other
applications include automated teller machines, point-of-sale terminals,
personal computers, electronic ticketing and automatic fare collection.
We believe that smart card technology represents the next step in the
evolution of credit/debit instruments and related products and services.
Smart card systems differ from other payment mechanisms in their ability to
store securely large quantities of data on a credit-card sized medium by
means of an integrated circuit chip. The sophisticated encryption algorithms
and other security mechanisms that the chip employs provide information
protection. In January 1999, Microsoft Corporation released a beta version of
its developers' kit to provide a standard model for interfacing smart card
readers and cards with personal computers. (Source: Microsoft Corporation,
HTTP://WWW.MICROSOFT.COM/WINDOWSCE/SMARTCARD.SCARD WP.HTM.) We believe that
with the integration of this technology with future versions of Windows and
Windows NT operating systems, smart card development and utilization for
security and electronic commerce on the Internet will become prevalent.
We believe that widespread acceptance and use of smart card technology
will occur, but only following the transition from magnetic stripe only
infrastructure to one that includes both magnetic stripe and smart cards.
Major credit card companies and large banking institutions have shown an
interest in smart card technology because the technology makes small-value
monetary transactions feasible, faster and more economically processed. Use
of smart cards reduces the need for signature, verification of credit
availability, receipts and paperwork. The 1996 Olympic smart card pilot in
Atlanta, Georgia by several banks in association with Visa demonstrated the
need for considerable consumer education before widespread acceptance and
utilization will occur.
We believe that closed-area smart card systems will serve as a
transitional or interim phase to widespread smart card utilization and
acceptance. A closed-area system is a limited venue, including a sports
arena, a university or college campus, or a limited access entertainment
event. There are several reasons for this.
- - First, open systems require huge investments in both infrastructure and
marketing. As with most technology implementation, especially point-of-
sale and other transaction technology, there is
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reluctance to invest in the requisite infrastructure. Also, there is
reluctance on the part of consumers to purchase and use the cards if
widespread utilization does not exist. In a closed-area, the consumer
may be required to use a smart card for purchases or access.
- - Second, the security and monitored-controlled access to a defined area
provided. A closed-area by its nature is a controlled environment where
security issues can be monitored easily and reacted to quickly should the
need arise. Smart card technology is well suited for monitoring and
controlling access for security purposes.
- - Third, the scale of infrastructure required for implementation. Within a
defined area the required scale of infrastructure is limited and
consequently results in more immediate implementation, either mandatory
or voluntary, requiring consumer acceptance and use.
We anticipate that significant short-term opportunities exist in the
development of closed-area systems including stored-value cards for events or
entertainment venues, individual store or franchise-wide loyalty
applications in retail, and access control and security applications for
corporations. Multiple-application systems for groups including hospitals,
corporate campuses, schools, colleges and universities can provide further
market opportunity.
We believe we are well positioned to take advantage of the developing
smart card technology and utilization based upon a number of factors. These
factors include
- - our reputation as a market leader and innovator,
- - our knowledge and understanding of the technology and market,
- - our successful development, implementation and sales of our products,
- - our commitment to quality and innovation in our product line, and
- - our ability to create applications quickly for a rapidly changing
industry.
In addition, a major factor in the rapid growth of smart card usage is
the ability to process small transactions. Smart card technology can
eliminate the need to carry cash and coins for many day-to-day transactions.
By enabling an individual to exchange information and payment through the
smart card microchip technology, we expect that this technology will open up
new opportunities with regard to the way people interact with financial
institutions, healthcare providers, retailers and others. Most information-
based industries are candidates for smart card conversion and utilization.
We anticipate that significant additional revenue growth opportunities
exist in a variety of markets that we do not at present serve. We believe
that these opportunities include the academic campus, transportation and
telecommunications.
During the year ended December 31, 1998 and the six months ended June
30, 1999, we had revenue of $322,483 and $25,000, respectively. Revenue
during the six months ended June 30, 1999, decreased $9,404, a 27.3%
decrease, to $25,000 from $34,404 during the six months ended June 30, 1998.
This decrease was attributable to our lack of financial resources to support
marketing of our products during the 1999 six-month period. Consequently, we
did not replace the revenue from implementation of the PrecisCache-TM- system
for the 1998 PGA Championship and the Kiel Center Arena, home of the National
Hockey League's St. Louis Blues, during the 1998 six-month period.
Our smart card technology has focused on healthcare and closed-area
sports environments and events. This technology is capable of being
customized for other markets. We are encouraged by the results of these
initial programs, and believes that these programs will lead to the national
introduction and installation of these products.
WHAT PRODUCTS ARE OFFERED BY PRECIS?
PRECISCACHE-TM-. Our fixed stored-value product is known as
PrecisCache-TM-. This product is designed to be used in stadiums, arenas,
corporate or educational campuses, festivals, events, specific retail sites
or communities and other closed-area environments. This protected memory card
stores monetary value or tokens to be used within a designated card reader
system. This reader system can include portable (stand-alone) computer
terminals as well as terminals connected to existing point-of-sale computer
network systems. The stored-value smart card system also includes a
"back-office" processing system to account for transactions, create reports
and provide other data base information.
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Use of the PrecisCache-TM- system greatly reduces the cost of handling
cash, while expediting transaction processing. Cards and reader sites can
serve as marketing or advertising media for clients and outside sponsors.
Many of the cards issued will have an intrinsic collectible value based on
their limited distribution, the fan/collector oriented artwork on the card
and the novelty of the new technology.
The smart card systems implemented for Major League Baseball's Chicago
White Sox, the 1998 PGA Championship, the Oklahoma State University Athletic
Department, the Main Street Fort Worth Arts Festival, Demo '97, National
Football League's Carolina Panthers, National Hockey League's St. Louis
Blues, and First Chicago NBO are stored-value systems based on the
PrecisCache-TM- product technology. With respect to each of these
installations, the engineering and managerial approach to implementation
resulted in timely and expeditious installation. The Chicago White Sox system
was developed and installed in five months as compared to 12 to 18 months for
similar installations by our competitors. The Oklahoma State University
project was implemented in 60 days using prototype VeriFone-TM- Omni 1250
readers for which documentation had not yet been printed. The Fort Worth
project was implemented in 75 days. Enormously successful, the 10,000
allocated cards were sold during the four-day festival. More than 34,000
transactions were logged during the event. Finally, in a period of five days,
at the request of VeriFone, we customized the PrecisCache-TM- system for use
throughout the hotel/resort hosting the Demo '97 conference. Demo '97 is the
leading computer industry conference focused exclusively on emerging
technologies.
The most significant ongoing installation of the PrecisCache-TM- system
was implemented in July of 1998. This project, at Ericsson Stadium in
Charlotte, North Carolina, for the Carolina Panthers of the National Football
League, was completed in cooperation with NationsBank. The Precis system
replaced an earlier smart card system that had been developed by two much
larger competitors.
PRECIS HEALTH CARD SYSTEMS-TM-. The Precis Health Card System (formerly
MediCard) was developed and installed in 1993 by our predecessor Advantage
Data Systems. Currently, there are no hospitals, healthcare organizations and
insurance companies using the Precis Health Card System.
The Precis Health Card System was the first healthcare smart card system
that linked patients with emergency response personnel, physicians, hospitals
and pharmacies. The card stored a patient's personal information and medical
history. It included patient demographics, family and physician contacts,
blood type, last hospital admission, allergies, medications, procedures,
diagnoses, primary and secondary insurance status, along with other pertinent
information. Card readers were located at healthcare facilities, including
hospitals, physician offices, mobile emergency units and pharmacies.
The Precis Health Card System expedites the delivery of medical care
while reducing administrative time and cost because it provides accurate
information, reduces redundant testing and procedures, decreases the
likelihood of harmful drug interactions, improves the provider/patient
relationship and provides a private and secure information storage system.
With the addition of biometrics technology and electronic date interchange
processes, the Precis Health Card System will provide a powerful mechanism to
reduce insurance fraud. We plan to integrate these additional capabilities
into our health card system through customized software development or
interfacing with existing systems.
PRECISRESERVE-TM-. Our reloadable stored-value system is
PrecisReserve-TM-. This product represents a significant modification to the
PrecisCache-TM- technology which, in addition to storing monetary value or
tokens, can be reloaded, facilitating extended use.
The PrecisReserve-TM- product is seen as a second stage product for many
venues that have already implemented the disposable stored-value product. Its
reusability also enables the expansion of our marketing efforts into
corporate campus and community-based applications. The reusability also
allows for the addition of other applications to be added and used on the
same card, including loyalty and security access.
PRECISPERSONA-TM-. Market trends toward loyalty and affinity products
led to the development of PrecisPersona(TM), our smart card based loyalty
application. Rewarding frequent purchasers encourages repeat business and the
tracking capabilities of smart card technology provide opportunities to
acquire valuable customer preference and purchasing pattern information which
marketers, retailers, distributors and manufacturers can use to
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improve service, improve existing products and develop new products.
WHO ARE PRECIS PRINCIPAL CUSTOMERS?
During the six months ended June 30, 1999, all of our revenues were
received for Entertainment Smart Systems. During the six months ended June
30, 1999, During 1998, Bank of America (then NationsBank) in conjunction with
the Ericsson Stadium installation and Tangent Associates in conjunction with
the St. Louis Blues installation, accounted for 76% and 15% of our total
revenues, respectively. During 1997, the Main Street Fort Worth Arts Festival
accounted for all of our revenues. The loss of Bank of America, Tangent
Associates, or Entertainment Smart Systems as a customer will have a material
adverse effect on our revenues and consequently our operations and financial
condition.
HOW ARE PRECIS PRODUCTS DEVELOPED AND WHAT DO THE PRECIS PRODUCTS OFFER?
PrecisCache-TM-, PrecisReserve-TM-, Precis Health Card System-TM-,
PrecisPersona-TM- and all Precis products in the foreseeable future are
object-oriented programming applications. We have a number of products
currently in development. Physical access, network/intranet/Internet access,
security, identification and recognition applications using smart card
technology are expected to be leading areas of industry growth.
Our products are object-oriented programming computer applications. This
methodology allows our engineers and programmers to create sets of reusable
components, or building blocks, that may be combined to form a complex
system. Our developmental efforts have produced a library of reusable
individual software components for a variety of personal computer and smart
card devices. Using this extensive collection of software components or
building blocks provides:
- - a simpler system design, thus reducing system maintenance costs, as well
as allowing for the reusability of these building blocks across a wide
range of smart card systems;
- - the ability to respond rapidly to customers that have specialized smart
card needs; and
- - the ability to seamlessly integrate our software with all major operating
systems, office-management and point-of-sale systems.
We continue to have a significant commitment to innovation and quality
in the development of our products. We adhere to a stringent set of
development standards in the development of our products. These standards
include the following:
- - COMPATIBILITY WITH OPERATING SYSTEMS -- We design our software products
to be compatible with all major operating systems for the various system
architectures. The compatibility of our products is key to market
acceptance and provides a distinct advantage.
- - MARKET-DRIVEN ENHANCEMENTS AND PRODUCT OFFERINGS -- Our product design
and architecture provide flexibility and adaptability to emerging
technologies.
- SUPPORT FOR INDUSTRY STANDARDS -- Our development standards
include adherence to industry standards as promulgated by the
International Standards Organization. We also follow different
operating systems standards and recommended configurations when
developing each product for those operating systems.
DOES PRECIS HAVE ANY STRATEGIC BUSINESS RELATIONSHIPS?
We have established formal and informal strategic relationships with a
number of companies that are established leaders in their respective
industries to establish and maintain technological leadership, realize
advantageous product pricing structures and expand our marketing and
distribution channels.
One of these strategic relationships is with Bank of America, formerly
NationsBank. Working with NationsBank's Strategic Technologies Group, we
received significant support in our efforts with consistent referrals based
upon this relationship. Most notable was the selection of the PrecisCache
system to replace the stored-value system previously implemented at Ericsson
Stadium in Charlotte, North Carolina. That implementation, known as
FANCash-R-, is a flagship project of NationsBank that illustrates the
strength of its ongoing commitment to smart card technology. We are currently
exploring opportunities to expand NationsBank's FANCash-R- stored-value
program throughout the bank's primary markets.
We were selected by VeriFone (a Hewlett-Packard company), one of the
leading providers of transaction automation systems for the payment
processing for
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financial institutions, merchants and consumers, as the testing site for
VeriFone's newest smart card point-of-sale device, the Omni 1250 as a part of
our Oklahoma State University implementation in February 1997. Additionally,
we assisted in the debut of VeriFone's newest smart card product, the
Personal ATM, at Demo '97. We are currently serving as one of the first
developers on VeriFone's VeriSmart-R- system, which will provide personal ATM
access from homes, offices and digital phones throughout the world.
We are also working closely with Entertainment Smart Systems of Orlando,
Florida, on the development of a PrecisCache-TM- implementation to serve ESS'
tourism-based travel, theme park and resort infrastructures throughout Mexico
and the United States.
