<PAGE>
As filed with the Securities and Exchange Commission on January , 2000
Registration No. 333-86643
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRECIS SMART CARD SYSTEMS, INC.
(Name of small business issuer in its charter)
OKLAHOMA 5045 73-1494382
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or organization)
11032 QUAIL CREEK ROAD, SUITE 108 LARRY E. HOWELL
OKLAHOMA CITY, OKLAHOMA 73120 CHIEF EXECUTIVE OFFICER
(405) 752-5550 PRECIS SMART CARD SYSTEMS, INC.
11032 QUAIL CREEK ROAD, SUITE 108
OKLAHOMA CITY, OKLAHOMA 73120
(Address and telephone number, (405) 752-5550
including area code, of registrant's (Name, address and telephone number,
principal executive offices) of agent for service)
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Copies To:
MICHAEL E. DUNN, ESQ. BERT L. GUSRAE, ESQ.
DUNN SWAN & CUNNINGHAM DAVID A. CARTER, P.A.
2800 OKLAHOMA TOWER 2300 GLADES ROAD
210 PARK AVENUE SUITE 210, WEST TOWER
OKLAHOMA CITY, OKLAHOMA 73102-5604 BOCA RATON, FLORIDA 33431
TELEPHONE NUMBER: (405) 235-8318 TELEPHONE NUMBER: (561) 750-6999
FACSIMILE NUMBER: (405)235-9605 FACSIMILE NUMBER: (561) 367-0960
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE MAXIMUM OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock(2)............................... 1,150,000 $6.00 $6,900,000 $1,919
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Common Stock Underlying
Underwriters' Warrants(3)................. 100,000 $9.00 $900,000 $ 250
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Total................................... $7,800,000 $2,169
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(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c).
(2) Includes 150,000 shares of Common Stock subject to the underwriter's
over-allotment option.
(3) Pursuant to Rule 416, includes such indeterminate number of additional
securities as may be required for issuance on exercise of underwriters'
warrants as a result of adjustment in the number of securities issuable
on such exercise by reason of anti-dilution provisions of such warrants.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
PRELIMINARY PROSPECTUS
JANUARY 18, 2000
1,000,000 SHARES OF COMMON STOCK
PRECIS SMART CARD SYSTEMS, INC.
11032 Quail Creek Road, Suite 108
Oklahoma City, Oklahoma 73120
Telephone: (405) 752-5550
This is our initial public offering, and no public market exists for our
common stock. The offering price of our common stock may not reflect the market
price after the offering.
<TABLE>
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PER SHARE TOTAL
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<S> <C> <C>
Public offering price.............................. $6.00 $6,000,000
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Underwriting Discounts and Commissions............. $ .60 $ 600,000
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Proceeds to Precis................................. $5.40 $5,400,000
</TABLE>
Barron Chase Securities and Emerson Bennett & Associates are offering our
common stock on a firm commitment basis.
We have granted Barron Chase Securities, as the managing underwriter, a
45-day option to purchase up to 150,000 additional shares of our common stock to
cover over-allotments. If exercised in full, the total public offering price,
underwriting discounts and commissions, and proceeds to Precis will be
$6,900,000, $690,000 and $6,210,000, respectively.
WE ARE CONSIDERED TO BE IN UNSOUND FINANCIAL CONDITION. THIS INVESTMENT
INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. YOU SHOULD ONLY
PURCHASE SHARES IF YOU CAN AFFORD A COMPLETE LOSS. BEFORE INVESTING, YOU SHOULD
CAREFULLY READ THIS PROSPECTUS AND ANY SUPPLEMENT, PAYING PARTICULAR ATTENTION
TO THE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BARRON CHASE EMERSON BENNETT
SECURITIES & Associates
WE WILL AMEND AND COMPLETE THE INFORMATION CONTAINED IN THIS PROSPECTUS.
ALTHOUGH WE ARE PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE
SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO
BUY THEM UNTIL DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS
BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
ATTENTION CALIFORNIA RESIDENTS:
A resident of California must meet one or more of the following suitability
standards to qualify for purchase of the common stock in this offering:
- - Have a net worth (exclusive of home, home furnishings and automobile) of
not less than $250,000 and gross annual income of not less than $65,000; or
- - Have a net worth (exclusive of home, home furnishings and automobile) of
not less than $500,000; or
- - Have a net worth of not less than $1,000,000; or
- - Have annual gross income of not less than $200,000.
ATTENTION NEW JERSEY RESIDENTS:
Sales in this offering in New Jersey may only be made to accredited
investors as defined in Rule 501(a) under the Securities Act of 1933, as
amended. Under Rule 501(a), to be an accredited investor an individual must have
- - A net worth or joint net worth with the individual's spouse of more than
$1,000,000 or
- - Income of more than $200,000 in each of the most recent years or joint
income with the individual's spouse or more than $300,000 in each of those
years and reasonably expectation of reaching the same income level in the
current year.
There will be no secondary sales of the common stock to persons in New Jersey
who are not accredited investors for 90 days after the date of this prospectus
by the underwriters and selected dealers.
ATTENTION OKLAHOMA RESIDENTS:
A resident of Oklahoma must meet one or more of the following suitability
standards to qualify for purchase of the common stock in this offering:
- - Have a net worth (exclusive of home, home furnishings and automobile) of
not less than $65,000 and gross annual income of not less than $65,000; or
- - Have a net worth (exclusive of home, home furnishings and automobile) of
not less than $150,000.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary......................................................... 1
Precis Smart Card Systems, Inc..................................... 1
The Offering....................................................... 2
Summary Financial Information...................................... 3
Risk Factors............................................................... 4
Use of Proceeds............................................................ 12
Dividend Policy............................................................ 12
Dilution................................................................... 13
Capitalization............................................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 14
Results of Operations.............................................. 14
Liquidity and Capital Resources.................................... 17
Business................................................................... 18
Management................................................................. 29
Directors and Executive Officers................................... 29
Executive Officer Compensation..................................... 30
Stock Option Plan.................................................. 31
Director Liability and Indemnification............................. 31
Lack of Employment Arrangements
and Keyman Insurance........................................... 32
Certain Transactions....................................................... 32
Security Ownership of Certain Beneficial
Owners and Management.................................................. 32
Description of Securities.................................................. 33
Common Stock....................................................... 33
Preferred Stock.................................................... 34
Transfer Agent and Registrar....................................... 34
Underwriters' Warrants............................................. 34
Outstanding Stock Options.......................................... 35
Shareholder Action................................................. 35
Anti-Takeover Provisions........................................... 36
Shares Eligible for Future Sale............................................ 36
Lock-Up Agreements................................................. 37
State Imposed Lock-In Arrangement.................................. 37
Underwriting............................................................... 38
Legal Matters.............................................................. 40
Experts.................................................................... 40
Where You Can Find Additional Information.................................. 40
Index to Financial Statements.............................................. F-1
</TABLE>
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS OR MAY BE IMPORTANT
TO YOU. YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY. FOR ADDITIONAL
INFORMATION, SEE "WHERE YOU CAN FIND
ADDITIONAL INFORMATION."
WE CALL THIS DOCUMENT A PROSPECTUS. IT COVERS THE SHARES OF OUR COMMON
STOCK WHICH ARE OFFERED BY US TO YOU AND OTHERS. THIS OFFERING TO YOU AND OTHERS
IS REFERRED TO AS THE OFFERING. THESE SHARES OF OUR COMMON STOCK HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
GIVES EFFECT TO AND ASSUMES THE FOLLOWING:
- - THE SALE OF 1,000,000 SHARES OF OUR COMMON STOCK FOR THE INITIAL PUBLIC
OFFERING PRICE OF $6.00 PER SHARE AND OUR RECEIPT OF NET PROCEEDS OF
$5,050,000 FROM THE OFFERING; AND
- - BARRON CHASE SECURITIES DOES NOT EXERCISE ITS OVER-
ALLOTMENT OPTION TO SELL AN ADDITIONAL 150,000
SHARES OF OUR COMMON STOCK.
WE RECOMMEND THAT YOU ESPECIALLY CONSIDER THE INFORMATION CONTAINED IN "RISK
FACTORS" (PAGE 4). ALL REFERENCES IN THIS PROSPECTUS TO FISCAL YEARS ARE TO THE
12 MONTHS ENDED DECEMBER 31 OF THE PARTICULAR YEAR.
PRECIS SMART CARD SYSTEMS, INC.
