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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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Commission File Number: 001-15667
PRECIS SMART CARD SYSTEMS, INC.
(Name of small business issuer in its Charter)
OKLAHOMA 73-1494382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 MCGEE STREET, SUITE 147
NORMAN, OKLAHOMA 73072
(Address of principal executive offices)
(405) 842-0131
(Issuer's telephone number)
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 Par Value Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[X]
The issuer's revenues for the year ended December 31, 1999 were $63,060.
The aggregate market value of the issuer's common stock, $.01 par value, held
by non-affiliates of the issuer as of April 11, 2000, was $10,487,857 based on
the closing bid price on that date as reported by the Nasdaq Stock Market,
Inc. on the Nasdaq SmallCap Market. As of April 11, 2000, 2,350,000 shares of
the issuer's common stock, $.01 par value, were outstanding.
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PRECIS SMART CARD SYSTEMS, INC.
FORM 10-KSB
For the Fiscal Year Ended December 31, 1999
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TABLE OF CONTENTS
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Part I.
Item 1. Description of Business................................................................... 3
Item 2. Description of Property................................................................... 19
Item 3. Legal Proceedings......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....................................... 19
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters.................................. 19
Item 6. Management's Discussion and Analysis or Plan of Operation................................. 21
Item 7. Financial Statements ..................................................................... 24
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................................................. 24
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act......................................... 24
Item 10. Executive Compensation.................................................................... 26
Item 11. Security Ownership of Certain Beneficial Owners and Management............................ 28
Item 12. Certain Relationships and Related Transactions............................................ 29
Item 13. Exhibits and Reports on Form 8-K.......................................................... 30
SIGNATURES........................................................................................... 31
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Item 1. Description of
Business" "Item 6. Management's Discussion and Analysis or Plan of Operation,"
and elsewhere in this report constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but
not necessarily all, of such forward-looking statements can be identified by
the use of forward-looking terminology such as "anticipates," "believes,"
"expects," "may," "will," or "should" or other variations thereon, or by
discussions of strategies that involve risks and uncertainties. Our actual
results or industry results may be materially different from any future
results expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include general economic and
business conditions; our ability to implement our business strategies;
competition; availability of key personnel; increasing operating costs;
unsuccessful promotional efforts; changes in brand awareness; acceptance of
new product offerings; and changes in, or the failure to comply with, and
government regulations.
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PART I
ITEM 1. DESCRIPTION OF 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 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 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
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sufficient expertise in hardware technology and 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 device.
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 used 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
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.scardwp.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 reluctance
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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.
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 also exist in a variety of markets including the academic
campus, transportation and telecommunications.
Our revenue during 1999 decreased $259,423, an 80% decrease, to
$63,060 from $322,483 during 1998. This decrease was attributable to our lack
of financial resources to support marketing of our products during 1999.
Consequently, during 1999 we did not replace the revenue from implementation
during 1998 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,
and Ericsson Stadium, home of the Charlotte Panthers of the National Football
League.
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 believe 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.
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,
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Demo '97, the National Football League's Carolina Panthers, the 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. 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.
Our 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 (now Bank of America).
The Precis system replaced an earlier smart card system that had been
developed by two much larger competitors.
PRECIS HEALTH CARD SYSTEM-TM-. The Precis Health Card System-TM-
(formerly MediCard) was developed in 1993 by our predecessor Advantage Data
Systems. Currently, there are no hospitals, healthcare organizations or
insurance companies using the Precis Health Card System.
The Precis Health Card System-TM- 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-TM- 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 data interchange
processes, the Precis Health Card System-TM- provides 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 improve
service, improve existing products and develop new products.
WHO ARE PRECIS PRINCIPAL CUSTOMERS?
During the year ended December 31, 1999, 40% of our revenues were
received from Entertainment Smart Systems and 60% of our revenues were
received from the Bank of America in connection with the Ericsson Stadium
installation. 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
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76% and 15% of our total revenues, respectively. As of the date of this
report, we do not have a significant ongoing business relationship with Bank
of America, Tangent Associates, or Entertainment Smart Systems.
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 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-Registered Trademark-, was a flagship project of NationsBank that
illustrates the strength of its ongoing commitment to smart card technology.
We were selected by VeriFone (a Hewlett-Packard company), one of the
leading providers of transaction automation systems for the payment processing
for 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.
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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
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 successful installations
have been limited to the arena/stadium, event, and the healthcare markets.
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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, St.
Louis Blues and Oklahoma State University. For the years ended December 31,
1999 and 1998, approximately $38,000 (60%) 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, St. Louis Blues
and 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, Because baseball is the least expensive game to attend, the same
demographic April 1996.] 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 year ended December 31, 1998, approximately $17,500 (5%)
of our revenues were attributable to this market. During 1999, we did not
receive any revenue 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 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 was 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
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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 and the experience we gained from it. Currently, there are
no hospital associations, HMOs, PPOs, independent healthcare provider
organizations and insurance companies using the Precis Health Card System. 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.