We also have long-standing strategic relationships with the two leading
developers and producers of smart cards and terminals--Schlumberger and
Gemplus. Gemplus has actively promoted our products, domestically and
internationally through sharing display space at conferences as well as
producing and distributing marketing literature on the Precis Health Card
System. We, along with Oracle, Sun Microsystems, International Business
Machines and Apple are referenced in a Gemplus educational booklet on smart
card technology.
We are currently negotiating terms for Schlumberger Associates agreement
that will result in preferred customer, preferred pricing, VAR status with
enhanced access to proprietary information that will be useful in product
development and implementation. Schlumberger Associates has more than 45
associates.
WHAT IS PRECIS' BUSINESS STRATEGY AND PLANS FOR FURTHER PRODUCT
DEVELOPMENT?
Our objective is to become a leading provider of smart card solutions
across a wide range of applications. Our marketing strategy is to focus on
product development and innovation in the area of smart card technology. Our
market focus is on smart card applications for consumer situations that
necessitate card usage on a weekly or more frequent basis or on an event
basis. We have identified the following industries as those best suited to
benefit from smart card technology and have begun research and development
efforts aimed at meeting perceived needs of these industries:
- - HEALTHCARE-- We believe that the healthcare industry, with its millions
of participants and voluminous and individualized information and payment
requirements, can benefit significantly from smart card technology. Smart
cards can be designed to provide patient identification and medical
record storage and retrieval, as well as electronic benefit transfers,
determination of eligibility and drug interaction information. In an
emergency situation, a quick assessment of vital information including
allergies, prescriptions and immunizations is critical for effective
healthcare delivery. Additionally, patient cards can be used to improve
and streamline administrative and billing procedures as well as insurance
reimbursement.
- - TRAVEL AND ENTERTAINMENT-- The travel and entertainment industry holds
great promise with regard to smart card applications. All categories that
comprise this market, including air travel, car rentals, movie theaters,
sporting events, restaurants, casinos, video stores, sports arenas,
hotels and other venues would benefit from a multi-functional card. This
is an enormous global market with strong growth predicted for the near
future. Business travelers in particular are bogged down by paper-based
expense reimbursement. Paper-based reimbursement systems are hampered
with the potential for fraud in addition to being costly to administer.
Smart cards would enable businesses to more effectively monitor travel
and entertainment expenses.
Smart cards offer solutions in terms of their ability to collect and
disseminate data and conduct electronic commerce. Several major airlines
have initiated smart card pilot programs that allow ticketless travel,
store frequent flier miles and process payments. In a resort setting, a
multifunction card allows an individual access to restaurants, shopping,
sports and entertainment activities and lodging while keeping track of
loyalty points.
- - RETAILING-- All types of retailing can be embraced and enhanced with
smart card technology. The retail sector encompasses everything from
locally owned stores to national department stores. Retailers have been
made acutely aware of the value of their contact with the consumer. The
key to repeat business is to accurately identify, and then satisfy,
customer
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needs. Smart cards would enable retailers to track customer
behavior and base marketing decisions gleaned from this valuable
information. This technology can also reduce the risk of fraud,
improve inventory management and offer the customer convenience and
better service.
- - AFFINITY PROGRAMS-- The trend in retail, fund raising and other repeat
customer businesses is the move toward customer rewards. This application
represents a tremendous opportunity and an explosive growth area, which
is virtually untapped. By incorporating a smart card into a traditional
point-of-sale application, the retailer will realize complete tracking of
all aspects of the sales process including the ability to reward repeat
customers with premiums or discounts through the use of a smart card
without the traditional computerized infrastructure. Retailers could use
the data accumulated to target market areas not being penetrated and
focus marketing and advertising costs on those areas.
WHAT ARE THE CURRENT AND FUTURE MARKETS FOR PRECIS' PRODUCTS?
We believe our early success in several important market niches has
positioned us for growth. Our near-term marketing focus is to solidify our
market position and use that foundation as a basis for expanding into
additional markets. To date our marketing efforts and successes have been
limited to the arena/stadium, event, and the healthcare markets.
ARENA/STADIUM MARKET. Within the arena/stadium market there are more
than 750 major arenas, stadiums, auditoriums and coliseums in the United
States. Aside from professional sports teams associated with those arenas and
stadiums, concerts and events constitute a large potential market for our
products. Our PrecisCache-TM- card systems and technology have been used in
the stadiums and arenas of the Carolina Panthers, Chicago White Sox, the St.
Louis Blues and the Oklahoma State University. For the six months ended June
30, 1999 and the year ended December 31, 1998, approximately $25,000 (100%)
and $305,000 (94%), respectively, of our revenues were attributable to this
market.
The PrecisCache-TM- disposable store-value product is an appropriate
solution to the need for a convenient and secure cash handling process that
we believe will be favorably received by customers. For longer-term needs,
enhanced tracking capability and extended identity development potential,
companies may utilize the PrecisReserve-TM- reloadable card system. We
believe our experience with the Carolina Panthers, Chicago White Sox, the St.
Louis Blues and the Oklahoma State University has established our credibility
within this market and will be beneficial in any future discussions with
prospects in this market.
One of our long-term goals is to capitalize on the name recognition and
positive association we achieve through our affiliation with professional
sports. It is reported that the likelihood of attending a baseball game
increases steadily with household income. By 2010 the largest growth area for
attendance in Major League Baseball will be in the 45 to 64 year-old
population. [Source: Shannon Dortch, "The Future of Baseball," AMERICAN
DEMOGRAPHICS, April 1996.] Because baseball is the least expensive game to
attend, the same demographic expectations should hold for other major sports,
including football, basketball and hockey. We believe that through this
marketing channel, we will reach corporate America, our ultimate target
audience.
EVENTS MARKET. There are approximately 10,000 festivals in the United
States each year. [Source: Festivals.com LLC, available from
HTTP://WWW.FESTIVALS.COM.] The scope of these of these festivals ranges from
air shows, art, food and music festivals, to state fairs and sporting events.
Our experience in the events market is limited to the Main Street Fort Worth
Arts Festival and the 1998 PGA Championship (at Sahalee Country Club,
Redmond, Washington). For the years ended December 31, 1998 and 1997,
approximately $17,500 (5%) and $40,800 (100%), respectively, of our revenues
were attributable to this market. Although limited, we believe that our
experience with these events demonstrates the successful application of the
PrecisCache-TM- system.
One of our significant advantages in the festival-fair market is that
the product can be sold profitably and implemented with minimum cost and
development effort. Given the large number of festivals that occur each year,
the opportunity for steady and reliable cash flows form the sale of this
product could be considerable.
ADVERTISING MEDIUM AND CORPORATE SPONSORSHIP. As an adjunct to our
efforts to capture both the arenas-stadiums market and the festivals-fairs
market, we are developing a strategy for securing or assisting in the
securing of card sponsors-advertisers. In addition to its technological
aspects, the uniqueness of the product, the size and personal nature of the
card, and the fact that it is carried in an individual's wallet or purse and
seen often, make smart cards a very suitable advertising medium. Furthermore,
beyond simply the card, sponsor mentions in promotional materials, signage,
advertising for the
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cards and press reports surrounding an event can greatly enhance the value of
the card as a sponsorship medium. In many cases, revenues from the
sponsorship of the card may simply be used to offset the expenses incurred in
implementing the system. This is the case in the "Allsports" series of cards
for Oklahoma State University that the Bank of Oklahoma sponsored.
In the sports market, sponsorships are providing new and significant
revenues for franchises and stadiums as well. The smart card may provide
another, possibly significant, vehicle for companies to deliver their
messages to the public. In the festivals-fairs market, where the audience is
a more mass-market group, the opportunity for sponsorship-advertising
revenues is also very good. Where a sponsor may spend a significant amount on
a single, one-location promotional presentation, a smart card offers a better
opportunity for repeated impressions when carried and used for purchases at
the event. Many festivals and fairs are financed in part by corporate
sponsorships. The smart card simply provides another sponsorship vehicle. As
an example, PrimeCo, a sponsor of and in connection with the Main Street Fort
Worth Arts Festival, appeared on the smart card. The funds from the
sponsorship in part defrayed the cost of implementation of the smart card
system for this festival. We are currently developing a sponsorship pricing
strategy and contact list for the purpose of enlisting major sponsors in the
Company's efforts to approach the sports and arena markets as well as
schools, festivals, fairs, and others.
HEALTHCARE MARKET. Our first market segment focus was in healthcare. We
believe that every insurance company, HMO, PPO, hospital association, and
independent provider association which serves the United States healthcare
market can benefit from the use of a smart card system. Our advantage in this
market is based upon our position as the first to provide a healthcare smart
card implementation of its kind and the experience we gained from it. The
opportunity to reduce healthcare costs, improve the quality of healthcare
services, and facilitate the payments process makes the use of smart card
systems very attractive and viable.
We continue to provide consulting to some of the major providers in the
healthcare industry in and out of the United States that are considering
implementation of a smart card system. A number of these companies have shown
an interest in the Precis Health Card System-TM-. These enquires have
provided us with important insight into many of the components that are
necessary to succeed in this market.
We conducted a limited project study in Oklahoma City, Oklahoma of the
potential benefits of the Precis Health Card System-TM-. The features of the
Oklahoma project, however, limited the collection and analysis of data
including actual reductions in costs and paperwork, rates of decrease of
incidents of harmful drug interactions, increases in the speed and quality of
healthcare delivery and payment, and quantifiable improvements in
patient-provider relationship. The best opportunity to gather this data,
which is vital in making the case to the healthcare industry, will come in a
"closed-area-system implementation" of the product which, although expensive,
will provide the best data for selling the system to the broader targeted
market. We are currently pursuing a number of organizations to serve as
strategic alliance partners to conduct the implementation and study.
Although we expect to continue to market smart card systems directly
through our management and employees, we intend to obtain the assistance of
unrelated third parties to assist our product marketing and to establish
strategic marketing alliances and licensing or other arrangements with
systems integrators, value-added resellers and other smart card vendors.
Fulfillment of product orders and installations will continue to be managed
directly by our staff.
Our marketing staff is currently in discussions and contact with a
number healthcare providers. These healthcare providers include 14 insurance
companies, 9 managed healthcare organizations, 7 governmental agencies, 13
hospitals, and 16 other companies providing healthcare services and emergency
medical response services. Following the offering, we expect to have the
financial resources to broaden our marketing efforts within the healthcare
market.
WHAT IS THE NATURE AND EXTENT OF PRECIS' COMPETITION?
The environment within which we operate is intensely competitive and
subject to rapid change in general. To maintain or increase our market share
position in the smart card industry, we will continually need to enhance our
current product offerings, introduce new product features and enhancements,
and expand our professional service capabilities. We currently compete
principally on the basis of the specialized nature of our products and
ability to expeditiously install and implement a smart card system. Our
product features and functions facilitate integration with a wide range of
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operating systems and platforms to insure product quality, ease of use and
reliability. We believe we compete favorably in all of these areas.
Our competitors vary in size and in the scope and breadth of the
products and services offered. We may encounter competition from a number of
sources, including International Business Machines, Inc., ICL, 3GI,
CyberMark, Touch Technology International, Inc., Sun MicroSystems, Inc.,
Technology @ Work, Bull, Card Europe, Gemplus, Innovatron, Philips
Electronics, Aladdin Systems, Pathways Group, Inc., MONDEX, MasterCard,
Microsoft, Motorola, Schlumberger, Siemens, DigiCash, Leapfrog, Inc. We
compete against numerous, smaller, privately-held companies with fewer
resources based on breadth of product features and functionality, as well as
larger, publicly-held companies with greater resources and having greater
product and market diversification.
Many of our current and potential competitors, both privately-held and
publicly-held, have greater financial, technical, marketing and distribution
resources than ours. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or to
devote greater resources to the development and distribution of their
products. In addition, because there are relatively low barriers to entry in
the software marketplace, we expect additional competition from other
established or emerging companies as the smart card market continues to
expand. Increased competition is likely to result in pricing pressures,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations.
We also expect that competition will increase as a result of software
industry consolidations. There can be no assurance that we will be able to
compete successfully against current and future competitors or that
competitive pressures we encounter will not materially adversely affect our
business, financial condition and results of operations.
DOES PRECIS HAVE ANY LICENSE AGREEMENTS AND INTELLECTUAL PROPERTY RIGHTS?
We regard our software as proprietary and license our products generally
under written license agreements executed by licensees. We also employ an
encryption system which restricts a user's access to source codes to further
protect our intellectual property. Because our products allow customers to
customize their applications without altering source codes, the source codes
for our products are typically neither licensed nor provided to customers.
We have applied for registration of our Precis Health Card System-TM-
trademark. Because of inadequate working capital and financial resources, we
have not applied for registration of our PrecisCache-TM-, PrecisReserve-TM-,
and PrecisPersona-TM- trademarks. We have no patents or patent applications
pending. Currently, we rely on a combination of copyright, trademark and
trade secret laws to protect our products. We also require employee and
third-party non-disclosure and confidentiality agreements. Despite these
precautions, it may be possible for unauthorized parties to copy portions of
our products or reverse engineer or obtain and use information that we regard
as proprietary. Following completion of the offering, we intend to take
appropriate measures to register our trademarks.