We at Precis Smart Card Systems, Inc. are a development stage company. We
develop and market commercial software products used with a technology commonly
referred to as "smart cards." The smart card contains an embedded microchip that
serves as an information storage device that performs limited computer
functions. This smart card technology enables electronic commerce for
point-of-sale transactions and can serve as an information storage device for
personal healthcare and emergency medical treatment.
Our products include the following:
- - Precis Health Card System -- personal medical history and information are
stored on the care smart card for use by healthcare providers and emergency
response personnel;
- - PrecisCache -- an amount of money value is stored on a disposable smart
card that may be used to purchase products or services typically in closed
areas including stadiums, arenas, campuses, and events and specific retail
sites;
- - PrecisReserve -- a reusable smart card system on which an amount of money
value is initially stored and additional amounts may be added to replenish
the money value and may be used to purchase products or services; and
- - PrecisPersona -- a smart card system designed for use by marketers,
retailers, distributors and manufacturers to track customer purchasing
preferences and patterns and reward customer loyalty through discounts,
refunds and other complementary gifts.
Our products may require enhancement or further development depending on the
customer's proposed use of our products.
During the nine months ended September 30, 1999 and the years ended
December 31, 1998 and 1997, we
- - had product and service revenue of $48,513,
$322,483 and $40,856, respectively, and
- - incurred a net loss of $665,598, $671,330 and
$1,150,160, respectively.
Our principal executive offices are located at
11032 Quail Creek Road, Suite 108, Oklahoma City,
Oklahoma 73120, and our telephone number is (405)
752-5550.
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THE OFFERING
Common stock offered............. 1,000,000 shares.
Common stock outstanding
after the offering............... 2,200,000 shares.
Use of proceeds.................. We expect to have net proceeds of
approximately $5,050,000 after payment
and deduction of the expenses of the
offering. We plan to use the net
proceeds as follows:
- $2,709,000 (53.6% of net proceeds)
for marketing of our smart card
products and systems at trade shows
and conventions, for travel and
entertainment, trade journal
advertising and for promotional
materials, and miscellaneous
marketing expenses;
- $700,000 (13.9% of net proceeds)
for further development of our
smart card products and technology;
- $425,800 (8.4% of net proceeds) for
payment of accounts payable;
- $329,650 (6.5% of net proceeds) for
repayment of shareholder loans;
- $277,550 (5.5% of net proceeds) for
payment of long-term debt; and
- $608,000 (12% of net proceeds) for
working capital.
The allocation of net proceeds to these
uses is our best estimate. We have the
discretion to determine the use of a
substantial portion of the net proceeds
of the offering.
Proposed Nasdaq SmallCap symbol of
common stock: PSPS
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SUMMARY FINANCIAL INFORMATION
You should read the following selected financial data in conjunction
with our financial statements and related notes, together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(page 14). The selected financial data as of and for the years ended December
31, 1998 and 1997, are derived from our audited financial statements. The
selected financial data as of and for the nine months ended September 30,
1999 and 1998, are derived from our unaudited financial statements. In our
opinion, the financial information presented for the nine months ended
September 30, 1999 and 1998, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of this
information. All of this financial information is presented elsewhere in this
prospectus The results of operations during years and periods presented are
not necessarily indicative of our future operations.
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FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
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1998 1997 1999 1998
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<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Product and service revenue....................... $ 322,483 $ 40,856 $ 48,513 $ 295,716
---------- ------------- ---------- ---------
Operating expenses--
Product deployment and
research and development.................. 389,586 542,203 188,135 476,666
Sales and marketing........................... 147,411 148,885 131,819 127,564
General and administrative.................... 399,756 472,320 340,870 155,133
---------- ------------- ---------- ---------
Total expenses........................ 936,753 1,163,408 660,824 759,363
---------- ------------- ---------- ---------
Operating loss........................ (614,270) (1,122,552) (612,311) (463,647)
---------- ------------- ---------- ---------
Other expense (income)--
Interest expense.............................. 59,196 29,890 53,287 18,381
Interest income............................... (2,136) (2,282) -- (1,364)
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57,060 27,608 53,287 17,017
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Net loss -- Deficit accumulated
during development state...................... $ (671,330) $ (1,150,160) $ (665,598) $(480,664)
---------- ------------- ---------- ---------
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Weighted average number of common
shares outstanding........................ 1,200,000 1,200,000 1,200,000 1,200,000
---------- ------------- ---------- ---------
---------- ------------- ---------- ---------
Per share..................................... $ (0.56) $ (0.96) $ (0.55) $ (0.40)
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DECEMBER 31, SEPTEMBER 30, 1999
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1998 1997 ACTUAL AS ADJUSTED(1)
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<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.................................... $ 10,035 $ 45,864 $ 174,515 $4,083,512
Working capital (deficit)......................... (757,441) (551,188) (1,011,899) 3,930,101
Total assets...................................... 74,253 206,139 182,510 4,199,507
Total current liabilities......................... 767,476 597,052 1,186,414 153,411
Long-term debt, net of current portion............ 41,570 273,669 -- --
Stockholders' equity (deficit).................... (734,793) (664,582) (922,772) 4,127,228
</TABLE>
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(1) Adjusted to give effect to the sale of 1,000,000 shares of our common
stock, receipt of estimated net proceeds of $5,050,000 and the application
of the net proceeds as anticipated.
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<PAGE>
RISK FACTORS
THE PURCHASE OF THE SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS, YOU SHOULD CONSIDER THE FOLLOWING FACTORS AND THE MATTERS DISCUSSED
ELSEWHERE IN THIS PROSPECTUS WHEN EVALUATING AN INVESTMENT IN OUR COMMON STOCK.
MANY OF THE FACTORS DISCUSSED BELOW ARE NOT WITHIN OUR CONTROL. WE PROVIDE NO
ASSURANCE THAT ONE OR MORE OF THESE FACTORS
- - WILL NOT ADVERSELY AFFECT
- THE MARKET PRICE OF OUR COMMON STOCK,
- OUR FUTURE OPERATIONS, AND
- OUR BUSINESS,
- FINANCIAL CONDITION, OR
- RESULTS OF OPERATIONS
- - REQUIRING SIGNIFICANT REDUCTION OR DISCONTINUANCE
OF OUR OPERATIONS,
- - REQUIRING US TO SEEK A MERGER PARTNER OR
- - REQUIRING US TO SELL ADDITIONAL STOCK ON TERMS THAT ARE HIGHLY DILUTIVE TO
OUR SHAREHOLDERS.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE MAY
NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR
ACHIEVE PROFITABILITY.
We are a development stage company. We have a limited operating history
upon which you can base your evaluation of our prospects and the potential value
of our common stock. Previously, we have engaged principally in research and
development of our proprietary smart card technology and software. Accordingly,
we have incurred substantial operating losses. Now, we face the uncertainties,
expenses, delays and difficulties associated with shifting from development to
commercialization and marketing of our smart card products and technologies.
WE HAVE HAD VERY LIMITED REVENUE AND OUR REVENUE
GROWTH IS DEPENDENT UPON MARKET ACCEPTANCE OF OUR
SMART CARD PRODUCTS.
During the nine months ended September 30, 1999, and the years ended
December 31, 1998 and 1997, we had total revenues of $48,513, $322,483, and
$40,856, respectively. We have generated limited revenues to date compared to
our expenditures. Significant increases in our revenues to achieve profitability
is dependent upon market acceptance of our smart card products and systems.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE
CONTINUED LOSSES WHICH WILL INCREASE OUR ACCUMULATED
DEFICIT.
We incurred significant losses from operations resulting in an accumulated
deficit at September 30, 1999, of $3,635,842 and a negative stockholders' equity
of $922,772. We will continue to have a high level of operating expenses. We
also will be required to make significant expenditures in further development
and marketing of our smart card products and systems. Consequently, we
anticipate continuing to incur significant and increasing losses in the
foreseeable future until the time, if ever, that we are able to generate
sufficient revenues to support our development and marketing activities.
WE MAY NOT OBTAIN PROFITABILITY WHICH MAY REQUIRE
SUSPENSION OF OUR OPERATIONS, SEEK A MERGER PARTNER
OR OBTAIN ADDITIONAL EQUITY CAPITAL WHICH MAY BE
DILUTIVE TO OUR SHAREHOLDERS.