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.
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 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.
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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.
We intend to take appropriate measures to register our trademarks.
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 December 31, 1999, our product development staff consisted of
three employees. Our total expenses for product development and deployment
during 1999 and 1998 were $230,828 and $389,586, 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 "Item 6. Management's Discussion and Analysis
or Plan of Operation."
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. 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.
EMPLOYEES
As of December 31, 1999, we had a total of eight employees, of which
three were employed in sales and marketing, three were employed in product
development, one was employed in professional services and customer support,
and one was employed in internal operations support. 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.
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ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
You should consider the following factors and the matters discussed
below and elsewhere in this report when evaluating our business operations and
strategies. Additionally, there may be risks and uncertainties that we are not
aware of or that we currently deem immaterial, which may become material
factors affecting our operations and business success. Many of the factors 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,
- our business,
- our financial condition, or
- our 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. 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 1999 and 1998, we had total revenues of $63,060 and $322,483,
respectively. We have generated limited revenues to date compared to our
expenditures. Significant increase 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 December 31, 1999, of $3,763,749. 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.
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WE MAY NOT OBTAIN PROFITABILITY WHICH MAY REQUIRE SUSPENSION OF OUR
OPERATIONS, OR REQUIRE US TO 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 our shareholders.
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 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 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
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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, 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 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, IF GOVERNMENT CONTRACTS ARE OBTAINED, WE WILL BE
EXPOSED 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 or 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.
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.
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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 other problems will 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
- - 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.
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 depend on our ability to
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- - 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,
- - 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 DO NOT HAVE COMPUTER SOFTWARE AND SMART
CARD DEVELOPMENT TECHNOLOGY EXPERIENCE.
Our smart card software technology has been developed by our
engineering and software technology personnel. Our executive officers and
directors have not written or developed our software technology and lack
computer software and smart card development technology experience.
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
- - our debt repayment history,
- - 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 suspension of
our operations, including our research and development activities, or require
us
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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 provied 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, 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.
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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.
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.
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.
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WE MAY ISSUE ADDITIONAL COMMON STOCK AT PRICES AND ON TERMS DETERMINED BY OUR
BOARD OF DIRECTORS WITHOUT YOUR CONSENT OR APPROVAL.
We will have approximately 5,400,000 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 THE EFFECTS OF A
POSSIBLE TAKEOVER FROM BEING REFLECTED IN THE MARKET PRICE OF OUR COMMON
STOCK.
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. All of these things may affect the market price of
our common stock should a takeover rumor develop or an actual takeover attempt
occur.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices are located at 2500 McGee Street, Suite 147,
Norman, Oklahoma. These offices consist of approximately 500 square feet and
are occupied under a month-to-month lease requiring monthly rental payments of
$600. Our operations offices are located at 11032 Quail Creek Road, Suite 108,
Oklahoma City, Oklahoma. These offices consists of approximately 3,150 square
feet and are occupied under a month-to-month unwritten lease requiring monthly
rental payments of $2,229. We consider the space in which our offices are
occupied to be adequate for our current needs. In the event we are required to
relocate our office upon termination of the existing leases, we believe other
office space is available under favorable leasing terms in the Oklahoma City
and Norman areas.
ITEM 3. 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. We are
not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of our security holders during the
fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market and is
quoted on Nasdaq SmallCap Market System under the symbol PCIS and is listed on
The Boston Stock Exchange under the symbol PCI. Prior to February 9, 2000,
there was no public trading market for our common stock. On April 11, 2000,
the closing sale price of the Common Stock as quoted on Nasdaq SmallCap Market
was $5.50. On April 11, 2000, there were approximately 720 holders of our
common stock.
The market price of our common stock is subject to significant
fluctuations in response to, and may be adversely affected by
- - variations in quarterly operating results,
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- - 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 Boston Stock Exchange 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
and the Boston Stock Exchange 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
and Boston Stock Exchange,
- - 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 actual sale price ultimately obtained for a block of stock 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 and Boston Stock
Exchange.
If our common stock is delisted from the Nasdaq SmallCap Market and
the Boston Stock Exchange 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 or 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.
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<PAGE>
DIVIDEND POLICY
Our dividend policy is to retain our earnings, if any, to support the
expansion of our operations. Our board of directors does not intend to pay
cash dividends on the common stock in the foreseeable future. Any future cash
dividends will depend on future earnings, capital requirements, our financial
condition and other factors deemed relevant by our board of directors.