Because the software development industry is characterized by rapid
technological change, we believe that factors, including
- - the technological and creative skills of our personnel,
- - new product developments,
- - frequent product enhancements,
- - name recognition
- - and reliable product maintenance,
are more important to establishing and maintaining a technology leadership
position, than the various legal protections available for our technology.
HOW MUCH DOES PRECIS SPEND ON RESEARCH AND PRODUCT DEVELOPMENT?
We must continue to make significant investments in research and
development to continue development of our smart card technology. Currently,
the dynamic nature of the smart card technology industry places large
research and development demands on businesses that desire to remain
competitive. Competing with larger firms with substantially greater capital
resources, we have devoted significant portions of available resources to
remain abreast of industry developments and to offer competitive products and
services.
As of June 30, 1999, our product development staff consisted of three
employees. Our total expenses for product development and deployment during
1998, 1987 and the six months ended June 30, 1999, were $389,586,
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$542,203 and $134,462, respectively. Our customers have not borne any portion
of our product development and deployment expenses. We anticipate that we
will continue to commit substantial resources to product development in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ARE THE OPERATIONS OF PRECIS SUBJECT TO GOVERNMENT REGULATION?
Our operations are subject to various federal, state and local
requirements which affect businesses generally, including taxes, postal
regulations, labor laws, and environment and zoning regulations and
ordinances.
Furthermore, although there may be aspects of our services subject to
Regulation E promulgated by the Federal Reserve Board, we believe that most
of our services are not subject to Regulation E. Regulation E governs
electronic funds transfers made by regulated financial institutions and
providers of access devices and electronic fund transfer systems. Regulation
E requires written receipt for transactions, monthly statements, pre-
transaction disclosures and error resolution procedures. There can be no
assurance that the Federal Reserve Board will not require all of our services
to comply with Regulation E, or revise Regulation E, or adopt new rules and
regulations for electronic funds transfers that could result in an increase
in our operating costs, reduce the convenience and functionality of our
services and products, possibly resulting in reduced market acceptance and
revenues which would have a material adverse effect on our business,
financial condition or operating results.
We believe that current state and federal regulations concerning
electronic commerce do not apply to our current product line. However, there
is a move towards taxation of Internet use by several states including the
state of Washington. There are some strategic plans under consideration to
conduct commerce on the Internet using our core technology. We have an
ongoing regulatory compliance program pertaining to transactions utilizing
smart card technology and subscribe to industry watch publications that
address regulatory issues.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. The Company
is not currently a party to any legal proceedings.
EMPLOYEES
As of June 30, 1999, at Precis we had a total of eight employees, of
which two were employed in sales and marketing, three were employed in
product development, one was employed in professional services and customer
support, one was employed in internal operations support, and one was
employed in administration and finance. Our future performance depends in
significant part upon the continued service of our key technical and
management personnel, and our continuing ability to attract and retain highly
qualified and motivated personnel in all areas of our operations. Competition
for qualified personnel is intense. We provide no assurance that we can
retain key managerial and technical employees or that we can attract,
assimilate or retain other highly qualified personnel in the future. Our
employees are not represented by a labor union. We have not experienced any
work stoppages and consider our employee relations to be good.
FACILITIES
The corporate headquarters of Precis are located at 11032 Quail Creek
Road, Suite 108, Oklahoma City, Oklahoma. This office facility consists of
approximately 3,150 square feet and occupied under a month-to-month unwritten
lease requiring monthly rental payments of $2,229.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to each of our
executive officers and directors. Our directors are generally elected at the
annual shareholders' meeting and hold office until the next annual
shareholders' meeting or until their successors are elected and qualified.
Executive officers are elected by our board of directors and serve at its
discretion. Our bylaws authorize the board of directors to be constituted of
not less than one and the number as our board of directors may determine by
resolution or election. Our board of directors currently consists of four
members.
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<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- --------
<S> <C> <C>
Kent H. Webb, M.D.(1)(2)..................................... 42 Chairman of the Board
Larry E. Howell(1).......................................... 53 Chief Executive Officer and Director
Donald (Dan) A. Cunningham.................................. 56 President and Chief Operating Officer
and Director
Mark R. Kidd(2).............................................. 33 Chief Financial Officer
Michael E. Dunn(2).......................................... 53 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
The following is a brief description of the business background of our
executive officers, directors and nominee directors:
KENT H. WEBB, M.D., a founder of Precis, has served as Chairman of the
Board since June 1996 and was a member or general partner of our predecessors
Advantage Data Systems, Ltd. and Medicard Plus - ADS Limited Partnership. Dr.
Webb is a general and vascular surgeon and is the cofounder and a director of
Surgical Hospital of Oklahoma. He is a Fellow of the American College of
Surgeons and serves as a Clinical Professor for the University of Oklahoma. Dr.
Webb is a past Director of the Smart Card Industry Association, a nonprofit
association. He is a surgical consultant for the Ethicon Division of Johnson &
Johnson Company, a publicly-held pharmaceutical and consumer products company.
LARRY E. HOWELL became one of our directors in January 1999 and became
Chief Executive Officer in August 1999. Until July 1999, Mr. Howell was employed
by Laboratory Specialists of America, Inc. and served as President and Chief
Operating Officer, and a Director until December 7, 1998. Laboratory Specialists
of America, Inc. is engaged in forensic drug testing and was formerly
publicly-held until acquired by The Kroll-O'Gara Company by merger. Mr. Howell
served as a Director, President and Treasurer of Vantage Capital Resources, Inc.
from March 1996 until its merger with The ViaLink Company (formerly Applied
Intelligence Group, Inc.) and thereafter served as a Director and Vice President
of The ViaLink Company until October 14, 1996. Since January 1982, Mr. Howell as
the sole proprietor of Howell and Associates provides consulting services
principally related to corporate acquisitions and mergers.
DONALD (DAN) A. CUNNINGHAM became one of our Directors in 1996 and became
President and Chief Operating Officer in August 1999. During 1998 and 1997 Mr.
Cunningham served as President and Chief Executive Officer of the Smart Card
Industry Association. Before that position, he served as Senior Vice President
of Business Development of Phoenix Planning & Evaluation, Ltd. Phoenix is one of
the premier consulting firms in the United States providing strategic planning
and technical assistance to the banking industry, government agencies, and
healthcare and transportation industries. Mr. Cunningham served as President and
Chief Executive Officer of Gemplus Card International Corp., the United States
subsidiary of French-owned Gemplus SA, from 1993 to 1996. Before joining
Gemplus, Mr. Cunningham held positions at Micro Card Technologies, Inc.,
Recognition Equipment, Inc. and the NCR Corporation.
MARK R. KIDD became our Chief Financial Officer in August 1999. Mr. Kidd
began serving as President of PaceCo Financial Services, Inc. and President of
UniFin Inc. in March 1998, both are privately held companies that provide
various financial services. From January 1997 until March 1998, he served as
Senior Vice President and Chief Financial Officer of Republic Bank of Norman.
From May 1988 through 1996, Mr. Kidd was employed by the public accounting firm
of Arthur Andersen LLP. Mr. Kidd is a Certified Public Accountant and holds a
B.B.A. in accounting from Southern Methodist University in accounting.
MICHAEL E. DUNN became a Director of the Company in January 1999. Mr. Dunn
has been a member, shareholder and the President of Dunn Swan & Cunningham, A
Professional Corporation, since February 28, 1995. From August 1994 until
December 7, 1998, when acquired by The Kroll-O'Gara Company, Mr. Dunn served as
a Director of Laboratory Specialists of America, Inc., a forensic drug testing
company. From April 1980 to January 1995, he was a member, shareholder and
director of the law firm of Zrenda Dunn & Swan, A Professional Corporation
(formerly Bright Zrenda & Dunn), in Oklahoma City, Oklahoma, and President from
April 1992 until January 1995. He has been the owner of the Woodlake Racquet
Club, a
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recreational athletic club, since 1981. Mr. Dunn was graduated from the
University of Oklahoma College of Law in 1972, and holds a B.B.S. in
accounting and pursued graduate studies at the University of Oklahoma.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the compensation, paid or accrued, our
President and Chief Executive Officer during 1998, 1997 and 1996. None of
our executive officers received compensation in excess of $100,000 during
these years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION(1) COMMON STOCK
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS
- --------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
James Lout....................................................... 1998 $64,000 $ -- 17,241
President and Chief Executive Officer 1997 $74,000 $ -- --
1996 $48,667 $ -- 45,977
</TABLE>
- ------------------------
(1) The named executive officer received additional non-cash compensation,
perquisites and other personal benefits; however, the aggregate amount and
value thereof did not exceed 10% of the total annual salary and bonus paid
to and accrued for the named executive officer during the year.
(2) Dollar value of base salary (both cash and non-cash) earned during the
year.
(3) Dollar value of bonus (both cash and non-cash) earned during the year.
AGGREGATE OPTION GRANTS AND EXERCISES DURING THE YEAR ENDED DECEMBER 31,
1998 AND YEAR-END OPTION VALUES
STOCK OPTIONS AND OPTION VALUES. The following table sets forth information
related to options granted to the executive officers named in the Summary
Compensation Table during the year ended December 31, 1998.
<TABLE>
<CAPTION>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
------------------------------------------------------------ ASSUMED RATES OF STOCK
PERCENT OF PRICE APPRECIATION
NUMBER TOTAL OPTIONS EXERCISE OR FOR OPTION TERM(1)
OF OPTIONS GRANTED BASE PRICE --------------------------
NAME GRANTED(2) TO EMPLOYEES PER SHARE EXPIRATION DATE FIVE PERCENT TEN PERCENT
- ---- ---------- -------------- ---------- -------------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
James Lout................ 17,241 14.9% $5.22 December 31, 2008 $146,597 $233,432
</TABLE>
- ------------------------------
(1) The potential realizable value portion of the foregoing table illustrates
the value that might be realized upon exercise of the options immediately
before expiration of their term, assuming the specified compound rates of
appreciation of the Common Stock over the term of the options. These
amounts do not take into consideration provisions restricting exercise and
transferability, and represent assumed rates of appreciation only. Actual
gains on stock option exercises are dependent on the future operating
results of the Company. There can be no assurance that the potential values
reflected in this table will be achieved. All amounts have been rounded to
the nearest whole dollar amount.
(2) The number of options granted and base price per share give effect to the
adjustment for the reverse split of the Common Stock on October 30, 1998.
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number of options
exercised in the year ended December 31, 1998, and the value realized by each
executive officer named in the Summary Compensation Table, as well as,
information related to the number and value of options held by them at December
31, 1998. During the year ended December 31, 1998, no outstanding options were
exercised.
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OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James Lout.......................... 36,399 26,819 $ -- $ --
</TABLE>
- ------------------------
(1) A market for our common stock does not exit. The value of unexercised
in-the-money options is based upon the fair market value of the shares of
common stock underlying the options, which was determined by to be less
than $5.22 per share as of December 31, 1998 (after giving effect to and
adjustment for the reverse stock split), minus the exercise price
multiplied by the number of shares of Common Stock underlying the options.
STOCK OPTION PLAN
For the benefit of our employees, directors and consultants, we have
adopted the Precis Smart Card Systems, Inc. 1999 Stock Option Plan (the "stock
option plan" or the "plan"). The plan provides for the issuance of options
intended to qualify as incentive stock options for federal income tax purposes
to our employees and non-employees, including employees who also serve as our
directors. Qualification of the grant of options under the plan as incentive
stock options for federal income tax purposes is not a condition of the grant
and failure to so qualify does not affect the exercisability of the stock
options. The number of shares of common stock authorized and reserved for
issuance under the Plan is 300,000. As of the date of this prospectus, no
options have been granted under the plan.
Our board of directors administers and interprets the plan (unless
delegated to a committee) and has authority to grant options to all eligible
participants and determine the types of options granted, the terms, restrictions
and conditions of the options at the time of grant.
The exercise price of options may not be less than 75% of the fair market
value of our common stock on the date of grant of the option and to qualify as
an incentive stock options may not be less than the fair market value of common
stock on the date of the grant of the incentive stock options. Upon the exercise
of an option, the exercise price must be paid in full, in cash, in our common
stock (at the fair market value thereof) or a combination thereof. During the
one-year period following the date of this prospectus, we have agreed with
Barron Chase Securities not to grant options or warrants having an exercise
price of less than $6.00 per share, without the written consent of Barron Chase
Securities.
Options qualifying as incentive stock options are exercisable only by an
optionee during the period ending three months after the optionee ceases to be
our employee, a director, or non-employee service provider. However, in the
event of death or disability of the optionee, the incentive stock options are
exercisable for one year following death or disability. In any event options may
not be exercised beyond the expiration date of the options. Options may be
granted to our key management employees, directors, key professional employees
or key professional non-employee service providers, although options granted
non-employee directors do not qualify as incentive stock options. No option may
be granted after December 31, 2008. Options are not transferable except by will
or by the laws of descent and distribution.