We cannot assure you that
- - our smart card products and systems will gain
market acceptance,
- - we will be able to successfully implement our
business strategy, or
- - we will be able to generate meaningful revenues or
achieve profitable operations.
If we do not achieve or sustain profitable operations, we could be required to
reduce significantly or suspend our operations, including research and
development activities, seek a merger partner or sell additional securities on
terms that are highly dilutive to the purchasers of our common stock under the
offering.
WE HAVE A SUBSTANTIAL DEFICIT WORKING CAPITAL AND DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY RESULT IN DISCONTINUANCE OF OUR
OPERATIONS AND LOSS TO OUR SHAREHOLDERS.
Our financial statements included in this prospectus were prepared on the
assumption that we will continue as a going concern. The report of our
independent accountants with respect to our financial statements for 1998 and
1997 notes that we have
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<PAGE>
suffered losses from operations in 1998 and 1997 and had an accumulated deficit
at December 31, 1998. The report indicated that these factors raised substantial
doubt regarding our ability to continue as a going concern. Unless our marketing
efforts successfully result in profitability, our losses will consume our
capital resources and eventually require us to discontinue operations. If this
occurs, our shareholders will lose their investment in our common stock.
BECAUSE OUR PRODUCTS ARE BASED ON SMART CARD TECHNOLOGY, WE LACK PRODUCT AND
REVENUE SOURCE DIVERSIFICATION; THEREFORE, OUR BUSINESS SUCCESS AND
PROFITABILITY ARE TOTALLY DEPENDENT UPON MARKET ACCEPTANCE OF OUR SMART CARD
PRODUCTS.
Our smart card products and technology are expected to provide most if not
all of our sales and revenues in the foreseeable future. Our operating results
will therefore depend on
- - continued and increased market acceptance of our smart card products and
technology and
- - our ability to modify our products and technology to meet the needs of
our customers.
Any reduction in demand for, or increasing competition with respect to, these
products will result in loss of or the potential for revenue from smart card
sales. This lack of revenues will adversely affect potential profitability, may
result in additional losses, increase our accumulated deficit, and possibly
result in discontinuance of our operations.
SO FAR THE MARKETING AND MARKET ACCEPTANCE OF OUR SMART CARD TECHNOLOGY IS VERY
LIMITED; THEREFORE MARKET ACCEPTANCE OF OUR PRODUCTS AND TECHNOLOGY ON A BROAD
BASIS IS UNPROVEN.
Market acceptance of our smart card products and technology requires
convincing governmental authorities, commercial enterprises and other potential
system sponsors or users to adopt a smart card system. It will be necessary for
the smart card system come to be used instead of magnetic stripe card and
paper-based systems, and would change the way traditional transaction and
information processing tasks are accomplished.
Due to the large capital and infrastructure investment made by debit and
credit card issuers and significantly lower costs associated with the use of
magnetic stripe cards, there is no assurance that our smart card technology will
be economically viable for a sufficient number of sponsors and users.
Consequently, potential system sponsors or users may be reluctant to convert to
smart card technology. Accordingly, there is no assurance that significant
market opportunities will develop for smart card systems in the United States or
that the acceptance of smart card-based systems in other countries will be
sustained.
ERRORS IN OUR SOFTWARE PRODUCTS MAY ADVERSELY AFFECT MARKET ACCEPTANCE OF OUR
PRODUCTS.
Our software products may contain errors or failures when installed,
updated or enhanced. There is no assurance that, despite testing, errors will
not be found in our products after the delivery. If errors occur, these errors
or failures may result in loss of or delay in market acceptance.
BECAUSE WE DO NOT MANUFACTURE SMART CARD HARDWARE, WE ARE DEPENDENT UPON
INDEPENDENT THIRD PARTIES FOR THE MANUFACTURE AND SUPPLY OF THE SMART CARD
HARDWARE.
We obtain all of the hardware components utilized in conjunction with our
smart card software technology from manufacturers and suppliers. We believe that
these components are generally available from several suppliers. We do not,
however, have any long-term supply contracts. Also, although a component may be
available from more than one supplier, we could incur delays in switching
suppliers, which could result in loss or delay of sales and reduced revenues,
thus having an adverse effect on results of operations.
IF WE DEVELOP MARKETS FOR OUR PRODUCTS INTERNATIONALLY AS EXPECTED, WE WILL BE
CONFRONTED WITH THE LEGAL, FINANCIAL AND MANAGEMENT CHALLENGES OF FOREIGN
OPERATIONS WHICH MAY BE BEYOND OUR ABILITY TO SUCCESSFULLY MANAGE.
We intend to market our smart card technology in Mexico and Canada. In
order to successfully expand internationally, we will be required to establish
foreign operations and hire additional personnel. This will require significant
management attention and financial resources and could materially adversely
affect our operating margins and profitability, especially if such operations
are not profitable. International sales and operations are subject to numerous
risks, including:
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<PAGE>
- - 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, WE INTEND TO OBTAIN GOVERNMENT CONTRACTS, WHICH MAY
EXPOSE US TO THE SPECIAL RISKS ASSOCIATED WITH GOVERNMENT CONTRACTS.
As part of our strategy, we may market our smart card systems to government
agencies in the United States and internationally. In this event, we will become
subject to the special risks including
- - delays in funding,
- - lengthy review processes for awarding contracts,
- - non-renewal, delay, termination at the convenience of the government,
- - reduction or modification of contracts in the event of changes in the
governmental policies or as a result of budgetary constraints, and
- - increased or unexpected costs resulting in losses.
Any or all of the foregoing could have a material adverse effect on the
profitability of these contracts and consequently our business, financial
condition and results of operations.
Furthermore, we may also be required to obtain any potential government
contracts through the competitive bidding process. The competitive bidding
process is typically lengthy and often results in the expenditure of financial
and other resources in connection with bids that are not accepted.
BECAUSE THE NUMBER OF MARKETING COMPANIES WITH EXPERIENCE IN MARKETING SMART
CARD PRODUCTS IS VERY LIMITED, WE MAY NOT SUCCESSFULLY FIND THIRD PARTY
MARKETERS TO ASSIST US, WHICH WILL INCREASE THE POSSIBILITY THAT OUR MARKETING
ACTIVITIES WILL NOT BE SUCCESSFUL.
Achieving market acceptance of our products and systems requires
significant efforts and expenditures to create awareness, demand and interest by
potential system sponsors and users, and others. We expect to rely on unrelated
third parties to assist in marketing our smart card products and technology. We
believe that companies with smart card marketing experience are very limited.
Although we are in discussions with a third-party marketing company, we have not
entered into any contractual arrangements for such assistance. Therefore, we may
not be able to find companies to assist us. Without this assistance, our product
marketing will be limited to our internal marketing staff. This may increase the
possibility that our marketing activities will be unsuccessful.
OUR CAPITAL RESOURCES AVAILABLE FOR PRODUCT MARKETING MAY BE LIMITED TO THIS
OFFERING, UNLESS REVENUE SOURCES DEVELOP FROM SUCH MARKETING ACTIVITIES, AND IF
EXHAUSTED MAY LEAD TO DISCONTINUANCE OF OPERATIONS AND LOSS TO OUR SHAREHOLDERS.
Following the offering, we will have limited financial, personnel and other
resources to undertake extensive marketing activities. Unless our initial
marketing activities result in revenues and cash flows, we may exhaust our
capital resources before achieving significant levels of revenue and obtaining
profitability. If this occurs, we may be required to discontinue operations
which would result in loss to our shareholders.
BECAUSE OUR SMART CARD PRODUCTS AND TECHNOLOGY ARE OUR SOLE SOURCE OF REVENUES,
OBSOLESCENCE OF OUR TECHNOLOGY AND PRODUCTS WILL RESULT IN LOSS OF REVENUE
SOURCE AND MAY REQUIRE US TO DISCONTINUE OPERATIONS.
The computer application software market is subject to
- - rapid technological change,
- - frequent new product introductions, and
- - evolving technologies and industry standards
-6-
<PAGE>
that may render our products and technology obsolete.
Furthermore, our product research and development efforts are subject to
the risks
- - that our products and systems will satisfactorily perform the functions
for which they are designed,
- - that our products and systems will meet applicable price or performance
objectives, or
- - that unanticipated technical or that other problems will not occur which
would result in increased costs or material delays in development.
Because of the rapid pace of technological change in the application
software industry, any developed market position in the smart card industry or
other markets that we may enter could be eroded rapidly by product advancements.