1999 PRIVATE PLACEMENT OFFERING
In July 1999, we completed our private offering of 300,000 shares of
our common stock for $2.00 per share. This offering was made pursuant to the
applicable registration exemptions of Rule 506 of Regulation D of the
Securities and Exchange Commission and applicable state securities laws. The
common stock was purchased by 36 individuals, corporations and trusts for
gross proceeds of $600,000, each of which was an "accredited investor" within
the meaning of Rule 501(a). The common stock was offered and sold by Barron
Chase Securities, Inc. Barron Chase received sales commissions of $60,000
($.20 per share) and a non-accountable expense allowance of $18,000 ($.06 per
share) per share. The net proceeds of this offering were approximately
$475,000 ($1.58 per share) after deduction of our other offering costs.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
You should read the following discussion in conjunction with our
financial statements and notes thereto appearing elsewhere in this report. 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
the years ended December 31, 1999 and 1998. We took the information from our
financial statements appearing elsewhere in this report.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Product and service revenues.......................................... $ 63,060 100 % $ 322,483 100 %
--------- ------ --------- ----
Operating expenses:
Product deployment and research
and development................................................... 230,828 366 389,586 121
Sales and marketing................................................. 163,712 260 147,411 46
General and administrative.......................................... 382,764 607 399,756 124
--------- ------ --------- ----
Total expenses.................................................... 777,304 1,233 936,753 290
--------- ------ --------- ----
Operating loss.................................................... (714,244) (1,133) (614,270) (190)
--------- ------ --------- ----
Other expenses (income):
Interest expense.................................................... 79,261 126 59,196 18
Interest income..................................................... -- -- (2,136) (1)
--------- ------ --------- ----
79,261 126 57,060 18
--------- ------ --------- ----
Net loss - deficit accumulated during
development stage................................................... $(793,505) (1,258)% $(671,330) (208)%
========= ====== ========= ====
</TABLE>
COMPARISON OF 1999 AND 1998
Revenue during 1999 decreased $259,423, an 80% decrease, to $63,060
from $322,483 during 1998. This decrease was attributable to our lack of
financial resources to support marketing of our products during 1999.
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 1998. In
addition, during 1999 we completed the initial installation and implementation
of our smart card system in Ericsson Stadium. Our 1998 revenue from this
installation was $251,483, which included our cost of smart cards and computer
hardware of $86,424. In comparison, during 1999 we had revenue of $38,060 from
this installation. Typical of a installation like the Ericsson Stadium
installation, we furnish third-party manufactured hardware. Accordingly, our
revenue from these installations include the sales of the installed hardware.
Following initial
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<PAGE>
installation, we may continue to sell additional smart cards as part of the
installation, but we do not typically have continuing significant hardware
sales associated with the installation. During 1999, we did not complete an
installation comparable to that of the Ericsson Stadium, which we believe was
principally due to our inadequate financial resources to support marketing
efforts.
Operating expenses during 1999 decreased $159,449 to $777,304 from
$936,753 during 1998. Decreases in general and administrative and sales and
marketing expenses and product deployment and research and development costs
were offset by an increase in sales and marketing expenses. decrease in
product deployment and research and development costs. The $158,758 decrease
in product deployment and research and development costs to $230,828 during
1999 from $389,586 during 1998 was primarily attributable to a decrease in
product deployments costs associated with the decrease of product and service
revenue during 1999 compared to 1998. Product deployment costs in 1998
included the costs of implementation of the PrecisCache-TM- system for the
1998 PGA Championship and the Kiel Center Arena and the maintenance in 1998 of
the Chicago White Sox project test that was implemented for the 1997 and 1998
seasons. Also, general and administrative expenses decreased to $16,992 to
$382,764 during 1999 from $399,756 during 1998. The decrease in general and
administrative expenses was attributable to the decrease in depreciation
expense. Offsetting the decrease in product deployment and research and
development costs and general and administrative expenses, sales and marketing
expenses increased $16,301 to $163,712 during 1999 from $147,411 during 1998.
This increase was attributable to the continued focus on marketing activities.
We incurred operating losses of $714,244 and $614,270 during 1999 and 1998,
respectively. The $99,974 increase in 1999 operating loss was attributable to
the decrease in product and service revenues.
Other expenses (income) increased by $22,201 or 39% to a net expense
of $79,261 during 1999 from $57,060 in 1998. This increase was principally due
to the increase in interest expense, which increased from $59,196 during 1998
to $79,261 during 1999. The increase in interest expense was attributable to
increase in our outstanding debt during 1999 compared to 1998. During 1999 we
had a $793,505 net loss, while during 1998 we had a net loss of $671,330, an
increase of $122,175.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
We have historically used stock options to retain and compensate
our officers, directors, employees and others. During 1998, 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 had an
estimated fair value at the date of grant of the options of $116,278,
utilizing the methodology prescribed under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. After giving effect to the estimated fair value of
these options, during 1998, we had a pro forma net loss of $787,608 ($0.66 per
common share).