All outstanding options granted under the Plan will become fully vested and
immediately exercisable if (i) within any 12-month period, we sell an amount of
common stock that exceeds 50% of the number of shares of common stock
outstanding immediately before the 12-month period or (ii) a "change of
control" occurs. For purposes of the plan, a "change of control" is defined as
the acquisition in a transaction or series of transactions by any person, entity
or group (two or more persons acting as a partnership, limited partnership,
syndicate or other group for the purpose of acquiring our securities) of
beneficial ownership, of 50% or more (or less than 50% as determined by a
majority of our directors) of either the then outstanding shares of our common
stock or the combined voting power of our then outstanding voting securities.
DIRECTOR LIABILITY AND INDEMNIFICATION
As permitted by the provisions of the Oklahoma General Corporation Act, our
Certificate of Incorporation eliminates the monetary liability of our directors
for a breach of their fiduciary duty as directors. However, these provisions do
not eliminate our director's liability
- - for a breach of the director's duty of loyalty to us or our shareholders,
- - for acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law,
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- - arising under Section 1053 of the Oklahoma General Corporation Act
relating to the declaration of dividends and purchase or redemption of
shares in violation of the Oklahoma General Corporation Act, or
- - for any transaction from which the director derived an improper personal
benefit.
In addition, these provisions do not eliminate liability of a director for
violations of federal securities laws, nor do they limit our rights or your and
our other shareholders rights, in appropriate circumstances, to seek equitable
remedies including injunctive or other forms of non-monetary relief. These
remedies may not be effective in all cases.
Our bylaws require us to indemnify all of our directors and officers. Under
these provisions, when an individual in his or her capacity as an officer or a
director is made or threatened to be made, a party to any suit or proceeding,
the individual may be indemnified if he or she acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interest. Our
bylaws further provide that this indemnification is not exclusive of any other
rights to which the individual may be entitled. Insofar as indemnification for
liabilities arising under our bylaws or otherwise may be permitted to our
directors and officers, we have been advised that in the opinion of the
Securities and Exchange Commission the indemnification is against public policy
and is, therefore, unenforceable.
LACK OF EMPLOYMENT ARRANGEMENTS AND KEYMAN
INSURANCE
We do not have employment agreements with our employees. We do not maintain
any keyman insurance on the life or in the event of disability of our executive
officer.
CERTAIN TRANSACTIONS
Contained below is a description of transactions we entered into with our
officers, directors, and shareholders during 1997, 1998 and 1999 to the date of
this prospectus. These transactions will continue in effect and may result in
conflicts of interest between us and these individuals. Although these persons
have fiduciary duties to us and our shareholders, there can be no assurance that
conflicts of interest will always be resolved in favor of us and our
shareholders.
Under 10 separate promissory notes, Dr. Webb loaned $254,743 to us from
1997 through June 30, 1999. These shareholder loans are evidenced by promissory
notes, currently bearing interest at 15% per annum. The principal amount of
those notes issued before September 30, 1999, accrued interest at 25% per annum
until September 30, 1999, and thereafter at the 15% per annum rate. In January
1998, we repaid one of the promissory notes in the principal amount of $25,000
and accrued interest of $531. The outstanding promissory notes will become due
30 days following completion of the offering. We have not paid any interest on
the outstanding loans. During the six months ended June 30, 1999, and the year
ended December 31, 1998, the interest accrued for payment to Dr. Webb was $6,113
and $14,899, respectively.
Our board of directors believes that the terms of the transactions
described above were at least as favorable as could be obtained from
unaffiliated third parties. We have adopted policies that any loans to officers,
directors and 5% or more shareholders ("affiliates") are subject to approval by
a majority of our disinterested independent directors and that further
transactions with affiliates will be on terms no less favorable than could be
obtained from unaffiliated parties and approved by a majority of our
disinterested independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents, as of the date of this prospectus,
information related to the beneficial ownership of our common stock of (i) each
person who is known to us to be the beneficial owner of more than 5% thereof,
(ii) each of our directors and executive officers, and (iii) all of our
executive officers and directors as a group, together with their percentage
holdings of the outstanding shares, and, as adjusted to give effect to the
offering. All persons listed have sole voting and investment power with respect
to their shares unless otherwise indicated, and there are no family
relationships amongst our executive officers and directors. For purposes of the
following table, the number of shares and percent of ownership of our
outstanding common stock that the named person beneficially owns includes shares
of our common stock that the person has the right to acquire within 60 days of
the date of this prospectus from exercise of stock options
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and are deemed to be outstanding, but are not deemed to be outstanding for the
purposes of computing the number of shares beneficially owned and percent of
outstanding common stock of any other named person.
<TABLE>
<CAPTION>
AFTER THE
BEFORE THE OFFERING OFFERING
--------------------------- ------------
SHARES PERCENT OF PERCENT OF
BENEFICIALLY OUTSTANDING OUTSTANDING
NAME (AND ADDRESS) OF BENEFICIAL OWNER OWNED(1) SHARES(1)(2) SHARES(1)(2)
- -------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Kent H. Webb, M.D.................................................... 72,018 6.0% 3.3%
4221 South Western
Oklahoma City, Oklahoma 73109
Larry E. Howell..................................................... 100,000 8.3% 4.5%
Donald (Dan) A. Cunningham........................................... 697 (3) (3)
Michael E. Dunn..................................................... -- -- % -- %
Michael R. Morrisett................................................. 270,401 22.5% 12.3%
8626 South Florence Avenue
Tulsa, Oklahoma 74137
Executive Officer and Directors as a group (four persons)(3)......... 172,715 14.4% 7.9%
</TABLE>
- ------------------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them within 60 days are treated as outstanding for
determining the amount and percentage of our common stock owned by the
person. To our knowledge, each named person has sole voting and sole
investment power with respect to the shares shown except as noted, subject
to community property laws, where applicable.
(2) The percentage shown was rounded to the nearest one-tenth of one percent,
based upon 1,200,000 shares of our common stock outstanding before the
offering and 2,200,000 shares of our common stock outstanding after the
offering.
(3) The percentage is less than 1.0%.
DESCRIPTION OF SECURITIES
Under our Certificate of Incorporation, we are authorized to issue up to
10,000,000 shares of capital stock, consisting of 8,000,000 shares of common
stock, $.01 par value per share, and 2,000,000 shares of preferred stock, $.01
par value per share. As of the date of this prospectus, our issued and
outstanding capital stock consists of 1,200,000 shares of common stock. We are
offering 1,000,000 shares of our common stock under the offering.
The following description of our common stock and preferred stock is a
summary and is qualified in its entirety by the provisions of our Certificate of
Incorporation and bylaws. Our Certificate of Incorporation and bylaws have been
filed as exhibits to the registration statement of which this prospectus is a
part. See "Where You Can Find Additional Information."
COMMON STOCK
As holders of our outstanding shares of the common stock, your rights,
privileges, disabilities and restrictions in general are as follows:
- - the right to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of assets legally available
therefor, subject to the payment of preferential dividends with respect
to our then outstanding preferred stock;
- - the right to share ratably in all assets available for distribution to
the Common Stock shareholders after payment of our liabilities in the
event of our liquidation, dissolution and winding-up, subject to the
prior distribution rights of the holders of our then outstanding
preferred stock;
- - the right to one vote per share on matters submitted to a vote by our
common stock shareholders;
- - no preferential or preemptive right and no subscription, redemption or
conversion privilege with respect to the issuance of additional shares of
our common stock; and
- - no cumulative voting rights, which means that the holders of a majority
of shares voting for the election of directors can elect all members of
our board of directors then subject to election.
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In general, a majority vote of shares represented at a meeting of common stock
shareholders at which a quorum (a majority of the outstanding shares of common
stock) is present, is sufficient for all actions that require the vote or
concurrence of shareholders, subject to and possibly in connection with the
voting rights of the holders of our then outstanding preferred stock and
entitled to vote with the holders of our common stock. Upon issuance of the
common stock offered under the offering, all of the outstanding shares of our
common stock will be fully paid and non-assessable.
PREFERRED STOCK
Our authorized preferred stock may be issued from time to time in one or
more series. Our board of directors, without further approval of the common
stock shareholders, is authorized to fix the relative rights, preferences,
privileges and restrictions applicable to each series of our preferred stock. We
believe that having this a class of preferred stock provides greater flexibility
in financing, acquisitions and other corporate activities. While there are no
current plans, commitments or understandings, written or oral, to issue any of
our preferred stock, in the event of any issuance, our common stock shareholders
will not have any preemptive or similar rights to acquire any of the preferred
stock. Issuance of preferred stock could adversely affect
- - the voting power of the holders of our then outstanding common stock,
- - the likelihood that the holders will receive dividend payments and
payments upon liquidation and
- - could have the effect of delaying or preventing a change in shareholder
and management control.
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. is the registrar and transfer agent of our Common Stock. The
mailing address of UMB Bank, N.A. is Security Trust Division, 28 Grand
Boulevard, 13th Floor, Kansas City, Missouri 64106.
OUTSTANDING STOCK OPTIONS
As of the date of this prospectus, we have outstanding stock options
exercisable for the purchase of 86,398 shares of our common stock during
various periods which expire December 20, 1999 through January 1, 2008, at an
exercise price of $5.22 per share. The exercise prices of the stock options
were equal to the estimated fair market value of the common stock on the date
of the grant of each stock option as determined by our board of directors. In
addition, we have reserved 122,031 shares of our common stock for issuance
upon the vesting and exercise of outstanding stock options. Our board of
directors is also authorized to issue additional stock options exercisable
for the purchase of 300,000 shares of our common stock under our stock option
plan.
SHAREHOLDER ACTION
Under our bylaws, the affirmative vote of the holders of a majority of our
outstanding shares of the common stock entitled to vote thereon is sufficient to
authorize, affirm, ratify or consent to any act or action required of or by the
holders of the common stock, except as otherwise provided by the Oklahoma
General Corporation Act.
Under the Oklahoma General Corporation Act, our shareholders may take
actions without the holding of a meeting by written consent. The written consent
must be signed by the holders of a sufficient number of shares to approve the
act or action had all of our outstanding shares of capital stock entitled to
vote thereon been present at a meeting. In this event, we are required to
provide prompt notice of any corporate action taken without a meeting to our
shareholders who did not consent in writing to the act or action. However, any
time that we have 1,000 or more shareholders of record, any act or action
required of or by the holders of our capital stock entitled to vote thereon may
only be taken by unanimous affirmative written consent of the shareholders or a
shareholder meeting.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation and the Oklahoma General Corporation Act
include a number of provisions which may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral takeover proposals to
negotiate with our board of directors rather than pursue non-negotiated takeover
attempts. We believe that the benefits of these provisions outweigh the
potential disadvantages of discouraging the proposals because, among other
things, negotiation of the proposals might result in an improvement of their
terms. The description below related to provisions of our Certificate of
Incorporation is intended as a summary only and is qualified in its entirety by
reference to our Certificate of Incorporation filed as an exhibit to the
registration statement of which this prospectus is a part. See "Where You Can
Find Additional Information."
PREFERRED STOCK. Our Certificate of Incorporation authorizes the issuance
of the preferred stock in classes.
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Our board of directors is authorized to set and determine the voting rights,
redemption rights, conversion rights and other rights relating to the class of
preferred stock. In some circumstances, the preferred stock could be issued and
have the effect of preventing a merger, tender offer or other takeover attempt
which our board of directors opposes. We have agreed not to issue any preferred
stock for three years from the date of this prospectus without the consent of
Barron Chase Securities.
OKLAHOMA ANTI-TAKEOVER STATUTES. Following the offering, we may be subject
to Section 1090.3 and Sections 1145 through 1155 of the Oklahoma General
Corporation Act.
Section 1090.3 of the Oklahoma General Corporation Act prohibits a
publicly-held Oklahoma corporation from engaging in a "business combination"
with an "interested shareholder." This prohibition is for a three-year period
following the date of the transaction in which the person became an interested
shareholder. This prohibition does not apply to a transaction if the interested
shareholder attained this status with approval of our board of directors or the
business combination is approved by our shareholders. A "business combination"
includes mergers, asset sales, and other transactions resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a person
who, together with affiliates and associates, owns, or within three years did
own, 15% or more of our common stock.
In general, Sections 1145 through 1155 of the Oklahoma General Corporation
Act provide that shares ("interested shares") of voting stock acquired (within
the meaning of a "control share acquisition") become nonvoting stock for the
three-year period following the control share acquisition. This loss of voting
rights does not apply if a majority of the holders of non-interested shares
approve a resolution reinstating the interested shares with the same voting
rights that the shares had before the interested shares became control shares.
Any person ("acquiring person") who proposes to make a control share
acquisition may, at the person's election, and any acquiring person who has made
a control share acquisition is required to deliver an acquiring person statement
to us disclosing prescribed information regarding the acquisition. We are
required to present to the next annual meeting of the shareholders the
reinstatement of voting rights with respect to the control shares that resulted
in the control share acquisition. Alternatively, an acquiring person may request
a special meeting of shareholders for this purpose; however, the acquiring
person must undertake to pay the costs and expenses of the special meeting. In
the event voting rights of control shares acquired in a control share
acquisition are reinstated in full and the acquiring person has acquired control
shares with a majority or more of all voting power, you and the other
shareholders will have dissenters' rights entitling you and the other
shareholders to receive the fair value of the shares of the Common Stock held.