Our software applications rely primarily on internally developed software tools
and applications. If alternative software development tools and applications
were to be redesigned and generally accepted in the marketplace, we could be at
a competitive disadvantage relative to companies employing alternative
developmental tools and applications. Our smart card products and systems must
keep pace with
- - technological developments,
- - conform to evolving technologies and standards, and
- - must address increasingly sophisticated client needs.
We can not provide any assurance that
- - we will have sufficient resources to make the necessary research and
development investments,
- - we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products,
- - the new products and product enhancements will meet the requirements of the
marketplace and achieve market acceptance, or
- - our current or future products will conform to industry requirements.
If our products and technology become obsolete, we will required to develop
alternative sources of revenues or discontinue operations which would result in
loss of our shareholders' investment in our common stock.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
Our success to date has been largely dependent upon the skills and efforts
of our directors, executive officers and other key employees. In particular our
success depends on the continued efforts of our chairman of the board Kent H.
Webb, our chief executive officer and director Larry E. Howell, and our
president and chief operating officer Donald A. Cunningham, with whom we do not
have employment agreements. The loss of services of any of our chairman,
executive officers or key technology personnel could have an adverse effect on
the management of our operations and our product development and technology.
BECAUSE OUR MARKETING EXPERIENCE IS VERY LIMITED AND OUR REVENUE GROWTH AND
POSSIBLE PROFITABILITY IS DEPENDENT UPON MARKET ACCEPTANCE OF OUR SMART CARD
TECHNOLOGY, OUR BUSINESS PLAN IS NOT PROVEN AND MAY BE UNSUCCESSFUL.
The successful implementation of our business plan will be largely
dependent on the effectiveness of our efforts to market our smart card
technology. This will on our ability to
- - enter into marketing and licensing or other arrangements on a timely basis
and on favorable terms;
- - establish satisfactory arrangements with sales representatives and
marketing consultants;
- - hire and retain skilled management as well as financial, technical,
marketing and other personnel;
- - manage successfully our growth (including monitoring operations,
controlling costs and maintaining effective quality, inventory and service
controls); and
- - obtain adequate financing when and as needed.
There is limited information available concerning the performance of our
technologies or market acceptance of our products. We provide no assurance that
- - we will be successful in implementing our business plan or
-7-
<PAGE>
- - that unanticipated expenses or problems or technical difficulties will not
occur which would result in material implementation delays, or
- - we will have sufficient capacity to satisfy any increased demand for our
smart card products and technologies resulting from implementation of our
plan of operation.
OUR EXECUTIVE OFFICERS AND DIRECTORS 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.
OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE COMPLETE DISCRETION OVER THE
APPLICATION OF THE PROCEEDS OF THIS OFFERING.
We anticipate that a substantial portion of the proceeds of this offering
will be allocated to the payment of debts, including repayment of shareholder
loans, and working capital for general corporate purposes. The application of
the net proceeds of the offering will be in the sole discretion of our
management. Our shareholders will have no input or control over decisions
regarding application or use of the net proceeds. Two or our shareholders,
including Kent H. Webb, our chairman of the board, hold notes in the aggregate
amount of $329,643, bearing interest at 15% to 25% per year (see Note 3 of our
financial statements, page F-8). These notes become due 30 days following
completion of the offering. We intend to repay the notes from the proceeds of
the offering. If our management elects not to repay these shareholder notes as
anticipated, the holders of the outstanding principal amounts of these notes
will continue to be entitled to receive the interest on these notes until paid.
If not paid within 30 days following completion of the offering, these notes
begin bearing interest at 30% per year until paid.
FOLLOWING THE OFFERING, WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL RESOURCES
TO CONTINUE OUR OPERATIONS AND THE TERMS OF THE ADDITIONAL CAPITAL MAY BE
DETRIMENTAL TO OUR SHAREHOLDERS.
Our capital requirements have been and will continue to be significant. Our
future capital requirements will depend on many factors. These factors include
- - the our debt repayment history, possibly including our current default in
repayment of our $277,522 long-term debt,
- - the extent and timing of acceptance of our products,
- - the progress of our research and development,
- - the cost of increasing our sales and marketing activities,
- - our operating results, and
- - the status of competing products.
Also, further development of our smart card products to meet the requirements
and specifications of a particular customer may require significant investment
in research and development. This investment may be much in advance of the
actual installation and commencement of revenues from the installation.
We cannot accurately predict our timing or amount of capital requirements.
If and when needed, we may not be able to obtain additional capital resources or
if available the additional capital will be on terms satisfactory or
advantageous to our shareholders. If needed, our inability to obtain additional
financing could require significant reduction or suspend of our operations,
including our research and development activities, or require us to seek a
merger partner both of which could result in significant losses to our
shareholders. Alternatively, we may sell additional shares of our stock on terms
that are dilutive to our shareholders and superior to the rights of our
shareholders.
BECAUSE THE PERIOD FROM INITIATION TO COMPLETION OF A SALE AND INSTALLATION IS
LENGTHY, WE MAY HAVE FLUCTUATIONS IN REVENUE, WHILE MOST OF OUR OVERHEAD COST
ARE FIXED, WHICH MAY RESULT SIGNIFICANT FLUCTUATIONS IN OF OUR RESULTS OF
OPERATIONS FROM PERIOD TO PERIOD.
The purchase of a smart card system generally involves a significant
commitment of capital with attendant delays frequently associated with large
capital expenditures and implementation procedures within an organization.
Accordingly, our product sales cycle varies by customer and industry, and may
extend for periods of 12 months or more. Also, our sales cycles are subject to
-8-
<PAGE>
- - customers' or clients' budgetary constraints,
- - internal acceptance reviews,
- - competition,
- - hardware and software vendors' inability promptly to provide quality
products and services,
- - technological factors, and
- - market acceptance.
We have limited or no control of these risks. Because we determine our
expenditure levels in advance of each quarter, our ability to reduce costs
quickly in response to an unforeseen revenue shortfall is limited.
Therefore,
- - our quarterly operating results are likely to vary significantly in the
future,
- - period-to-period comparisons of our results of operations may not
necessarily be meaningful, and
- - in any event, period-to-period comparisons may not be indicative of future
performance.
It is also likely that in some future quarter our operating results will be
below the expectations of public market analysts and investors, which, in turn,
could have a severe adverse effect on the price of our common stock.
BECAUSE WE ARE MOVING FROM DEVELOPMENT INTO MARKETING OF OUR SMART CARD
TECHNOLOGY, AS WE GROW, WE MAY NOT BE ABLE SUCCESSFULLY TO MANAGE OUR GROWTH.
If we experience substantial growth, this growth will
- - challenge our management and operating resources,
- - require us to hire more technical, sales and marketing, support and
administrative personnel,
- - require us to expand customer service capabilities, and
- - require us to expand management information systems.
There can be no assurance that we will
- - attract and retain the necessary personnel to accomplish our growth
strategies or
- - not experience constraints that will adversely affect our ability to
satisfy customer demand in a timely fashion or to satisfactorily support
our customers.
If we are unable to manage growth effectively, expected levels of product sales
and revenues may not be obtained or maintained. If this happens our results of
operations will be materially and adversely affected.
BECAUSE THE COMPETITION FOR QUALIFIED EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE
TO ATTRACT, MOTIVATE AND RETAIN PERSONNEL WITH THE SKILLS AND EXPERIENCE NEEDED
TO SUCCESSFULLY MANAGE AND GROW OUR BUSINESS AND OPERATIONS.
Our success and growth will continue to depend in large part on our ability
to attract and retain talented and qualified employees, including highly skilled
management personnel. Competition in the recruiting of highly-qualified
personnel is intense. We may experience difficulty in recruiting talented and
qualified employees, particularly for further development of out smart card
technology. We provide no assurance that we will hire, motivate and retain
personnel with the skills and experience needed to successfully manage our
business and operations.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.
We do not currently believe that we will experience any significant adverse
effects or material unbudgeted costs resulting from the inability of our current
computer technology to change the year 2000. Nevertheless, we cannot provide
assurance that the change to the year 2000 will not result in computer system
failures, delays or miscalculations causing disruptions to our operations.
WE HAVE MANY COMPETITORS AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY WHICH MAY
LEAD TO LACK OF REVENUES AND DISCONTINUANCE OF OUR OPERATIONS.