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
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<PAGE>
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, 1999 and 1998, we had the benefit of net
operating loss carryforwards of $980,000 and $743,300, respectively. The tax
benefit was attributable to the net operating loss carryforwards of
approximately $2,450,000 which if not realized, will expire at various dates
through 2015. The cumulative net deferred tax asset at December 31, 1999,
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 December 31, 1999,
we had a deficit working capital of $1,198,107. In February 2000, we completed
our initial public offering and from the sale of 1,150,000 shares of our
common stock we received net proceeds of approximately $5,675,000. Prior to
completion of our initial public offering, other than possible loans from our
shareholders and the proceeds of the offering, we did not have any capital
resources other those provided by operations. At December 31, 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 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, 1998, the holder of $50,000 of these
shareholder loans did not agree to reduce the interest rate from 25% to 15%.
In February 2000, these shareholder loans were paid in full from the proceeds
of our initial public offering.
At December 31, 1999, we were in default in the payment of $277,522
of our long-term debt. This debt bears interest at 10% per annum. We paid this
debt in full from the proceeds of our initial public offering.
We have a $50,000 line of credit with Stillwater National Bank of
Oklahoma City maturing on June 28, 2000, which is collateralized by our
business assets. The outstanding principal balance of this loan bears interest
at bank's prime rate plus 1% (or 9.5% at December 31, 1999). There was no
balance outstanding on this loan at December 31, 1999.
Operating activities for the year ended December 31, 1999, used net
cash of $444,671 as the result of a net loss of $793,505, reduced by
depreciation of $75,523 and increased by changes in inventory, accounts
payable and accrued liabilities of $273,311. 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 1999 and 1998,
we used cash of $14,793 and $7,537, respectively, for investing activities by
purchase of property and equipment. During 1999 and 1998, net cash provided by
financing activities was $481,002 and $426,505, respectively. During 1999 we
sold 300,000 shares of our common stock for gross proceeds of $600,000 (net
proceeds of approximately $475,000) and borrowed $226,643 on a short-term
basis. During 1999, we paid overdraft and long-term debt of $75,832. 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. We believe that our existing cash and cash from operations 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.
In February 2000, we completed our initial public offering with the
sale of 1,150,000 shares of our common stock and received net proceeds of
approximately $5,675,000. Our business plan is to use more than $2.7 million
of the net proceeds from this offering 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
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<PAGE>
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
- - 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.
FORESIGHT, INC. MERGER AGREEMENT
On March 21, 2000, we and our wholly-owned subsidiary,
Precis-Foresight Acquisition, Inc., entered into an Agreement and Plan of
Merger with Foresight, Inc., an Oklahoma corporation. Under this agreement,
Foresight will merge with and into our subsidiary. In connection with this
merger, we will issue to the shareholders of Foresight one share of our common
stock for each dollar of the greater of (i) the income before income tax
expense of Foresight during 1999 or (ii) our and Foresight's combined or
consolidated income before income tax expense during each of 2000 through
2002. We expect to issue and deliver 500,000 shares of our common stock at
closing of this merger; however, if Foresight's income before income tax
expense is less than $450,000, the number of shares to be issued and delivered
at closing will be reduced for each dollar this income is less than $500,000.
Also, we will issue and deliver at closing 166,667 shares of our series A
convertible preferred stock. This preferred stock has a stated value of $12.00
per share and provides for annual dividends of $1.44 per share, payable
quarterly. Also, each share of this preferred stock is convertible, at the
holder's option, into one share of our common stock. The closing is subject to
completion of the audited financial statements of Foresight for 1999 and 1998,
and there not being any adverse material differences in the unaudited and
audited balance sheet and statement of income of Foresight at December 31,
1999, and for the year then ended. Also, closing of the merger is subject to
approval by our shareholders.
In connection with this merger, we have agreed to grant Barron Chase
Securities, Inc. stock options exercisable for the purchase of 200,000 shares
of our common stock for $9.37 per share. These options will be exercisable
through June 30, 2003.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements which are prepared in accordance with
Regulation S-B are set forth in this report beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
There have been no disagreements concerning matters of accounting
principle or financial statement disclosure between us and our independent
accountants of the type requiring disclosure hereunder.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLLED PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
OUR 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. Our
executive officers are elected by our board
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<PAGE>
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 five members.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------- --- --------
<S> <C> <C>
Kent H. Webb, M.D.(1)(2)............................... 43 Chairman of the Board
Larry E. Howell(1)..................................... 54 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 and Controller
and Secretary
Lyle W. Miller......................................... 56 Director
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 and Controller and
Secretary in August 1999. Mr. Kidd is also Executive Vice President of
Foresight, Inc., a privately-held company that provides various marketing
services. 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.
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<PAGE>
LYLE W. MILLER, began serving as one of directors on November 29,
1999. For more than the past five years, Mr. Miller has been the President and
a Director of McMiller Holding Company, Northern Leasing & Sales, Inc., and
Northern Connections, Inc., each a is privately-held company engaged in the
real estate business, a partner of MahMill Acres, a privately-held real estate
development partnership, President and Director of Servco Incorporated, a
privately-held sales company, Lansing Ice & Gymnastic Center, Inc., a
privately-held company operating the Lansing Ice & Gymnastic Center, and
Landings Restaurant, Inc., a privately-held company operating the Landings
Restaurant. In addition, Mr. Miller is a Director of Capitol Bancorp Limited,
a publicly-held bank holding company. Mr. Miller received a Bachelor of
Business Administration from Michigan State University.