In this case, the fair value will not be less than the highest price paid per
share by the acquiring person in the control share acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, control shares (generally shares
having more than 20% of all voting power in the election of directors of a
publicly held corporation), subject to the following exceptions
- - an acquisition under an agreement of merger, consolidation, or share
acquisition to which we are a party and is effected in compliance with
the Oklahoma General Corporation Act,
- - an acquisition by a person of additional shares within the range of
voting power for which the person has received approval by the majority
of the holders of non-interested shares,
- - an increase in voting power resulting from any action taken by us,
provided the person whose voting power is thereby affected is not our
affiliate,
- - an acquisition by proxy solicitation under and in accordance with the
Securities Exchange Act of 1934, as amended, or the laws of Oklahoma, and
- - an acquisition from any person whose previous acquisition of shares did
not constitute a control share acquisition, provided the acquisition does
not result in the acquiring person holding voting power within a higher
range of voting power than that of the person from whom the control
shares were acquired.
The anti-takeover provisions of the Oklahoma General Corporation Act may
have the effect of discouraging a third party from acquiring large blocks of the
common stock within a short period or attempting to obtain control of us, even
though the attempt might be beneficial to us and our shareholders. Accordingly,
you and our other shareholders could be deprived of the opportunities to sell
the shares of the common stock held at a higher market price than might
otherwise be the case.
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SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we have 1,200,000 outstanding shares of
our common stock. Upon completion of the offering, we will have 2,200,000 shares
of common stock outstanding and outstanding stock options and warrants
exercisable for the purchase of 86,398 shares of common stock. No prediction can
be made as to the effect, if any, that future sales or the availability of
shares for sale will have on the market price of the common stock prevailing
from time to time. Nevertheless, sales of substantial amounts of our common
stock in the public market could adversely affect the prevailing market price of
our common stock and could impair our ability to raise capital through sales of
our equity securities.
The 1,000,000 shares of common stock offered in the offering will be
immediately eligible for resale in the public market without restriction or
further registration under the Securities Act of 1933, except for shares
purchased by an "affiliate" (as that term is defined under the Securities Act of
1933) of ours. Any sales of our common stock by an affiliate will be subject to
the resale limitations of Rule 144 promulgated under the 1933 Act. There are
443,116 outstanding shares of our common stock held by our executive officers,
directors and affiliates. These shares are subject to the resale limitations of
Rule 144 promulgated under 1933 Act described below. Also, there are 300,000
shares of our outstanding common stock that are subject to the resale
limitations of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
unregistered shares of common stock for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of
- - 1% of the then outstanding shares of our Common Stock or
- - an amount equal to the average weekly reported volume of trading in the
shares during the four calendar weeks preceding the date on which notice
of the sale is filed with the U.S. Securities and Exchange Commission.
Sales under Rule 144 are also subject to the manner of sale limitations, notice
requirements and the availability of current public information about us.
Shares of common stock properly sold in reliance on Rule 144 are thereafter
freely tradable without restrictions or registration under the Securities Act of
1933, unless thereafter held by an affiliate of ours. In addition, our
affiliates must comply with the restrictions and requirements of Rule 144, other
than the one-year holding period requirement, in order to sell shares of common
stock which are not restricted shares within the meaning of Rule 144 (including
shares of common stock acquired by our affiliates in the offering). As defined
in Rule 144, an "affiliate" is a person that directly, or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with us. If two years have elapsed since the later of the date of any
acquisition of unregistered shares of common stock from us or from any of our
affiliates, and the acquiror or later holder thereof is deemed not to have been
our affiliate at any time during the 90 days preceding the sale, the person
would be entitled to sell the shares in the public market under Rule 144(k).
Under Rule 144(k) unregistered shares of common stock may be sold without regard
to volume limitations, manner of sale restrictions, or public information or
notice requirements. There are 456,884 outstanding shares of our common stock
that may be sold under Rule 144(k).
LOCK-UP AGREEMENTS
During the two-year period following the date of this prospectus, our
executive officers, directors, and shareholders have agreed not to sell or
otherwise dispose of the shares of common stock the beneficially own by them on
the date of this prospectus. This agreement is with Barron Chase Securities. The
agreement covers in the aggregate 743,116 shares of our common stock.
STATE IMPOSED ESCROW ARRANGEMENT
In connection with the registration of the offering in Oklahoma, our
executive officers and directors (and their wives) and Michael R. Morrisett (a
greater than 5% shareholder) deposited 443,116 shares of our common stock in
escrow with UMB Oklahoma Bank, under a promotional shares escrow agreement (the
"escrow agreement"). The escrow agreement was imposed by the Administrator of
the Oklahoma Department of Securities as a condition of the registration for the
protection and benefit of the initial purchasers of our common stock sold under
the offering (the "public shareholders").
Under escrow agreement, the owners (the "depositors") of the common stock
and stock options (the "subject securities") agreed that in event of a
"distribution" (as defined below) respecting the subject securities:
- - The public shareholders will share on a pro rata, per share basis in the
distribution to the exclusion of the
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depositors, in proportion to the public offering price of our common
stock until the public shareholders have received, or have had
irrevocably set aside for them, an amount equal to the per share $6.00
public offering price of our common stock
- - Thereafter, the depositors and the other holders of our equity securities
(including the public shareholders) will participate on an equal, per
share basis in the remaining amount of the distribution.
The distribution may be on lesser terms and conditions if a majority of the
holders of our common stock that are not held by the depositors and our officers
and directors or their associates or affiliates approve.
A "distribution" means a distribution of our assets or securities to our
shareholders as a result of our dissolution, liquidation, merger, consolidation
or reorganization or the sale or exchange of our assets or securities (including
by way of tender offer), or any other transaction or proceeding with a person
other than the depositors. In the event a public shareholder sells or otherwise
disposes of the shares of common stock purchased in the offering will cease to
be entitled to the distribution benefits of the escrow agreement.
The shares of common stock and stock options, as well as any shares of
common stock received upon exercise of the stock options, will remain subject to
the escrow agreements for the three-year period following the date of this
prospectus.
UNDERWRITING
In consideration for the purchase of 1,000,000 shares of our common stock
by Barron Chase Securities, Inc., under the our underwriting agreement:
- - Barron Chase Securities purchases the 1,000,000 shares at $5.40 per share
or at 90% of the public offering price (the "underwriting discount").
- - We grant to Barron Chase Securities a 45 day- option to purchase up to
150,000 shares of our common stock for $5.40 each to cover
over-allotments in the sale of our common stock in this offering (the
"over-allotment option").
- - We agree to pay Barron Chase Securities a non-accountable expense
allowance of 3% of the gross proceeds of the offering.
- - We sell to Barron Chase Securities and/or persons related to Barron Chase
Securities, for nominal consideration, common stock underwriter warrants
(the "underwriter's warrants") exercisable for the purchase of 100,000
shares of our common stock for $9.00 each for a five-year period
beginning on date of this prospectus.
- - We register the underwriter's warrants and the common stock underlying
the underwriter warrants and maintain this registration at our expense
for a maximum period of seven years.
- - We engage Barron Chase Securities for $108,000 to advice us concerning
potential merger and acquisition and financing proposals.
- - We pay Barron Chase Securities for services rendered in connection with
completed corporate transactions (only if introduced to us by Barron
Chase Securities during the next five years) a fee of
- 5% of up to $1 million of value paid or received in the
transaction,
- 4% of the next $1 million of value,
- 3% of the next $1 million of value,
- 2% of the next $1 million of value, and
- 1% of the value in excess of $4 million.
- - We indemnify Barron Chase Securities against any costs or liabilities
incurred by it by reason of misstatements or omissions to state material
facts in connection with the offering.
- - Barron Chase Securities indemnifies us against any liabilities by reason
of misstatements or omissions to state material facts in connection with
the statements made in this prospectus and the registration statement of
which this prospectus is a part, based on information relating to Barron
Chase Securities and furnished in writing by it.
- - For a seven-year period, we include the underwriter warrants or common
stock underlying these warrants in any amendment to the registration
statement of which this prospectus is a part or any new registration
statement filed with the United States Securities and Exchange Commission
at our expense.
- - Upon request by the holders of 50% or more of the underwriter's warrants
and common stock underlying these warrants during the period starting one
year from the date of this Prospectus and expiring four years thereafter,
we register the underwriter's warrants and common stock
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underlying these warrants.
Barron Chase Securities has advised or informed us that:
- - it proposes to offer the common stock to the public at the $6.00 offering
price through members of the National Association of Securities Dealers,
Inc. (the "NASD") who agree to sell the common shares in conformity with
the NASD Conduct Rules.
- - it may discretionarily allow a concession to selected NASD members, but
not in excess of the $.60 per share of the common stock sold.
- - it does not expect sales to discretionary customer accounts to exceed 5%
of the total number of shares of common stock offered under to the
offering.
The initial public offering price or our common stock has been determined
by negotiation between us and Barron Chase Securities. Among the factors
considered in determining the public offering price were
- - the history of, and the prospects for, our business,
- - an assessment of our management,
- - our past and present operations and development, and
- - the general condition of the securities market.
The initial public offering price does not necessarily bear any
relationship to our assets, book value, earnings or other established criterion
of value. The price is subject to change as a result of market conditions and
other factors. We provide no assurance that
- - a public market for our common stock will develop after the close of the
offering, or
- - if a public market in fact develops, that the public market will be
sustained, or
- - that the shares of common stock you purchase under the offering can be
resold at any time at the offering or any other price.
Our common stock is offered by Barron Chase Securities subject to prior
sale, when, as and if delivered to and accepted by it. To facilitate the
offering of our common stock, Barron Chase Securities
- - may engage in transactions that stabilize, maintain or otherwise affect
the market price of our common stock;
- - may over-allot in connection with the offering, creating a short position
in our common stock for its own account;
- - may also bid for, and purchase, shares of our common stock in the open
market to covering over-allotments or to stabilize the price of our
common stock;
- - may reclaim selling concessions allowed to a dealer for distributing our
common stock in the offering, if Barron Chase Securities repurchases
previously distributed common stock in transactions to cover its short
position, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the our
common stock above independent market levels. Barron Chase Securities is not
required to engage in these activities, and may end any of these activities at
any time.
To the extent that the indemnification provisions of our underwriting
agreement with Barron Chase Securities purports to provide exculpation from
possible liabilities arising from the federal securities laws, in the opinion of
the Securities and Exchange Commission, these indemnification provisions are
contrary to public policy and therefore unenforceable.
The underwriter's warrants provide the following:
- - the warrants are not transferable for one year from the date of this
prospectus, except to officers of Barron Chase Securities and members of
the selling group and officers and partners thereof, by will, or by
operation of law;
- - the warrants are appropriately adjustment in the event of any merger,
consolidation, recapitalization, reclassification, stock dividend, stock
split or similar transaction; and
- - the warrants may be exercised using shares of our common stock to be
issued upon exercise, at their fair market value, a payment of the
exercise price of the warrants.
The net issuance provisions have the effect of requiring us to issue shares of
our common stock without a corresponding increase in capital. A net exercise of
the underwriter's warrants will have the same dilutive effect on our
shareholders' interests as will a cash exercise. The underwriter's warrants and
the securities issuable upon their exercise may not be offered for sale except
in compliance with the applicable provisions of federal securities laws.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport
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to be complete. Reference is made to copies of each agreement which is filed as
exhibits to the registration statement. See "Where You Can Find Additional
Information."
LEGAL MATTERS
The validity of issuance of the shares of the common stock offered hereby
will be passed upon for us by our counsel, Dunn Swan & Cunningham, A
Professional Corporation, of Oklahoma City, Oklahoma. Legal matters related to
Barron Chase Securities will be passed upon for Barron Chase Securities by David
A. Carter, P.A., Boca Raton, Florida.
EXPERTS
The balance sheets as of December 31, 1998 and 1997, and the statements
of operations and accumulated deficit, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1998, included in this
prospectus, have been included herein in reliance on the report of Murrell,
Hall, McIntosh & Co., PLLP, independent public accountants, given on authority
of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2, of which this
Prospectus constitutes a part, with the Securities and Exchange Commission in
Washington, D.C. under the Securities Act of 1933, as amended, with respect to
the securities offered by this prospectus. As permitted by the rules and
regulations of the SEC, this prospectus does not contain all of the information
included in the registration statement and in the exhibits thereto. The
statements contained in this prospectus as to the contents of any contract or
other document referenced herein are not necessarily complete, and in each
instance, if the contract or document was filed as an exhibit, reference is
hereby made to the copy of the contract or other document filed as an exhibit to
the registration statement and each statement is qualified in all respects by
the reference. The registration statement (including the exhibits thereto) may
be inspected at the office of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004, and at its regional offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the registration statement and
the exhibits and schedules thereto may be obtained from the SEC at these
offices, upon payment of prescribed rates. In addition, the registration
statements as filed with the SEC through its Electronic Data Gathering, Analysis
and Retrieval (known as "EDGAR") system are publicly available through the SEC's
site on the World Wide Web on the Internet, located at http://www.sec.gov. We
will provide without charge to you, upon written or oral request, a copy of any
information incorporated by reference in this prospectus (excluding exhibits to
information incorporated by reference unless these exhibits are themselves
specifically incorporated by reference).