We compete with numerous well-established companies that design,
manufacture and/or market smart card systems. Some of our competitors may be
developing technologies or products that are functionally similar or superior to
our products. Most of our competitors possess substantially greater financial,
marketing, personnel and other resources than us. They may also have established
reputations relating to the design, development, marketing and service of smart
card systems.
Due to competitive market forces, we may
-9-
<PAGE>
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.
IF YOU PURCHASE OUR COMMON STOCK, YOU WILL SUFFER AN IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE OF YOUR SHARES OF COMMON STOCK.
Based upon our pro forma net tangible book value at September 30, 1999, you
and the other purchasers of our common stock will suffer an immediate and
substantial dilution of your investment in our common stock. On a per share
basis, you will suffer dilution of $4.12 per share or 69% of the initial public
offering price of our common stock.
THE OFFERING PRICE OF OUR COMMON STOCK MAY NOT REPRESENT ITS PUBLIC MARKET VALUE
AND THE PUBLIC MARKET PRICE MAY BE FLUCTUATE WIDELY.
The initial public offering price of our common stock
- - was determined solely by negotiations between us and Barron Chase
Securities, the managing underwriter of the offering,
- - does not necessarily bear any relationship to our assets, book value,
earnings or other established criteria of value, and
- - does not necessarily reflect the market price of the common stock after the
offering.
The market price of our common stock after the offering may be subject to
significant fluctuations in response to, and may be adversely affected by
- - variations in quarterly operating results,
- - changes in earnings estimates by analysts,
- - developments in the computer software industry generally and more
particularly the smart card industry and the industries served thereby,
- - adverse earnings or other financial announcements of our customers or
clients,
- - announcements and introductions of product or service innovations or new
contracts by us or our competitors, and
- - general stock market conditions.
IF WE FAIL TO MEET THE MINIMUM REQUIREMENTS, OUR COMMON STOCK WILL BE DELISTED
BY NASDAQ AND WILL BECOME TRADABLE ON THE OVER-THE-COUNTER MARKET, WHICH WILL
ADVERSELY AFFECT THE SALE PRICE OF OUR COMMON STOCK.
In order to continued inclusion of our common stock on Nasdaq minimum
listing requires must be met. In the event these minimum requirements for
inclusion are not met, our common stock
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<PAGE>
- - will be delisted and no longer included on the Nasdaq SmallCap Market,
- - will then be traded in the over-the-counter market, and
- - may become subject to the "penny stock" trading rules.
The over-the-counter market is volatile and characterized as follows:
- - the over-the-counter securities are subject to substantial and sudden price
increases and decreases,
- - at times the price (bid and ask) information for the securities may not be
available,
- - if there is only one or two market makers, there is a risk that the dealers
or group of dealers may control the market in our common stock and set
prices that are not based on competitive forces, and
- - the available offered price may be substantially below the quoted bid
price.
Consequently, the market price of our common stock will be adversely affected if
it ceases to be included on the Nasdaq SmallCap Market.
IF OUR COMMON STOCK BECOME SUBJECT TO "PENNY STOCK" RULES, THE MARKET PRICE OF
OUR COMMON STOCK WILL BE ADVERSELY AFFECTED.
If our common stock is delisted from the Nasdaq SmallCap Market and does
not trade on another national securities exchange, our common stock may become
subject to the "penny stock" rules. A "penny stock" is generally a stock that
- - is only listed in "pink sheets" or on the NASD OTC Bulletin Board,
- - has a price per share of less than $5.00 and
- - is issued by a company with net tangible assets less than $2 million.
The penny stock trading rules will impose additional duties and responsibilities
upon broker-dealers and salespersons recommending the purchase a penny stock or
the sale of a penny stock. Required compliance with these rules will
- - materially limit or restrict the ability to resell our common stock, and
- - the liquidity typically associated with other publicly traded stocks may
not exist.
WE MAY ISSUE ADDITIONAL COMMON STOCK AT PRICES AND ON TERMS DETERMINED BY OUR
BOARD OF DIRECTORS WITHOUT YOUR CONSENT OR APPROVAL.
Following completion of the offering, we will have 5,800,000 shares of our
common stock and 2,000,000 shares of preferred stock available for issuance. We
have the right to offer these shares at an offering price to be determined in
sole discretion of our board of directors. The sale of these shares may result
in substantial dilution. Also the preferred stock may have rights superior to
those of our common stock, which may adversely affect the market price of our
common stock.
IT IS DIFFICULT FOR A THIRD PARTY TO ACQUIRE US DUE TO PROVISIONS IN OUR
CHARTER, BYLAWS AND OKLAHOMA LAWS, WHICH MAY PREVENT OUR COMMON STOCK PRICE
REFLECTING POSSIBLE TAKEOVER.
Provisions of our certificate of incorporation and the Oklahoma corporate
law may make it difficult to effect a change in shareholder control and to
replace our incumbent management. Also, these provisions may limit the price
that a person will pay in the future for our common stock. Furthermore, our
certificate of incorporation authorizes us to issue preferred stock in classes
or series. Our board of directors is authorized to set and determine voting,
redemption and conversion rights and other rights related to the class or series
of preferred stock. In some circumstances, the preferred stock could be issued
to prevent a merger, tender offer or other takeover attempt that our board of
directors opposes.
At some time in the future, we may also become subject to the anti-takeover
provisions of Oklahoma corporate law that discourage a person from making a
control share acquisition (generally an acquisition of voting stock having more
than 20% of all voting power in the election of directors) without shareholder
approval.
All of these things may affect the market price of our common stock should
a takeover rumor develop or an actual takeover attempt occur.
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<PAGE>
USE OF PROCEEDS
From sale of the 1,000,000 shares of our common stock under the offering,
we will receive estimated net proceeds of $5,050,000 ($5,833,000 if Barron Chase
Securities Inc. elects to sell an additional 150,000 shares of our common
stock). We anticipate that the $5,050,000 estimated net proceeds will be
expended as follows:
<TABLE>
<CAPTION>
USE OF ESTIMATED NET PROCEEDS AMOUNT PERCENT
----------------------------- ------ -------
<S> <C> <C>
Marketing development costs:
Trade shows and conventions.................................................... 500,000 9.9
Travel and entertainment....................................................... 400,000 7.9
Trade journal advertising and promotional materials............................ 1,709,000 33.8
Miscellaneous expenses......................................................... 100,000 2.0
---------- ------
Total..................................................................... 2,709,000 53.6
Enhancement and further development of smart card products and technology........... 700,000 13.9
Payment of accounts payable as of September 30, 1999................................ $ 425,800 8.4%
Repayment of $329,650 shareholder unsecured loans becoming due 30 days following
completion of the offering:
Bearing interest at 25% per year........................................... 99,900 2.0
Bearing interest at 15% per year........................................... 229,750 4.5
Repayment of currently due long-term debt, bearing interest at 10% per year......... 277,550 5.5
Working capital..................................................................... 608,000 12.0
---------- ------
Total estimated net proceeds of the offering.............................. $5,050,000 100.0%
---------- ------
---------- ------
</TABLE>
The foregoing represents our best estimate of the allocation of the
proceeds of the offering based upon the present state of our business,
operations and plans, and current business conditions. We will have broad
discretion to determine the use of a substantial portion of the proceeds of the
offering. Conditions may develop which could cause us to reallocate proceeds
from the categories listed above. These conditions include difficulties
encountered in further development of our smart card products and technology and
marketing of these products, and changes in economic climate. The occurrence of
these conditions is unpredicted with any degree of certainty. Any reallocation
will be at the discretion of our board of directors.
We believe that the net proceeds of the offering, combined with the cash
and cash equivalents, will be sufficient to fund our budgeted capital and
operating requirements for the next 12 months. Pending use of the net proceeds,
we will invest the net proceeds in federally insured or guaranteed securities.
DIVIDEND POLICY
We do not intend to pay and you should not expect to receive cash dividends
on our common stock. Our dividend policy is to retain earnings to support the
expansion of our operations. If we were to change this policy, any future cash
dividends will depend on factors deemed relevant by our board of directors.
These factors will generally include future earnings, capital requirements and
our financial condition. No dividends may be paid on our outstanding common
stock until all dividends then due on our outstanding preferred stock have been
paid.