MICHAEL E. DUNN became a one of our directors 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 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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation during 1999, 1998
and1997, paid or accrued, of Larry E. Howell, our President and Chief
Executive Officer. Mr. Howell became our President and Chief Executive Officer
in August 1999 and accordingly during 1998 and 1997 did not receive any
compensation. None of our executive officers received compensation in excess
of $100,000 during these years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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(4).................................................... 1999 $46,108 $ -- --
President and Chief Executive Officer 1998 $64,000 $ -- 17,241
1997 $74,000 $ -- --
Larry E. Howell.................................................. 1999 $15,000 $ -- --
President and Chief Executive Officer 1998 $ -- $ -- --
1997 $ -- $ -- --
</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.
(4) Mr. Lout served as our President and Chief Executive Officer beginning
in June 1996 until mid-August 1999. As a result of Mr. Lout's
employment termination, 26,819 unexercisable stock options granted to
Mr. Lout expired or terminated without exercise.
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, 1999, 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, 1999. During the year ended December 31, 1999, no outstanding
options were exercised.
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<PAGE>
<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1999
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS(1) IN-THE-MONEY OPTIONS(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Larry E. Howell..................... -- -- $ -- $ --
James Lout.......................... 26,820 -- 20,920 --
</TABLE>
- ------------------------
(1) As a result of his employment termination in August 1999, Mr. Lout's
right to receive the unexercisable options immediately terminated.
(2) 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 be $6.00 per share as of December 31, 1999 (after giving
effect to and adjustment for the reverse stock split), minus the
$5.22 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 145,000. As of the date of this report, 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 85% 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 ending February 8, 2001, we 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.
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<PAGE>
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,
- - 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents, as of the date of this report,
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 report from exercise of stock options 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.
-28-
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NUMBER PERCENT
OF OF
NAME (AND ADDRESS) OF BENEFICIAL OWNER SHARES(1) SHARES(1)(2)
- -------------------------------------- ---------- ------------
<S> <C> <C>
Michael R. Morrisett................................................. 270,401 11.5
8626 South Florence Avenue
Tulsa, Oklahoma 74137
Larry E. Howell...................................................... 100,000 4.3
Kent H. Webb, M.D.................................................... 72,018 3.1
4221 South Western
Oklahoma City, Oklahoma 73109
Donald (Dan) A. Cunningham........................................... 10,697 (3)
Mark R. Kidd........................................................ -- --
Lyle W. Miller....................................................... -- --
Michael E. Dunn..................................................... -- --
Executive Officer and Directors as a group (six persons)(3).......... 182,715 7.7
</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 2,350,000 shares of our common stock outstanding.
(3) The percentage is less than 1.0%.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Contained below is a description of transactions we entered into with
our officers, directors, and shareholders during 1999 and 1998. 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. Kent H. 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, 1998, accrued interest at 25%
per annum until September 30, 1998, 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 were paid
in full in February 2000, which included accrued interest of $32,548. At
December 31, 1999, the interest accrued for payment to Dr. Webb was $28,092.
The terms of Dr. Webb's loans made prior to 1999 were approved and
ratified unanimously by our four independent directors, each of whom did not
have an interest in these loans and had access to our independent legal counsel
at our expense. At the time these loans were made in 1999, we did not have
sufficient disinterested independent directors to ratify the terms of the loans.
Because the 1999 loan terms were the same as the earlier loans, our board of
directors believes that the terms of the loans by Dr. Webb 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 not
less than two of our disinterested independent directors and that such loans and
other transactions with affiliates will be on terms no less favorable than could
be obtained from unaffiliated parties and approved by a majority of not less
than two of our disinterested independent directors. As of the date of this
report, our Board of Directors is comprised of five members, of which Lyle W.
Miller and Michael E. Dunn are the only independent directors. As a condition of
registration of our common stock with the Oklahoma Department of Securities and
a governance requirement of the Nasdaq Stock Market, Inc. and the
-29-
<PAGE>
Boston Stock Exchange, we are required and have undertaken to have not less
than two independent directors serving on our board of directors at all times.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Registrant's Certificate of Incorporation, incorporated
by reference to Exhibit 3.1 of Registrant's Form SB-2
Registration Statement (No. 333-86643).
3.2 Registrant's Bylaws, incorporated by reference to
Exhibit 3.2 of Registrant's Form SB-2 Registration
Statement (No. 333-86643).
4.1 Form of Certificate of Common Stock of Registrant,
incorporated by reference to Exhibit 4.1 of
Registrant's Form SB-2 Registration Statement
(No. 333-86643).
10.1 Precis Smart Card, Inc. 1999 Stock Option Plan (amended
and restated), incorporated by reference to Exhibit
10.1 of Registrant's Form SB-2 Registration Statement
(No. 333-86643).