We have not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. Following completion of the
offering, we will be subject to the informational reporting requirements of the
Securities Exchange Act as a "small business issuer" as defined under Regulation
S-B promulgated under the Securities Exchange Act. In accordance with the
Securities Exchange Act, we will file reports and other information with the
SEC, and these reports and other information can be inspected and copied at, and
copies of these materials can be obtained at prescribed rates from, the Public
Reference Section of the SEC in Washington, D.C. We will distribute to our
shareholders annual reports containing financial statements audited by our
independent public accountants and, upon request, quarterly reports for the
first three quarters of each fiscal year containing unaudited consolidated
financial information.
Any requests for copies of information, reports or other filings with
the SEC should be directed to Precis Smart Card Systems, Inc. at 11032 Quail
Creek Road, Suite 108, Oklahoma City, Oklahoma 731120, telephone: (405)
752-5550.
-38-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants............................................................ F-2
Balance Sheets as of December 31, 1998 and 1997, and as of June 30, 1999
and 1998 (Unaudited)....................................................................... F-3
Statements of Operations and Accumulated Deficit for the Years Ended
December 31, 1998 and 1997, for the Six Months Ended June 30,
1999 and 1998 (Unaudited) and from Inception
(April 1994) to June 30, 1999 (Unaudited).................................................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1998 and 1997, and for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)......................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997,
for the Six Months Ended June 30, 1999 and 1998 (Unaudited) and from
Inception (April 1994) to June 30, 1999 (Unaudited)........................................ F-6
Notes to Consolidated Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
of Precis Smart Card Systems, Inc.
We have audited the accompanying consolidated balance sheets of Precis
Smart Card Systems, Inc. (an Oklahoma Corporation in the development stage) as
of December 31, 1998 and 1997, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Precis Smart Card
Systems, Inc. as of December 31, 1998 and 1997, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered losses, has accumulated a
significant deficit, has negative working capital and is dependent on additional
borrowings and stock sales. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 8. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
MURRELL HALL MCINTOSH & CO., PLLP
Oklahoma City, Oklahoma
July 19, 1999
F-2
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- -------------------------
1998 1997 1999 1998
--------------------------- -------------------------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents.............................. $ -- $ 1,706 $ 364,637 $ 12,012
Inventory.............................................. 10,035 44,158 10,035 63,748
------------- ------------ ------------ ------------
Total Current Assets............................... 10,035 45,864 374,672 75,760
------------- ------------ ------------ ------------
Property and Equipment:
Office Equipment....................................... 48,219 48,219 48,219 48,219
Computer Equipment..................................... 263,499 256,178 270,489 263,499
Furniture and Fixtures................................. 6,890 6,674 7,736 6,890
------------- ------------ ------------ ------------
318,608 311,071 326,444 318,608
Less Accumulated Depreciation.......................... (254,390) (150,796) (311,382) (203,211)
------------- ------------ ------------ ------------
64,218 160,275 15,062 115,397
------------- ------------ ------------ ------------
Total Assets $ 74,253 $ 206,139 $ 389,734 $ 191,157
============= ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Book Overdraft......................................... $ 27,513 $ -- $ -- $ --
Accounts Payable....................................... 265,012 186,933 323,862 216,445
Accrued Liabilities.................................... 46,110 11,250 97,985 20,572
Mezzanine Debt - Related Party......................... 103,000 25,000 329,643 50,000
Current Portion of Capital Leases...................... 48,319 32,649 62,504 59,758
Current Portion of Long-Term Debt...................... 277,522 341,220 277,522 277,522
------------- ------------ ------------ ------------
Total Current Liabilities......................... 767,476 597,052 1,091,516 624,297
------------- ------------ ------------ ------------
Long-Term Liabilities:
Capital Leases, Net of Current Portion................. 41,570 89,889 4,558 50,394
Long-Term Debt, Net of Current Portion................. -- 183,780 -- --
------------- ------------ ------------ ------------
Total Long-Term Liabilities....................... 41,570 273,669 4,558 50,394
------------- ------------ ------------ ------------
Total Liabilities................................. 809,046 870,721 1,096,074 674,691
------------- ------------- ------------ ------------
Stockholders' Deficit:
Preferred Stock, $.01 Par Value, 2,000,000 Shares
Authorized; No shares Issued and Outstanding at
December 31, 1998 and 1997......................... -- -- -- 4,968
Common Stock, $.01 Par Value, 8,000,000 Shares
Authorized; 900,000 and 2,040,350 Issued
and Outstanding at December 31, 1998 and 1997,
Respectively; 1,157,500 Issued and Outstanding at
June 30, 1999 (Unaudited).......................... 9,000 20,404 11,575 20,429
Additional Paid-In Capital............................. 2,226,451 1,613,928 2,701,070 2,210,055
Deficit Accumulated During Development Stage........... (2,970,244) (2,298,914) (3,418,985) (2,718,986)
------------- ------------ ------------ ------------
Total Stockholders' Deficit....................... (734,793) (664,582) (706,340) (483,534)
------------- ------------ ------------ ------------
Total Liabilities and Stockholders' Deficit................ $ 74,253 $ 206,139 $ 389,734 $ 191,157
============= ============ ============= ============
</TABLE>
See Accompanying Notes to Financial Statements
F-3
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED INCEPTION
DECEMBER 31, JUNE 30, (APRIL 1994)
---------------------- ------------------------ TO JUNE 30,
1998 1997 1999 1998 1999
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product and Service Revenues.................... $ 322,483 $ 40,856 $ 25,000 $ 34,404 $ 404,966
--------- ----------- ----------- ----------- -----------
Operating Expenses:
Product Deployment and Research
and Development......................... 389,586 542,203 134,462 193,799 1,518,638
Sales and Marketing......................... 147,411 148,885 79,321 74,418 534,983
General and Administrative.................. 399,756 472,320 217,124 163,544 1,551,323
--------- ----------- ----------- ----------- -----------
Total Expenses.......................... 936,753 1,163,408 430,907 431,761 3,604,944
--------- ----------- ----------- ----------- -----------
Operating Loss.................................. (614,270) (1,122,552) (405,907) (397,357) (3,199,978)
--------- ----------- ----------- ----------- -----------
Other Expense (Income):
Interest Expense............................ 59,196 29,890 42,834 24,079 223,425
Interest Income............................. (2,136) (2,282) -- (1,364) (4,418)
--------- ----------- ----------- ----------- -----------
57,060 27,608 42,834 22,715 219,007
--------- ----------- ----------- ----------- -----------
Net Loss - Deficit Accumulated During
Development Stage........................... $(671,330) $(1,150,160) $(448,741) $ (420,072) $(3,418,985)
========= =========== =========== =========== ===========
Net Loss per Share.............................. $ (0.75) $ (1.8) $ (0.45) $ (0.47) $ (3.80)
========= =========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding................... 900,000 900,000 1,002,083 900,000 900,000
========= =========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
F-4
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. 1,877,600 $ 18,776 -- $ -- $1,290,055 $(1,148,754)
Sale of Stock.......................... 162,750 1,628 -- -- 323,873 --
Net Loss............................... -- -- -- -- -- (1,150,160)
---------- -------- ------ --------- ---------- -----------
Balance, December 1997................. 2,040,350 20,404 -- -- $1,613,928 (2,298,914)
Sale of Stock.......................... 2,500 25 4,968 4,968 596,127 --
Conversion of Preferred Stock.......... 298,060 2,980 (4,968) (4,968) 1,987 --
Reverse Stock Split.................... (1,440,910) (14,409) 14,409 --
Net Loss............................... -- -- -- -- -- (671,330)
---------- -------- ------ --------- ---------- -----------
Balance, December 31, 1998............. 900,000 9,000 -- -- 2,226,451 (2,970,244)
Sale of Stock (unaudited).............. 257,500 2,575 -- -- 512,425 --
Offering Costs (unaudited)............. -- -- -- -- (37,806) --
Net Loss (unaudited)................... -- -- -- -- -- (448,741)
---------- -------- ------ --------- ---------- -----------
Balance, June 30, 1999 (unaudited)..... 1,157,500 $ 11,575 -- $ -- $2,701,070 $(3,418,985)
========== ======== ====== ========== ========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
F-5
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED INCEPTION
----------------------- ------------------------ (APRIL 1994)
DECEMBER 31, JUNE 30, TO
----------------------- ------------------------ JUNE 30,
1998 1997 1999 1998 1999
--------- ----------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss...................................... $(671,330) $(1,150,160) $(448,741) $(420,072) $(3,418,885)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operations:
Depreciation.............................. 103,594 75,502 56,992 52,415 311,382
(Increase) Decrease -
Inventory............................... 34,123 (9,731) -- (19,590) (10,035)
Other Assets............................ -- 126,419 -- -- --
Increase (Decrease) -
Accounts Payable...................... 78,080 141,625 58,850 29,512 323,862
Accrued Liabilities................... 34,859 (3,544) 51,875 9,322 97,985
--------- ----------- --------- ---------- -----------
Net Cash Used by Operating
Activities........................ (420,674) (819,889) (281,024) (348,413) (2,695,691)
--------- ----------- --------- ---------- -----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment............ (7,537) (76,322) (7,836) (7,537) (326,444)
--------- ----------- --------- ---------- -----------
Net Cash Used by Investing
Activities......................... (7,537) (76,322) (7,836) (7,537) (326,444)
--------- ----------- --------- ---------- -----------
Cash Flows from Financing Activities:
Sale of Stock................................. 601,119 325,501 477,194 601,120 2,712,645
Book Overdraft................................ 27,513 -- (27,513) -- --
Payments on Long-Term Debt.................... (280,127) (7,571) (22,827) (259,864) (737,273)
Proceeds from Long-Term Debt.................. -- 525,000 -- -- 1,081,757
Proceeds from Short-Term Debt................. 78,000 25,000 226,643 25,000 329,643
--------- ----------- --------- ---------- -----------
Net Cash Provided by Financing
Activities......................... 426,505 867,930 653,497 366,256 3,386,772
--------- ----------- --------- ---------- -----------
Net Decrease in Cash............................ (1,706) (28,281) 364,637 10,306 364,637
Cash at Beginning of Period..................... 1,706 29,987 -- 1,706 --
--------- ----------- --------- ---------- -----------
Cash at End of Period........................... $ -- $ 1,706 $ 364,637 $ 12,012 $ 364,637
========= =========== ========= ========== ===========
Supplemental Disclosure:
Interest Paid................................... $ 25,884 $ 29,890
========= ===========
Property and Equipment Purchased with Debt...... $ -- $ 128,497
========= ===========
</TABLE>
See Accompanying Notes to Financial Statements
F-6
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(JUNE 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 1 - Nature of Business
Precis Smart Card Systems, Inc. (the "Company") is a development stage
company. The Company develops and markets commercial software products used with
a technology referred to as "smart cards". The smart card contains an embedded
integrated circuit or microchip that serves as a programmable storage device
that performs limited computer functions. The Company's products include the
Precis Health Card System(TM), a healthcare smart card system; PrecisCache(TM),
a fixed-value smart card system; PrecisReserve(TM), a reloadable stored-value
smart card system; and PrecisPersona(TM), a smart card based customer loyalty
and rewards system.
Note 2 - Summary of Significant Accounting Policies
INTERIM FINANCIAL STATEMENTS - The financial statements as of June 30,
1999 and 1998, and for the six months then ended and the inception (April 1994)
to June 30, 1999 are unaudited and, in the opinion of management, reflect all
adjustments that are necessary for a fair presentation of the financial position
as of the date and the results of operations and cash flows for the periods then
ended. All of these adjustments are of a normal and recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. The results of operations for the six months ended June 30, 1999, and
1998 are not necessarily indicative of the results that may be expected for the
entire years ending December 31, 1999, and 1998.
DEVELOPMENT STAGE OPERATIONS - Precis is a development stage enterprise
engaging in developing and marketing "smart card" technology. The Company has
yet to generate any significant revenue from smart card sales and has no
assurance of future revenues from sales. The Company plans to spend significant
amounts on the development and marketing of its products. These costs require
the Company to raise additional capital through debt or equity financing. Such
additional financing may require the encumbrance of Company assets or agreements
with other parties where some of the costs of development are paid by others in
exchange for an interest in the product or Company.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management of
the Company to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
PROPERTY AND EQUIPMENT - Property and Equipment are carried at cost,
less accumulated depreciation. Depreciation is calculated using the
straight-line method based on useful lives of three to seven years.
INVENTORY - The Company has recorded its inventory held for resale at
its estimated value which is less than its actual cost.
NET LOSS PER SHARE - Net loss per share is calculated based on the
weighted average number of common, and dilutive, common equivalent shares
outstanding. There were no material differences between primary and fully
diluted earnings per share for the periods presented. The computation of net
loss per share gives retroactive effect for all periods presented to reflect the
1998 reverse stock split (discussed in Note 5).
CONCENTRATION OF CREDIT RISK - The Company maintains its cash in bank
deposit accounts which, at times, may exceed federal insured limits. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any significant risk.