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<PAGE>
DILUTION
The net tangible book value of our common stock, at September 30, 1999, was
$(922,772), or $(0.77) per share. Without taking into account changes in net
tangible book value after September 30, 1999, other than assuming the sale of
1,000,000 shares of our common stock at the public offering price of $6.00 per
share and our receipt of approximately $5,050,000 in net proceeds from the
offering, our pro forma net tangible book value at September 30, 1999, would
have been $4,127,228, or $1.88 per share. This represents an immediate increase
in the pro forma net tangible book value of $2.65 per share to existing
shareholders and an immediate dilution in pro forma net tangible book value of
$4.12 per share of common stock to the purchasers of our common stock under the
offering. Pro forma net tangible book value per share is determined by dividing
the pro forma net tangible book value (tangible assets less liabilities) by the
number of shares of common stock outstanding at that date on a pro forma basis.
The following table illustrates the pro forma per share dilution to purchasers
of our common stock under the offering as of September 30, 1999:
<TABLE>
<CAPTION>
PERCENTAGE
OF PUBLIC
OFFERING PRICE
--------------
<S> <C> <C> <C>
Public offering price............................................................ $6.00 100%
Pro forma net tangible book value per share as of September 30, 1999......... $(0.77)
Increase in pro forma net tangible book value attributable
to existing shareholders................................................. 2.65
-----
Pro forma net tangible book value per share after the offering................... 1.88 31%
----- ----
Dilution to new investors........................................................ $4.12 69%
----- ----
----- ----
</TABLE>
In addition, we have outstanding stock options exercisable for the purchase
of 86,397 shares of our common stock and have reserved 95,210 shares of our
common stock for issuance upon vesting and exercise of outstanding stock
options. The exercise price of these stock options is $5.22 per share. Giving
effect to the offering and assuming exercise of these stock options in full, our
pro forma net tangible book value at September 30, 1999, would have been
$5,075,217, or $2.13 per share. On a per share basis, you would suffer dilution
of $3.87 per share or 64.5% of the initial public offering price of common
stock.
The following table sets forth, on a pro forma basis as of September 30,
1999, the number of shares of our common stock purchased for cash, the total
consideration paid and the average cash price per share paid by our current
shareholders and by the purchasers of our common stock under the offering before
deduction of underwriting discounts and other estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Our current shareholders............................... 1,200,000 (1) 59.5% $2,713,070 (1) 31.1% $2.16
The purchasers of our common stock..................... 1,000,000 45.5% 6,000,000 68.9% $6.00
--------- ------ ----------- -----
Total.......................................... 2,200,000 100.0% $8,713,070 100.0%
========= ===== ========== =====
</TABLE>
- ------------------------
(1) The amount is based upon the amount paid by our current shareholders
for our common stock at September 30, 1999, which is the sum of the par
value of our outstanding common stock and additional paid-in.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
and as adjusted to give effect to the offering. You should read the following
table in conjunction with our unaudited financial statements and notes thereto
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS
1999 ADJUSTED(1)
------------- ------------
<S> <C> <C>
Mezzanine debt.................................................................... $ 329,643 $ --
Current portion of long-term debt................................................. 336,098 58,576
------------- ------------
Stockholders' equity:
Common Stock.................................................................... 12,000 22,000
Additional paid-in capital...................................................... 2,701,070 7,741,070
Deficit accumulated during development stage.................................... (3,635,842) (3,635,842)
------------- -----------
Total stockholders' equity.................................................... (922,772) 4,127,228
------------- -----------
Total capitalization (deficit).................................................... $ (257,031) $4,185,804
------------- -----------
------------- -----------
</TABLE>
- ------------------------
(1) Adjusted to give effect to the sale of 1,000,000 shares of our common
stock under the offering and receipt of estimated net proceeds of
$5,050,000, and the repayment of our mezzanine and long-term debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and notes thereto appearing elsewhere in this prospectus. The results
of our operations as discussed below are not necessarily indicative of our
operations following completion of the offering.
RESULTS OF OPERATIONS
The following table sets forth selected results of our operations for (i)
the years ended December 31, 1998 and 1997, and (ii) the nine months ended
September 30, 1999 and 1998. We took the information from our financial
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ---------------------------------------
1998 1997 1999 1998
-------------------- ---------------------- --------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product and service revenues ........ $ 322,483 100% $ 40,856 100% $ 48,513 100% $ 295,716 100%
----------- --- ----------- --- ----------- --- --------- ---
Operating expenses:
Product deployment and research
and development ................. 389,586 121 542,203 1327 188,135 388 476,666 161
Sales and marketing ............... 147,411 46 148,885 364 131,819 272 127,564 43
General and administrative ........ 399,756 124 472,320 1159 340,870 703 155,133 52
----------- --- ----------- --- ----------- --- --------- ---
Total expenses .................. 936,753 290 1,163,408 2847 660,824 1362 759,363 257
----------- --- ----------- --- ----------- --- --------- ---
Operating loss .................. (614,270) (190) (1,122,552) (2747) (612,311) (1262) (463,647) (157)
----------- --- ----------- --- ----------- --- --------- ---
Other expenses (income)
Interest expense .................. 59,196 18 29,890 73 53,287 110 18,381 6
Interest income ................... (2,136) (1) (2,282) (5) -- -- (1,364) (--)
----------- --- ----------- --- ----------- --- --------- ---
57,060 18 27,608 68 53,287 110 17,017 6
----------- --- ----------- --- ----------- --- --------- ---
Net loss - deficit accumulated during
development stage ................. $ (671,330) (208)% $(1,150,160) (2815)% $ (665,598) (1372)% $(480,664) (163)%
----------- --- ----------- --- ----------- --- --------- ---
----------- --- ----------- --- ----------- --- --------- ---
</TABLE>
COMPARISON OF NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
Revenue during the nine months ended September 30, 1999, decreased
$247,203, an 83.6% decrease, to $48,513 from $295,716 during the nine months
ended September 30, 1998. This decrease was attributable to our lack of
financial resources to support marketing of our products during the 1999
nine-month period.
Consequently, we did not replace the revenue from implementation of the
PrecisCache-TM- system for the
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<PAGE>
1998 PGA Championship and the Kiel Center Arena, home of the National Hockey
League's St. Louis Blues, during the 1998 nine-month period. In addition, during
the 1998 nine-month period we completed the initial installation and
implementation of our smart card system in Ericsson Stadium. Our 1998 nine-month
revenue from this installation was $251,483, which included our cost of smart
cards and computer hardware of $86,424. In comparison, during the 1999
nine-month period we did not have any revenue 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 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 the 1999 nine-month period, 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 the 1999 nine-month period decreased $98,539 to
$660,824 from $759,363 during the 1998 nine-month period. Increases in general
and administrative and sales and marketing expenses were offset by a decrease in
product deployment and research and development costs. The $185,737 increase in
general and administrative expenses to $340,870 during the 1999 nine-month
period from $155,133 during the 1998 nine-month period was primarily
attributable to increase in insurance costs, legal costs and depreciation
expense. Also, sales and marketing expenses increased $4,255 to $131,819 during
the 1999 nine-month period from $127,564 during the 1998 nine-month period. The
increase in sales and marketing expenses was attributable to the increased focus
on marketing activities. Offsetting the increase in general and administrative
expenses and sales and marketing expenses, product deployment and research and
development expenses decreased $288,531 to $188,135 during the 1999 nine-month
period from $476,666 during the 1998 nine month period. This decrease was
attributable to the product and service revenue decrease during the 1999
nine-month period compared to the 1998 nine month period, principally due to
- - 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,
- - maintenance in 1998 of the Chicago White Sox
project test that was implemented for the 1997 and
1998 seasons, and
- - acquisition of hardware ($86,424) for resale and
implementation of the PrecisCache-TM- system at
Ericsson Stadium during 1998.
We incurred operating losses of $612,311 and $463,647 during the 1999 nine-month
period and 1998 nine-month period, respectively. The $148,664 increase in the
1999 nine-month period operating loss was attributable to the decrease in
product and service revenues.
Other expenses (income) increased by $36,270 or 213% to a net expense of
$53,287 during the 1999 nine-month period from $17,017 in the 1998 nine-month
period. This increase was principally due to the increase in interest expense,
which increased from $34,906 during the 1998 nine-month period to $53,287 during
the 1999 nine-month period. The increase in interest expense was attributable to
increase in our outstanding debt during the 1999 nine-month period compared to
the 1998 nine-month period. During the 1999 nine-month period we had a $665,598
net loss, while during the 1998 six-month period we had a net loss of $480,664,
an increase of $184,934.