10.2 Master Equipment Purchase and Maintenance Agreement,
dated June 29, 1999, between NationsBanc Services, Inc.
and Registrant, incorporated by reference to Exhibit
10.4 of Registrant's Form SB-2 Registration Statement
(No. 333-86643).
10.3 Smart Card Agreement, dated July 8, 1999, between
Entertainment Smart Systems, Inc. and Registrant,
incorporated by reference to Exhibit 10.5 of
Registrant's Form SB-2 Registration Statement
(No. 333-86643).
10.4 VeriFone VeriSmart Application Developer's Kit License
Agreement between VeriFone, Inc. and Registrant, dated
January 27, 1999, incorporated by reference to Exhibit
10.6 of Registrant's Form SB-2 Registration Statement
(No. 333-86643).
27 Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K:
During the last quarter of 1999, Registrant was not subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
accordingly, did not file any reports on Form 8-K.
-30-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PRECIS SMART CARD SYSTEMS, INC.
(Registrant)
By: /s/ LARRY E. HOWELL
------------------------------------
Larry E. Howell
Chief Executive Officer
Date: April 12, 2000
By: /s/ MARK R. KIDD
------------------------------------
Mark R. Kidd
Chief Financial Officer and
Controller
Date: April 12, 2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KENT H. WEBB Chairman of the Board April 12, 2000
- ------------------------------
Kent H. Webb
/s/ LARRY E. HOWELL Chief Executive Officer April 12, 2000
- ------------------------------ and Director
Larry E. Howell
/s/ DONALD A. CUNNINGHAM President, Chief Operating April 12, 2000
- ------------------------------ Officer and Director
Donald (Dan) A. Cunningham
/s/ MARK R. KIDD Chief Financial Officer and April 12, 2000
- ------------------------------ Controller, Secretary
Mark R. Kidd
/s/ LYLE W. MILLER Director April 12, 2000
- ------------------------------
Lyle W. Miller
/s/ MICHAEL E. DUNN Director April 12, 2000
- ------------------------------
Michael E. Dunn
</TABLE>
-31-
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1999 and 1998 F-3
Statements of Operations and Accumulated Deficit for the Years
Ended December 31, 1999 and 1998 F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 1999
and 1998 F-6
Notes to 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 balance sheets of PRECIS SMART CARD
SYSTEMS, INC. (an Oklahoma Corporation in the development stage) as of
December 31, 1999 and 1998, 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, 1999 and 1998, 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 7 to the
financial statements, the Company has suffered losses and has accumulated a
significant deficit. These conditions raise substantial doubt about its
ability to continue as a going concern. 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
April 3, 2000
F-2
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 21,538 $ --
Inventory -- 10,035
------------ ------------
Total Current Assets 21,538 10,035
------------ ------------
Property and Equipment:
Office Equipment 48,219 48,219
Computer Equipment 273,959 263,499
Furniture and Fixtures 7,735 6,890
------------ ------------
329,913 318,608
Less Accumulated Depreciation (329,913) (254,390)
------------ ------------
-- 64,218
------------ ------------
Deferred Offering Costs 147,428 --
------------ ------------
TOTAL ASSETS $ 168,966 $ 74,253
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Book Overdraft $ -- $ 27,513
Accounts Payable 443,074 265,012
Accrued Liabilities 127,836 46,110
Mezzanine Debt 329,643 103,000
Current Portion of Capital Leases 41,570 48,319
Current Portion of Long-Term Debt 277,522 277,522
------------ ------------
Total Current Liabilities 1,219,645 767,476
------------ ------------
Long-Term Liabilities:
Capital Leases, Net of Current Portion -- 41,570
------------ ------------
Total Long-Term Liabilities -- 41,570
------------ ------------
Total Liabilities 1,219,645 809,046
------------ ------------
Stockholders' Deficit:
Preferred Stock, $1 Par Value, 2,000,000 Shares
Authorized; No shares Issued and Outstanding -- --
Common Stock, $.01 Par Value, 8,000,000 Shares Authorized;
1,200,000 and 900,000 Issued and Outstanding at
December 31, 1999 and 1998, Respectively 12,000 9,000
Additional Paid-In Capital 2,701,070 2,226,451
Deficit Accumulated During Development Stage (3,763,749) (2,970,244)
------------ ------------
Total Stockholders' Deficit (1,050,679) (734,793)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 168,966 $ 74,253
============ ============
</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>
Inception
For the Years Ended (April 1994)
December 31, To
---------------------------- December 31,
1999 1998 1999
------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C>
Product and Service Revenues $ 63,060 $ 322,483 $ 443,026
------------ ------------ --------------
Operating Expenses
Product Deployment and
Research and Development 230,828 389,586 1,615,004
Sales and Marketing 163,712 147,411 619,374
General and Administrative 382,764 399,756 1,716,964
------------ ------------ --------------
Total Expenses 777,304 936,753 3,951,342
------------ ------------ --------------
Operating Loss (714,244) (614,270) (3,508,316)
------------ ------------ --------------