F-7
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(JUNE 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 2 - Summary of Significant Accounting Policies (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded amounts of cash,
inventory, accounts payable, and accrued liabilities approximate fair value
because of the short-term maturity of these items.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company accounts for the
impairment and disposition of ling-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of" (FAS
121). In accordance with FAS 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. As of December 31, 1998, no impairment has been indicated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist primarily
of cash on deposit or cash investments purchased with original maturities of
three months or less.
REVENUE RECOGNITION - The Company recognizes revenues as the services
or products are provided. Amounts billed and received prior to services or
products being performed or provided are included in deferred revenues.
Note 3 - Debt
Long-term debt consists of unsecured project notes bearing interest at
10%, due to various investors. Interest only was due and payable beginning
September 1, 1997 through December 1, 1997. Amortization of the notes began
January 1, 1998. The final payment is due in 1999. The Company is in default on
these notes due to failure to make the required payments. The holders have the
right to declare the notes immediately due and payable. As such the entire
balance on these notes has been classified as current.
The mezzanine debt is unsecured and due to two shareholders, one of
which is Chairman of the Board of Directors. Interest on the mezzanine debt due
the Chairman was 25% per annum through September 30,1998, and 15% per annum
thereafter. The remaining mezzanine debt bears interest at 25% per annum. All
mezzanine debt carried maturity dates as of the later of June 30, 1999, or 30
days after the Company's planned initial public offering (discussed in Note 9).
In the event the debt is not repaid by maturity, all notes will bear interest at
the rate of 30% per annum thereafter.
Note 4 - Adoption of New Accounting Standard
The Company has adopted Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities", issued by the American Institute of Certified
Public Accountants. This statement requires that the costs of start-up
activities and organization costs, as defined, be expensed as incurred.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION ("SOP 97-2"). SOP 97-2 focuses on when and
the amount of revenue that should be recognized for licensing, selling, leasing
or otherwise marketing computer software and is effective for transactions enter
into in fiscal years beginning after December 15, 1997. In March 1998, the
Accounting Standards Executive Committee issued Statement of Position 98-4,
DEFERRAL OF THE EFFECTIVE DATE OF PROVISION OF SOP 97-2, MODIFICATION OF SOP
97-2, SOFTWARE REVENUE RECOGNITION ("SOP 98-4"). SOP 98-4 defers for one year
specific provision of SOP 97-2. In December 1998, the Accounting Standards
Executive Committee issued Position 98-9, Modification of SOP 97-2, SOFTWARE
REVENUE RECOGNITION, with respect to Certain Transactions ("SOP 98-9"). SOP 98-9
also amended specific provisions of SOP 98-4 through fiscal years beginning on
or before March 15, 1999. Management believes that the adoption of SOP 97-2, as
amended, will not have a material effect on the financial position and results
of operations.
F-8
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(JUNE 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 5 - Capital Structure and Stock Options
Pursuant to its Certificate of Incorporation, the Company is authorized
to issue up to 10,000,000 shares of capital stock, consisting of 8,000,000
shares of Common Stock, $.01 par value per share (the "Common Stock"), and
2,000,000 shares of preferred stock, $1.00 par value per share (the "Preferred
Stock").
COMMON STOCK - The Company was operated historically (from
approximately April 1994 through June 1996) as a limited partnership (the
"LP"). Effective July 1, 1996, the entire business of the LP was merged into
the Company (the "Merger"). The Company issued shares of common stock to the
partners of the LP in consideration of the Merger, thus, the partners of the
LP became the shareholders of the Company. The merger was accounted for as a
"pooling-of-interest." The Company conducted a private placement of common
stock during 1997, during which it issued and subscribed shares of
common stock. Such shares were issued and subscribed at $2.00 per share.
PREFERRED STOCK - During 1998, the Company conducted a private
placement of convertible redeemable, "putable" preferred stock. During this
period, the Company sold 4,967.67 shares of $120.00 face value, no coupon
preferred stock, generating total capital of $596,120. The total capital of
$596,120 was comprised of $406,080 in cash and $196,040 in conversions of
Project Notes. During 1998, and in accordance with their conversion rights,
the preferred shareholders elected to convert their preferred shares into
298,060 shares of common stock ( a conversion ratio of 1 preferred share for
60 shares of common).
RESTRUCTURING PLAN - As a result of the conversion of the
outstanding preferred shares to common shares, the Company had 2,340,910
shares of common stock outstanding on October 29, 1998. On October 30, 1998,
the Company affected a reverse split of the common stock such that
immediately after the reverse split there were 900,000 shares of common stock
outstanding.
COMMON STOCK OPTIONS - Also, as part of the restructuring plan, the
Company obtained releases from its directors and Project Note holders that
cancelled all common stock options held by directors and Project Note holders.
After the reverse split discussed above and as of December 31, 1998, the Company
had the following common stock options outstanding to certain employees and
ongoing service providers:
Exercise Expiration Vesting
QUANTITY Price Date Status
-------- ----- ---- ------
86,471 $5.22 2006 - 2008 Vested
The Company also has agreed to issue 122,031 of future stock options
after the Company reaches certain annual earnings levels. These future options
will have an exercise price based on current fair market value at the date the
earnings levels are met. These options expire 10 years from the date granted.
It is expected that the Company will make future stock option grants to
its employees pursuant to the Company's stock option plan established in January
1999. The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no
compensation expense is recognized when the exercise price of stock options
equals the market price of the underlying stock on the date of the grant.
F-9
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(JUNE 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 5 - Capital Structure and Stock Options (continued)
If the Company had elected to recognize compensation based on the fair
value of the options granted at the grant date as prescribed by "Statement of
Financial Accounting Standards No. 123, (SFAS 123) Accounting for Stock- Based
Compensation", net loss and net loss per share would have increased to the pro
forma amounts shown below for the years ending December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
Pro Forma Net Loss...................... $ (787,608) $ (1,359,878)
Pro Forma Net Loss Per Share............ $ (0.87) $ (1.51)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants during the year ended December 31, 1998: weighted average risk free
interest rate of 5.50%; no dividend yield; volatility of 40%; and expected life
less than six years. Consequently, the underlying common shares had no historic
volatility prior to October 13, 1998. The fair values of the options granted
prior to October 13, 1998 were based on the difference between the present value
of the exercise price of the option and the estimated fair value price of the
common share.
The intent of the Black-Scholes option valuation model is to provide
estimates of fair values of traded options that have no vesting restrictions and
are fully transferable. Option valuation models require the use of highly
subjective assumptions including expected stock price volatility. The Company
has utilized the Black-Scholes method to produce the pro forma disclosures
required under SFAS 123. In management's opinion, existing valuation models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options because the Company's employee stock options have
significantly different characteristics from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate. The effects of applying SFAS 123 in this pro forma are not indicative
of future amounts.
Note 6 - Income Taxes
There was no current or deferred provision for income taxes for the
years ended December 31, 1998 or 1997. No current provision was required because
tax losses were incurred in those years. Deferred tax assets result from
differences in the basis of assets and liabilities for tax and financial
statement purposes. The tax effects of the net operating loss carry forwards and
the valuation allowance established are summarized below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Benefit of net operating loss carry forward.... $743,300 $488,100
Less: Valuation allowance...................... (743,300) (488,100)
-------- --------
Net deferred tax asset....................... $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1996 was
$86,800. The net change in the valuation allowance for the years ended December
31, 1998 and 1997 were increases of $255,200 and $401,300 respectively. At
December 31, 1998 and 1997 the Company had federal and state net operating loss
carry forwards of approximately $1,860,0000 expiring at various dates through
2013. The Company's ability to use these losses to offset future taxable income
would be subject to limitations under the Internal Revenue Code.
F-10
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(JUNE 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 7 - Year 2000 Risk
During recent years, there has been significant awareness raised
regarding the potential disruption of business operations worldwide resulting
from the inability of current technology to process properly the change in the
year 1999 to 2000. Based on a review of the Company's data processing, operating
systems, software and other technology already in place, we do not currently
believe the Company will experience any significant adverse effects or material
unbudgeted costs resulting therefrom. Nevertheless, we cannot provide any
assurance in this regard, and any such costs or effects could materially and
adversely affect the Company's operations and financial condition.
Note 8 - Operations and Borrowings
As of December 31, 1998, the Company had negative working capital of
$757,411 and accumulated deficit of $2,970,244. During 1999, the Company
completed a private placement of common stock. An initial public offering is
also planned to raise capital necessary to continue development efforts.
Note 9 - Contingencies
The Company operates in leased facilities. Management expects that
leases currently in effect will be renewed or replaced with other leases of a
similar nature and term. Rent expense under operating leases was $23,408 and
$19,304 for the years ended December 31, 1998 and 1997, respectively.
Capital lease obligations consist of non-cancelable equipment leases
expiring through September, 2001. These leases are payable in monthly
installments, aggregating $4,632 including imputed interest at 10.67%. These
leases are secured by certain equipment. The following is a schedule of future
lease payments under capital leases:
<TABLE>
<CAPTION>
<S> <C>
YEAR ENDING DECEMBER 31,
1999................................................... $55,589
2000................................................... 43,587
-------
Total minimum lease payments................................... $99,176
Imputed interest............................................... (9,287)
-------
Capital lease obligation (including current portion $48,319)... $89,889
=======
</TABLE>
As of June 30, 1999, there has been no market for the Company's common
stock. In the event of an initial public offering, the offering price would not
necessarily bear any relationship to the Company's assets, book value, earnings
or other established criterion of value. Management provides no assurance that a
public market for their common stock will develop after the close of any
offering, or if a public market in fact develops, that such public market will
be sustained, or that the shares of common stock purchased pursuant to the
offering can be resold at any time at the offering price or any other stock
price.
If the Company's initial public offering is completed, the Company has
agreed to sell to the underwriter warrants exercisable for the purchase of
100,000 to 115,000 shares of common stock for $9.00 per share during a five-year
period. The holders of these warrants will have the right, for seven years
following the effective date of the initial public offering, to include such
warrants and the shares of common stock issuable upon their exercise (the
"registrable securities") in any registration statement or amendment to a
registration statement of the Company at no expense to such holders. The Company
also agreed that, upon request by the holders of 50% or more of the
underwriter's warrants and registrable securities and expiring four years after
the effective date of the Company's initial public offering and under certain
circumstances, the Company will register the underwriter's warrants and the
registrable securities.
F-11
<PAGE>
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, SHARES OF OUR COMMON STOCK ONLY IN THOSE JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
1,000,000 SHARES OF
COMMON STOCK
PRECIS SMART
CARD SYSTEMS, INC.
------------
PROSPECTUS
------------
BARRON CHASE
S E C U R I T I E S I N C
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boston, Massachusetts
Brooklyn, New York
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrouk Heights, New Jersey
La Jolla, California
New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
West Boca Raton, Florida
, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and
Registrant's Certificate of Incorporation and Bylaws, which are incorporated by
reference herein, authorize) indemnification of directors and officers of
Registrant and officers and directors of another corporation, partnership, joint
venture, trust or other enterprise who serve at the request of Registrant,
against expenses, including attorneys fees, judgments, fines and amount paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding in which such person is a party by reason of such
person being or having been a director or officer of Registrant or at the
request of Registrant, if he conducted himself in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Registrant,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. Registrant may not indemnify an officer or
a director with respect to any claim, issue or matter as to which such officer
or director shall have been adjudged to be liable to Registrant, unless and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper. To
the extent that an officer or director is successful on the merits or otherwise
in defense on the merits or otherwise in defense of any action, suit or
proceeding with respect to which such person is entitled to indemnification, or
in defense of any claim, issue or matter therein, such person is entitled to be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection therewith.
The circumstances under which indemnification is granted with an action
brought on behalf of Registrant are generally the same as those set forth above;
however, expenses incurred by an officer or a director in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
final disposition upon receipt of an undertaking by or on behalf of such officer
or director to repay such amount if it is ultimately determined that such
officer or director is not entitled to indemnification by Registrant.