COMPARISON OF 1998 AND 1997
Product and service revenues during the year ended December 31, 1998,
increased by $281,627 (a 689% percent increase) to $322,483 from $40,856 during
the year ended December 31, 1997. The increase was principally attributable to
implementation of the PrecisCache system for NationsBank (now Bank of America)
in Ericsson Stadium (home of the National Football League's Carolina Panthers),
National Hockey League's St. Louis Blues, and the 1998 PGA Championship during
1998.
Operating expenses during 1998 decreased $226,655, a 19.5% decrease, to
$936,753 from $1,163,408 during 1997. This decrease was principally attributable
to the decrease of $152,617 decrease, a 28.1% decrease, in product deployment
and research and development to $389,586 from $542,203 during 1997 and the
$72,564 decrease (a
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15.4% decrease) in general and administrative expense to $399,756 from $472,320
during 1997. The decrease in product deployment and research and development was
attributable to the decrease in expenses associated with maintenance and
implementation of the Chicago White Sox project test which was implemented for
the 1997 and 1998 seasons. The largest portion of the costs associated with this
project test was incurred in 1997. The reduction in general and administrative
expense was attributable to a write-off of approximately $126,000 of previously
capitalized start-up costs as a result of our adoption of Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This statement requires that the
costs of start-up activities and organization costs be expensed as incurred.
This write-off was offset by an increase of $28,092 in depreciation expense to
$103,594 from $75,502 during 1997, and a general increase in other office and
overhead expenses associated with our increased activity during 1998 compared to
1997. Sales and marketing expenses remained constant with a $1,474 decrease to
$147,411 in the 1998 from $148,885 during 1997. We incurred an operating loss of
$614,270, a $508,282 decrease, in 1998 compared to a $1,122,552 operating loss
in 1997.
Other expenses (income) increased by $29,452 or 107% to a net expense of
$57,060 during the 1998 from $27,608 in 1997. This increase was due to the
increase in interest expense to $59,196 during 1998 from $29,890 during 1997.
This increase was due to the increase in outstanding, interest-bearing debt
during 1998 compared to 1997. During 1998 we had a net loss of $671,330,
compared to a net loss of $1,150,160 during 1997.
PRO FORMA EFFECT OF
STOCK-BASED COMPENSATION
We have historically used stock options to retain and compensate its
officers, directors, employees and others. During 1998 and 1997, we granted
stock options for the purchase of our common stock to our officers, directors,
employees and others. In accordance with Accounting Principles Board Opinion No.
25, the compensation cost of these stock options is not recognized in our
financial statements. The outstanding stock options granted in 1998 and 1997 had
an estimated fair value at the date of grant of the options of $116,278 and
209,718, respectively, utilizing the methodology prescribed under SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. After giving effect to the estimated
fair value of these options, we had pro forma net loss of $787,608 ($0.87 per
common share) for the year ended December 31, 1998, and had pro forma net loss
of $1,359,878 ($1.51 per common share) for the year ended December 31, 1997.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
Some of our computer systems were developed employing six digit date
structures. Where date logic requires the year 2000 or beyond, these structures
may produce inaccurate results. We have completed the implementation of a
program to comply with year 2000 requirements on a system-by-system basis
including information technology and non-information technology systems,
including micro controllers. Our information and non-information technology
systems are certified as year 2000 compliant. Accordingly, we believe that
- - the costs of our year 2000 compliance have not been material to our
financial position or results of operations and
- - the year 2000 compliance issue has not and will not pose significant
operational problems.
If our software were not year 2000 compliant, the customers at Ericsson
Stadium would not be able to use their smart cards to purchase items or the
transaction data reported to Bank of America (formerly NationsBank) would be
inaccurate. Based on progress to date and the limited instances of date
sensitive calculations, we have concluded that development of a contingency plan
is unnecessary.
The most likely risk to us from year 2000 compliance is external, due to
the difficulty of validating all key third parties' readiness for the year 2000.
Although our software is year 2000 compliant, our smart card technology is
utilized in conjunction with computer hardware systems and other software that
may not be compliant. We have sought and will continue to seek confirmation of
the compliance and seek relationships with subcontractors, suppliers, vendors,
customers and service providers that interface with our software and that are
year 2000 compliant. Tangent Associates one of the vendors of the Ericsson
Stadium smart card system, has not responded to our enquires. We have received
assurances from our subcontractors, suppliers, other vendors, customers and
service providers that they are year 2000 compliant. As of the date of this
prospectus, we have
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not experienced any event or occurrences attributable to the
failure to be year 2000 compliant.
RECENTLY ANNOUNCED ACCOUNTING
PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, Software Revenue Recognition ("SOP 97-2"), which supercedes Statement of
Position 91-1, Software Revenue Recognition. SOP 97-2 focuses on when and the
amount of revenue that should be recognized for licensing, selling, leasing or
otherwise marketing computer software and is effective for transactions enter
into in fiscal years beginning after December 15, 1997. In March 1998, the
Accounting Standards Executive Committee issued Statement of Position 98-4,
Deferral of the Effective Date of Provision of SOP 97-2, Modification of SOP
97-2, Software Revenue Recognition ("SOP 98-4"). SOP 98- 4 defers for one year
specific provision of SOP 97-2. In December 1998, the Accounting Standards
Executive Committee issued Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with respect to Certain Transactions ("SOP 98-9"). SOP 98-9
also amended specific provisions of SOP 98-4 through fiscal years beginning on
or before March 15, 1999. We believe that the adoption of SOP 97-2, as amended,
will not have a material effect on our financial position and results of
operations.
INCOME TAX PROVISION (BENEFIT)
Statement of Financial Accounting Standards 109, Accounting for Income
Taxes, requires the separate recognition, measured at currently enacted tax
rates, of deferred tax assets and deferred tax liabilities for the tax effect of
temporary differences between the financial reporting and tax reporting bases of
assets and liabilities, and net operating loss carryforwards for tax purposes. A
valuation allowance must be established for deferred tax assets if it is "more
likely than not" that all or a portion will not be realized. At December 31,
1998 and 1997, we had the benefit of net operating loss carryforwards of
$743,300 and $488,100, respectively. The tax benefit was attributable to the net
operating loss carryforwards of approximately $1,860,000 which if not realized,
will expire at various dates through 2013. The cumulative net deferred tax asset
at December 31, 1998, after the valuation allowance, had no value.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed operations and capital expenditures
through private placements and sales of debt and equity securities together with
cash from operations and loans from shareholders. At September 30, 1999, we had
a deficit working capital of $1,011,899. Other than possible loans from our
shareholders and the proceeds of the offering, we do not have any capital
resources other those provided by operations. At September 30, 1999, the
aggregate outstanding principal balance of the shareholder loans was $329,643
bearing interest at 15% to 25% per annum, with maturity dates 30 days following
completion of the offering. In 1997, 1998 and 1999, we were unable to borrow
funds from lending 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%.
At September 30, 1999, we are in default in the payment of $277,522 of our
long-term debt. This debt bears interest at 10% per annum. We have orally agreed
with the holders to pay this debt in full from the proceeds of the offering.
Following repayment of the shareholder loans and long-term debt, we may
reborrow amounts but from different lenders. As of the date of this prospectus,
we have not established any banking or institution lending relations or
arrangements for future borrowings. Therefore, there is no assurance that bank
or institutional borrowings will be obtained in the future, possibly as a result
of the default on our long-term debt, or, if available, that the terms will be
acceptable to us.
Operating activities for the nine months ended September 30, 1999, used net
cash of $391,988 as the result of a net loss of $665,598, reduced by
depreciation of $64,059 and increased by changes in accounts payable and accrued
liabilities of $160,826. In 1998, our operating activities used net cash of
$420,674 as the result of the net loss of $671,330,
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offset by depreciation of $103,594, a decrease in inventory of $34,123, and an
increase in accounts payable and accrued liabilities of $112,939. During the
nine months ended September 30, 1999, and the year ended December 31, 1998, we
used cash of $7,836 and $7,537, respectively, for investing activities by
purchase of property and equipment. During the nine months ended September 30,
1999 and the year ended December 31, 1998, net cash provided by financing
activities was $564,304 and $426,505, respectively. During the 1999 nine-month
period we sold 300,000 shares of our common stock for gross proceeds of $600,000
(net proceeds of approximately $497,000) and borrowed $226,643 on a short-term
basis. During this period, we paid overdraft and long-term debt of $58,826.