Other Expense (Income)
Interest Expense 79,261 59,196 259,852
Interest Income - (2,136) (4,419)
------------ ------------ --------------
79,261 57,060 255,433
------------ ------------ --------------
Net Loss - Deficit Accumulated During
Development Stage $ (793,505) $ (671,330) $(3,763,749)
============ ============ ==============
Net Loss per Share $ (0.66) $ (0.56) $ (3.14)
============ ============ ==============
Weighted Average Number of
Common Shares Outstanding 1,200,000 1,200,000 1,200,000
============ ============ ==============
</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 Accumulated
Shares Amount Shares Amount Paid-In-Capital Deficit
------------ ---------- -------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Inception (April 1994) -- $ -- -- $ -- $ -- $ --
Sale of Stock (Unaudited) 1,230,000 12,300 -- -- 693,831 --
Net Loss (Unaudited) -- -- -- -- -- (417,348)
------------ ---------- -------- ----------- ------------ -------------
Balance, December 31, 1994 (Unaudited) 1,230,000 12,300 -- -- 693,831 (417,348)
Sale of Stock (Unaudited) 525,000 5,250 -- -- 352,250 --
Net Loss (Unaudited) -- -- -- -- -- (333,017)
------------ ---------- -------- ----------- ------------ -------------
Balance, December 31, 1995 (Unaudited) 1,755,000 17,550 -- -- 1,046,081 (750,365)
Sale of Stock (Unaudited) 122,600 1,226 -- -- 243,974 --
Net Loss (Unaudited) -- -- -- -- -- (398,389)
------------ ---------- -------- ----------- ------------ -------------
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 4,968 596,120 4,975 --
Conversion of Preferred Stock 298,060 2,980 (4,968) (596,120) 593,139 --
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 300,000 3,000 -- -- 474,619 --
Net Loss -- -- -- -- -- (793,505)
------------ ---------- -------- ----------- ------------ -------------
Balance, December 31, 1999 1,200,000 $ 12,000 -- $ -- $ 2,701,070 $ (3,763,749)
============ ========== ======== =========== ============ =============
</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>
Inception
For the Years Ended (April 1994)
December 31, To
----------------------------- December 31,
1999 1998 1999
-------------- ------------ ------------------
(Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Loss $ (793,505) $ (671,330) $ (3,763,749)
Adjustments to Reconcile Net Loss to Net Cash Provided
by Operations:
Depreciation 75,523 103,594 330,072
(Increase) Decrease:
Inventory 10,035 34,123 --
Gain on Disposition of Assets 3,488 -- 3,488
Increase (Decrease):
Accounts Payable 178,062 78,080 443,074
Accrued Liabilities 81,726 34,859 127,836
-------------- ------------ ------------------
Net Cash Used by Operating Activities (444,671) (420,674) (2,859,279)
-------------- ------------ ------------------
Cash Flows from Investing Activities
Purchase of Property and Equipment (14,793) (7,537) (333,560)
-------------- ------------ ------------------
Net Cash Used by Investing Activities (14,793) (7,537) (333,560)
-------------- ------------ ------------------
Cash Flows from Financing Activities
Sale of Stock 330,191 601,119 2,565,642
Book Overdraft (Decrease) Increase (27,513) 27,513 --
Payments on Long-Term Debt (48,319) (280,127) (762,765)
Proceeds from Long-Term Debt -- -- 1,081,857
Proceeds from Short-Term Debt 226,643 78,000 329,643
-------------- ------------ ------------------
Net Cash Provided by Financing Activities 481,002 426,505 3,214,377
-------------- ------------ ------------------
NET INCREASE (DECREASE) IN CASH 21,538 (1,706) 21,538
Cash at Beginning of Period -- 1,706 --
-------------- ------------ ------------------
CASH AT END OF PERIOD $ 21,538 $ -- $ 21,538
============== ============ ==================
Supplemental Disclosure:
Interest Paid $ 7,755 $ 25,884
============== ============
</TABLE>
See Accompanying Notes to Financial Statements
F-6
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
Notes to Financial Statements
Note 1 - Nature of Business
Precis Smart Card Systems, Inc. (the "Company") is a development
stage enterprise. 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 health care
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
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 such sales. The Company plans to
spend significant amounts on the development and marketing of its products.
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 and nominal issuances of stock sold in
contemplation of a public offering (discussed in Notes 5 and 7).
Concentration of Credit Risk - The Company maintains its cash in
bank deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and believes it is
not exposed to any significant risk.
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 long-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, 1999, no impairment
has been indicated.
F-7
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
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 was 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. The notes were
paid subsequent to year end.
The mezzanine debt is unsecured, is due to two shareholders and
bears interest at 15% to 25% per annum. All mezzanine debt matures 30 days
subsequent to the Company's planned initial public offering (discussed in
Note 9). The notes were paid subsequent to year end.