These provisions may be sufficiently broad to indemnify such persons
for liabilities arising under the Securities Act of 1933, as amended (the
"Act"), in which case such provision is against public policy as expressed in
the 1933 Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
S.E.C. Registration Fees................................. $ 2,207
*N.A.S.D. Filing Fees..................................... 1,200
*State Securities Laws Filing Fees........................ 15,000
*Printing and Engraving................................... 25,000
*Legal Fees............................................... 73,593
*Accounting Fees and Expenses............................. 30,000
*Transfer Agent's Fees and Costs of Certificates.......... 2,000
*Miscellaneous............................................ 1,000
--------
Total................................................ $150,000
========
</TABLE>
- ----------------------------------------
*Estimated
II-I
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Registrant has sold and issued the securities described below pursuant
to and in accordance with Regulation D under the Securities Act of 1933, as
amended (the "Act") within the past three years which were not registered under
the Act:
<TABLE>
<CAPTION>
NUMBER OF
PURCHASE SHARES PURCHASED REGULATION
DATE OF PRICE PER ------------------------- D NET
NAME PURCHASE SHARE PREFERRED(1) COMMON(2) RULE PROCEEDS
- ---- -------- ---------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Smith, William 9/12/97 $2.00 5,000 506 $10,000
Martin, David 9/12/97 2.00 1,250 506 2,500
Dalton, W. Edward 9/12/97 2.00 5,000 506 10,000
Bowers, John 9/23/97 2.00 2,500 506 5,000
Dalton, Anne 9/23/97 2.00 2,500 506 5,000
Smith, Larry 10/16/97 2.00 5,000 506 10,000
O'Dell, Richard 12/11/97 2.00 2,500 506 5,000
Cunningham, Dan 12/29/97 2.00 5,000 506 10,000
Huffmyer, Joe 1/7/98 2.00 22,500 506 45,000
LaRoche, Richard 1/14/98 120.00 300.00 505 36,000
Sherman, Nolan 1/14/98 120.00 416.67 505 50,000
Sherman, Nolan 1/14/98 120.00 .33 505 40
McClary, David 1/14/98 120.00 416.67 505 50,000
McClary, David 1/14/98 120.00 83.33 505 10,000
Webb, Kent 1/14/98 120.00 416.67 505 50,000
Hale, Ron and Rochelle 1/15/98 120.00 500.00 505 60,000
Liff, Adam 1/15/98 120.00 500.00 505 60,000
Liff, Daniel 1/15/98 120.00 500.00 505 60,000
Austin, John 1/15/98 120.00 250.00 505 30,000
Lynn, C. Stephen 1/15/98 120.00 834.00 505 100,080
Preston, Tom 3/31/98 120.00 250.00 505 30,000
Kelly, James 4/27/98 120.00 500.00 505 60,000
Milton, Walter J. or Margaret 4/1/99 2.00 5,000 506 10,000
Brunner, Dennis or Julie 4/1/99 2.00 5,000 506 10,000
Lestino, John R. 4/1/99 2.00 5,000 506 10,000
Maddux, Jerry 4/1/99 2.00 5,000 506 10,000
Garber, Martin D., Jr. 4/5/99 2.00 5,000 506 10,000
McNitt, Kelly J. 4/5/99 2.00 5,000 506 10,000
Thompson, Steven R. 4/12/99 2.00 5,000 506 10,000
Richards, John M., Jr. 4/12/99 2.00 5,000 506 10,000
Howell, Tom 4/14/99 2.00 5,000 506 10,000
Bell, Terry 4/14/99 2.00 5,000 506 10,000
Kelly Banking Services, Inc. 4/15/99 2.00 32,500 506 65,000
Warren H. Carey IRA 4/15/99 2.00 10,000 506 20,000
Richards, John M., III 4/16/99 2.00 5,000 506 10,000
Plender, Arlin 4/20/99 2.00 5,000 506 10,000
W. Garner & Co. 4/26/99 2.00 10,000 506 20,000
Frechette, Robert 4/28/99 2.00 10,000 506 20,000
Watson, Arch 4/28/99 2.00 5,000 506 10,000
Wimberley, Carl 4/30/99 2.00 5,000 506 10,000
Bird, Phillip 4/30/99 2.00 10,000 506 20,000
Benge, James 4/30/99 2.00 5,000 506 10,000
Lamance Family Trust (Cathy) 5/3/99 2.00 5,000 506 10,000
II-II
<PAGE>
NUMBER OF
PURCHASE SHARES PURCHASED REGULATION
DATE OF PRICE PER ------------------------- D NET
NAME PURCHASE SHARE PREFERRED(1) COMMON(2) RULE PROCEEDS
- ---- -------- ---------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Purchase Number of Regulation
Lamance Family Trust 5/3/99 2.00 10,000 506 20,000
Lamance Family Trust (Chris) 5/3/99 2.00 5,000 506 10,000
Morris, Walter 5/5/99 2.00 10,000 506 20,000
Fiserv Cor. Ser. Cus. For Roth 5/12/99 $2.00 5,000 506 $10,000
IRA-J. Brown
Gronbach, Arthur 5/24/99 2.00 5,000 506 10,000
Hi-Tel Group, Inc. 5/25/99 2.00 15,000 506 30,000
Nowalsky, Leon 5/27/99 2.00 5,000 506 10,000
Lustigman, Andrew 6/2/99 2.00 5,000 506 10,000
Mathews & Associates, Inc. 6/7/99 2.00 5,000 506 10,000
Dumont, Gordon C. 6/7/99 2.00 2,500 506 5,000
Traffas, Francis C. 6/14/99 2.00 5,000 506 10,000
Eric Stein Revocable Trust 6/18/99 2.00 12,500 506 25,000
Hadde, Bill 6/25/99 2.00 10,000 506 20,000
Ozner, David 6/29/99 2.00 10,000 506 20,000
Mathers Associates 7/20/99 2.00 42,500 506 85,000
</TABLE>
- ------------------------
(1) Each share of preferred stock was converted into 60 shares of
Registrant's common stock pursuant to the conversion privilege of such
preferred stock.
(2) Each 2.61 outstanding shares of common stock was reverse split one
share of common stock on October 29, 1998.
Registrant relied on Rules 505 and 506 of Regulation D and Sections
3(b) and 4(2) of the Act for exemption from the registration requirements of the
Act. Each purchaser Registrant's common and preferred stock was furnished
information concerning the operations of Registrant, and each had the
opportunity to verify the information supplied. Additionally, Registrant
obtained a signed representation from each of the above named persons in
connection with the offer of Registrant's common and preferred stock of his, her
or its intent to acquire such stock for the purpose of investment only, and not
with a view toward the subsequent distribution thereof; each of the certificates
representing Registrant's common and preferred stock was stamped with a legend
restricting transfer of the securities represented thereby, and registrant
issued stop transfer instructions to UMB Bank, N.A., the transfer agent and
registrant of Registrant's common stock, with respect to all certificates
representing the common stock of Registrant held by the aforementioned
shareholders of Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
1.1 Form of Underwriting Agreement between Barron Chase
Securities, Inc. and Registrant.*
1.2 Form of Selected Dealer Agreement between Barron Chase
Securities, Inc. and selected dealers.*
3.1 Registrant's Certificate of Incorporation.*
3.2 Registrant's Bylaws.*
4.1 Form of Certificate of Common Stock of Registrant.*
4.2 Form of Underwriter's Warrant and Warrant Certificate.*
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities
covered by this Registration Statement.
10.1 Precis Smart Card, Inc. 1999 Stock Option Plan.*
II-III
<PAGE>
10.2 Form of Financial Advisor Agreement.*
10.3 Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and Registrant*.
10.4 Master Equipment Purchase and Maintenance Agreement, dated
June 29, 1999, between NationsBanc Services, Inc. and
Registrant.*
10.5 Smart Card Agreement, dated July 8, 1999, between
Entertainment Smart Systems, Inc. and Registrant.*
23.1 Consent of Independent Public Accountants, dated October 21,
1999.
23.2 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated October 20, 1999.
27 Financial Data Schedule.*
- ------------------------
* Previously furnished.
** To be furnished by amendment.
ITEM 28. UNDERTAKINGS
(A) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement
to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
end of the offering.
(D) EQUITY OFFERINGS OF NONREPORTING SMALL BUSINESS ISSUERS.
The Registrant will provide to the underwriter at the closing
specified in the underwriting agreement the certificates in such
denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
II-IV
<PAGE>
(E) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of Registrant pursuant to
the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred
or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(F) RELIANCE ON RULE 430A.
Registrant hereby undertakes that it will (i) for determining
any liability under the Securities Act, treat the information omitted
from the form of prospectus filed as a part of this Registration
Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Registrant under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as a part of this Registration Statement as of
the time the Commission declared it effective, and (ii) for determining
any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement for the securities offered in the Registration Statement, and
that offering of the securities at that time as the initial bona fide
offering of those securities.
II-V
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned in the City
of Oklahoma City, State of Oklahoma, on the 20th day of October, 1999.
PRECIS SMART CARD SYSTEMS, INC.
(Registrant)
By: /s/LARRY E. HOWELL
------------------------------------------
Larry E. Howell, Chief Executive Officer
By: /s/MARK R. KIDD
------------------------------------------
Mark R. Kidd, Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints Larry E. Howell his true and
lawful attorney-in-fact and agent, with all power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement and to file the same, with all exhibits thereto,
and other documents in connection therewith with the Securities and Exchange
Commission, granting unto same attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/KENT H. WEBB Chairman of the Board October 20, 1999
- ----------------------------
Kent H. Webb
/S/ LARRY E. HOWELL Chief Executive Officer October 20, 1999
- ---------------------------- and Director
Larry E. Howell
/S/DONALD A. CUNNINGHAM President, Chief Operating October 20, 1999
- ---------------------------- Officer and Director
Donald (Dan) A. Cunningham
/S/MARK R. KIDD Chief Financial Officer October 20, 1999
- ----------------------------
Mark R. Kidd
/S/MICHAEL E. DUNN Director October 20, 1999
- ----------------------------
Michael E. Dunn
II-VI
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement between Barron
Chase Securities, Inc. and Registrant*
1.2 Selected Dealer Agreement between Barron Chase
Securities, Inc. and selected dealers*
3.1 Registrant's Certificate of Incorporation*
3.2 Registrant's Bylaws*
4.1 Form of Certificate of Common Stock of Registrant*
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities covered by
this Registration Statement................................................
10.1 Precis Smart Card, Inc. 1999 Stock Option Plan*
10.2 Form of Financial Advisor Agreement*
10.3 Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and Registrant*
10.4 Master Equipment Purchase and Maintenance Agreement,
dated June 29, 1999, between NationsBanc Services, Inc. and Registrant*
10.5 Smart Card Agreement, dated July 8, 1999, between Entertainment
Smart Systems, Inc. and Registrant*
23.1 Consent of Independent Public Accountants, dated October 21, 1999..........
23.2 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated October 20, 1999......................................................
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously furnished.
** To be furnished by amendment.
<PAGE>
EXHIBIT 5.1
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
October 20, 1999
Board of Directors
Precis Smart Card Systems, Inc.
11032 Quail Creek Road
Oklahoma City, Oklahoma 73120
Gentlemen:
Reference is made to your Registration Statement on Form SB-2 filed
with the United States Securities and Exchange Commission (the "Commission"), as
declared effective by the Commission (the "Registration Statement"), with
respect to the proposed initial issuance by the Company of 1,265,000 shares of
common stock, $.001 par value (the "Common Stock") and the Underwriter Warrants
to be issued to Barron Chase Securities, Inc. and its designees exercisable for
the purchase of 115,000 shares of Common Stock (the "Underlying Common Stock").
Based upon the Registration Statement (including the Prospectus
contained therein and the exhibits thereto), a certificate of the Secretary of
State of the State of Oklahoma, and the financial statements of the Company, we
are of the opinion that:
1. The Company is duly organized and existing under the laws of the
State of Oklahoma;
2. All of the issued and outstanding shares of the Common Stock of
the Company have been legally issued, are fully paid and are not
liable to further call or assessment;
3. The 1,000,000 shares of Common Stock proposed to be sold by the
Company to Barron Chase Securities, Inc. (the "Underwriters") for
sale to the public against payment therefore in accordance with
the Underwriting Agreement, will be legally issued, fully paid
and not liable for further call or assessment;
4. In the event the Underwriter exercise its option to purchase up to
150,000 additional shares of Common Stock from the Company for
sale to the public solely to cover over-allotments with 45 days
of the effective date of the Registration Statement (the
"Over-Allotment Option"), such shares of Common Stock shall also
be legally issued, fully paid and not liable to further call or
assessment against payment therefor in accordance with the
Underwriting Agreement; and
5. The Underwriter's Warrant Agreement is a binding obligation of
the Company and the 100,000 shares of Common Stock (115,000 shares
of Common Stock in the event the Over-Allotment Options is
exercised in full) to be issued upon exercise of such warrants
shall be, upon receipt of the payment prescribed by the terms
of the Underwriter's
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Precis Smart Card Systems, Inc.
October 20, 1999
Page II
Warrants from the holders thereof, shall also be legally issued,
fully paid and not liable for further call or assessment.
In arriving at the foregoing opinion, we have relied, among other
things, upon the examination of the corporate records of the Company and
certificates of officers of the Company and of public officials. We hereby
consent to the use of this opinion in the Registration Statement and all
amendments thereto, and to the reference to our firm name under the caption
"Legal Matters" of the Prospectus which is included as a part of the
Registration Statement.
Very truly yours,
/s/ DUNN SWAN & CUNNINGHAM
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to the Registration
Statement on Form SB-2 of our report dated July 19, 1999, on our audits of the
financial statements of Precis Smart Card Systems, Inc. We also consent to the
reference to our firm under the caption "Experts."
/s/ MURRELL, HALL, McINTOSH & CO., PLLP.
Moore, Oklahoma
October 21, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF DUNN SWAN & CUNNINGHAM
Dunn Swan & Cunningham, A Professional Corporation, hereby consents to
the use of its name under the headings "Management--Executive Officers and
Directors" and "Legal Matters" in the Prospectus constituting a part of this
Amendment No. 1 to the Registration Statement.
/s/ DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma,
October 20, 1999