The Company has a $50,000 line of credit with a bank maturing on
June 28, 2000 which is collateralized by all business assets of the Company.
There was no balance outstanding on this agreement at December 31, 1999.
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 entered 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 provisions 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 the financial position or results of operations.
F-8
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
Notes to Financial Statements
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 private placements of common
stock during 1997 and 1999, during which it issued and subscribed shares of
common stock.
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. 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, 1999,
the Company had the following common stock options outstanding to certain
employees and ongoing service providers:
<TABLE>
<CAPTION>
Exercise Expiration Vesting
Quantity Price Date Status
-------- ----- ---- ------
<S> <C> <C> <C>
76,819 $5.22 2008 Vested
</TABLE>
The Company also has agreed to issue 87,547 of future stock options
if 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.
The Company also has agreed to grant future stock options upon
completion of an initial public offering to an officer of the Company for
10,000 shares of the Company's common stock at $6.00 per share, exercisable
during a three-year period commencing six months following completion of the
initial public offering (discussed in Note 9).
F-9
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
Notes to Financial Statements
Note 5 - Capital Structure and Stock Options (continued)
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
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.
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 year ending December
31, 1998:
<TABLE>
<S> <C>
Pro Forma Net Loss $ (787,608)
Pro Forma Net Loss Per Share $ (0.66)
</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: weighted average risk free interest rate of
5.50%; no dividend yield; volatility of 40%; and expected life less than six
years. The fair values of the options 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. No stock options were granted during 1999.
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, 1999 or 1998. 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 carryforwards
and the valuation allowance established are summarized below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Benefit of net operating loss carryforward $980,000 $743,300
Less: Valuation allowance (980,000) (743,300)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
</TABLE>
F-10
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
Notes to Financial Statements
Note 6 - Income Taxes (continued)
The valuation allowance for deferred tax assets at January 1, 1998
was $488,100. The net change in the valuation allowance for the years ended
December 31, 1999 and 1998 were increases of $236,700 and $255,200
respectively. At December 31, 1999 and 1998 the Company had federal and state
net operating loss carryforwards of approximately $2,450,000 and $1,860,000
expiring at various dates through 2015. The Company's ability to use these
losses to offset future taxable income is subject to limitations under the
Internal Revenue Code.
Note 7 - Operations
As of December 31, 1999, the Company had negative working capital of
$1,198,107 and accumulated deficit of $3,763,749. During 1999, the Company
incurred an operating loss of $714,244.
Note 8 - 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 $25,080 and
$23,408 for the years ended December 31, 1999 and 1998 respectively.
Capital lease obligations consist of non-cancelable equipment leases
expiring through September, 2000. These leases are payable in monthly
installments, aggregating $4,632 including imputed interest at 10.67%. These
leases are secured by certain equipment.
Prior to the Company's initial public offering (discussed in Note
9), there has been no public market for the Company's common stock. The
initial public offering price does 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, 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 or any other price.
In connection with the Company's initial public offering, the
Company agreed to sell to the underwriter warrants exercisable for the
purchase of 100,000 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 in any registration statement or amendment to a registration
statement of the Company at no expense to such holders.
Note 9 - Subsequent Events
During February 2000, the Company completed an initial public offering of
1,150,000 shares of common stock and received net proceeds of approximately
$5,675,000.
F-11
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
Notes to Financial Statements
Note 9 - Subsequent Events (continued)
On March 21, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") to acquire Foresight, Inc. ("Foresight")
through a merger transaction. The merger is subject to, among other
conditions, approval of the Company's shareholders. It is anticipated that
the merger will be completed in June 2000 and that it will be accounted for
as a purchase. The Merger Agreement provides that on the effective date of
the merger, the Company will issue 500,000 shares of its common stock and
166,667 shares of preferred stock for Foresight. Additional shares of common
stock are issuable based on earnings levels of the Company for the years 2000
through 2002. Following the merger, the Company's Board of Directors will be
limited to seven with three designated by Foresight shareholders. The Company
is related to Foresight because one Foresight shareholder is the chief
financial officer of the Company.
Also, in connection with this merger, the Company granted Barron
Chase Securities, Inc. stock options exercisable for the purchase of 200,000
shares of common stock for $9.37 per share. The options are exercisable
through June 30, 2003.
F-12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 21,538
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,538
<PP&E> 329,913
<DEPRECIATION> 329,913
<TOTAL-ASSETS> 168,966
<CURRENT-LIABILITIES> 1,219,645
<BONDS> 0
0
0
<COMMON> 12,000
<OTHER-SE> (1,062,679)
<TOTAL-LIABILITY-AND-EQUITY> 168,966
<SALES> 63,060
<TOTAL-REVENUES> 63,060
<CGS> 0
<TOTAL-COSTS> 777,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,261
<INCOME-PRETAX> (793,505)
<INCOME-TAX> 0
<INCOME-CONTINUING> (793,505)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (793,505)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