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, together
with the proceeds of the offering, will be sufficient to fund our operations for
more than the next 12 months. Because our capital requirements cannot be
predicted with certainty, there is no assurance that we will not require
additional financing before expiration of the 12- month period. There is no
assurance that any additional financing will be available on terms satisfactory
to us or advantageous to our shareholders, including those that purchase shares
of our common stock in the offering.
Our business plan is to use more than $2.7 million of the offering net
proceeds to market our products and technology. We believe that through our
marketing efforts we will obtain significant revenue growth and obtain
profitability. Historically, we have devoted our financial resources principally
to development of our smart card technology. We believe that with the net
proceeds of the offering, we will have the financial resources to develop market
acceptance of our smart card technology. However, there is limited information
available concerning the performance of our technologies or market acceptance of
our products. Also, our marketing experience is very limited. Thus, we provide
no assurance that
- - we will be successful in implementing our business
plan or
- - that unanticipated expenses or problems or technical difficulties will not
occur which would result in material implementation delays, or
- - we will have sufficient capacity to satisfy any increased demand for our
smart card products and technologies resulting from implementation of our
plan.
Any one of these will adversely affect our ability to become profitable. See
"Business."
BUSINESS
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
We have included some forward-looking statements in this section and other
places in the prospectus regarding our expectations after completion of this
offering. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, levels of
activity, performance or achievements, or industry results, to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Some of
these forward-looking statements can be identified by the use of forward-looking
terminology including "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategies that involve risks and
uncertainties. You should read statements that contain these words carefully
because they:
- - discuss our future expectations;
- - contain projections of our future operating results or of our future
financial condition; or
- - state other "forward-looking" information.
We believe it is important to communicate our expectations to you, but
events may occur in the future over which we have no control and which we are
not accurately able to predict.
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AT PRECIS SMART CARD SYSTEMS, INC. WE DEVELOP AND DESIGN COMPUTER SOFTWARE
APPLICATIONS AND PRODUCTS UTILIZING OUR SMART CARD TECHNOLOGY.
We were organized in 1996 as an Oklahoma corporation and successor to
MediCard Plus-ADS, LLP, an Oklahoma limited partnership which was formed in
March 1994. At Precis, we design, market, implement and service custom memory
and microprocessor card products, known as smart cards, on which information and
software can be stored. This information can be easily, securely and accurately
accessed and manipulated by electronic data processing equipment Our software
offers solutions for creating and processing data and ensuring secure electronic
transactions. Through our research efforts, we have developed a library of
reusable computer software components for a variety of personal computer and
embedded applications all centered on smart card technology. Our technology
enables electronic commerce in closed-system environments for point-of-sale
transactions and other uses. Our products includes the Precis Health Card
System-TM-, a healthcare smart card system; PrecisCache-TM-, a fixed-value smart
card system; PrecisReserve-TM-, a reloadable stored-value smart card system; and
PrecisPersona-TM-, a smart-card based customer loyalty and rewards system.
Our near-term marketing efforts are focused on using the success of our
initial smart card system installations in several key market niches to further
solidifying our market position in these markets and as the foundation for
expansion additional markets.
Our products and services include full service hardware integration and
software development and implementation from the point-of-sale to back-end
processing for electronic commerce. We believe that we can become a leading
developer and marketer of integrated smart card software systems and that we are
positioned to provide customers with sophisticated smart card business solutions
across a wide range of applications.
WHAT IS A SMART CARD AND ITS USES?
A smart card is a credit card-sized plastic card in which an integrated
circuit, usually containing a reusable memory chip, is embedded. In their
simplest form, smart cards provide memory storage capabilities, including
fixed-value cash cards, in which the card is discarded after the value stored on
the card is depleted. This microchip acts as a storage device and can be
programmed to perform many of the functions of a computer. The data on the cards
can be read and updated when the card is inserted into a terminal or, in some
cases, simply placed in the proximity of a radio-frequency based smart card
device.
There are two basic types of cards that are often called smart cards and
some are smarter than others. The first is a simple memory card that, like a
magnetic stripe card, stores data. Unlike a 'mag-stripe' card, the smart card
can be over-written with new data many times and can store, depending on the
card, up to 32 Kbytes of information. Because of its versatile nature, our smart
card technology is adaptable for use over a variety of applications. These
applications are generally categorized as payment vehicles, access and security
keys, and information management.
PAYMENT VEHICLE CARDS -- The most familiar of these cards are the
stored-value payment vehicles, commonly known as electronic purse or wallet
cards, credit, debit and automated teller machine cards, which are disposable or
value reloadable. Some library applications use the same structure using tokens
or units instead of a monetary value.
ACCESS AND SECURITY KEY CARDS -- These cards are used to store and access
identification and authentication information, including biometrics and
encryption technology, including digital certificates, for control of physical
access, online access and for facilitating secured commerce on intranets and the
Internet.
INFORMATION MANAGEMENT CARDS -- These cards enable the storage and
manipulation of data of all kinds, including emergency information, medical
history, account management information, expense tracking and various loyalty
programs. These cards may be used to track and cross-reference consumer
purchasing habits to provide marketing information to retailers, distributors
and manufacturers of various products and services.
To provide smart card applications for some clients, we develop customized
software and integrate appropriate hardware technology to adapt the card to the
customer's needs. We believe that our engineers have sufficient expertise in
hardware technology and computer programming languages necessary for these
development efforts.
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The manufacturing cost of a card varies from less than $1 to approximately
$10 depending on the amount of information the card holds and the complexity of
the microchip or its operating system. Similarly, the cost of a reader device
can vary from $50 to $2,000, depending on the complexity and functionality of
the terminal.
WHAT IS THE HISTORY OF THE SMART CARD INDUSTRY?
Smart cards were first developed in the late 1960's in France. At present
smart card technology is established and extensively used in Europe and Asia.
According to Ovum Ltd., the market for smart card units will reach 2.7 billion
by 2003. The largest markets will be in the prepayment applications, followed by
access control, and electronic cash applications. According to a recent study
from Dataquest, the overall market for memory and microprocessor-based cards
will grow from 544 million units in 1995 to 3.4 billion units by 2001. Of that
figure, microprocessor-based smart cards, which accounted for only 84 million
units in 1995 will grow to 1.2 billion units in 2001. (Source: Microsoft
Corporation: http://www.microsoft.com/windowsce/smartcard/ background.asp.)
According to research firm, SJB Research, the smart card market is growing at a
rate close to 50% a year, with three to four billion cards expected to be issued
in 2000. (Source: Smart Card Central: http://www.smartcardresearch.com/
reports/sjb.html.) Furthermore, Killen & Associates, Inc., also a research firm,
projects that the smart card market will grow from a world wide total of 250
million transactions in 1996 to 25 billion in 2005. (Source: Killen Associates,
Inc., quoted in the SMART CARD FORUM, http://www.smartcrd.com/
info/more/factoid.htm.) The smart card market in North America totaled 13
million cards in 1996 and is expected to grow to 273 million by 2001 and the
projection for 2005 is an estimated 543 million cards in North America. (Source:
Schlumberger Public Relations Department, "Schlumberger Electronic
transactions," quoted in SMART CARD FORUM, http://www.smartcrd.cwom/
info/more/factoid.htm.)
At first mainly installed in pay telephones, smart cards are now being used
for transportation, car parking, arcade games and vending machines. Any coin
operated machine can be converted to a smart card format. Other applications
include automated teller machines, point-of-sale terminals, personal computers,
electronic ticketing and automatic fare collection.
We believe that smart card technology represents the next step in the
evolution of credit/debit instruments and related products and services. Smart
card systems differ from other payment mechanisms in their ability to store
securely large quantities of data on a credit- card sized medium by means of an
integrated circuit chip. The sophisticated encryption algorithms and other
security mechanisms that the chip employs provide information protection. In
January 1999, Microsoft Corporation released a beta version of its developers'
kit to provide a standard model for interfacing smart card readers and cards
with personal computers. (Source: Microsoft Corporation,
http://www.microsoft.com/windowsce/smartcard.scard wp.htm.) We believe that with
the integration of this technology with future versions of Windows and Windows
NT operating systems, smart card development and utilization for security and
electronic commerce on the Internet will become prevalent.
We believe that widespread acceptance and use of smart card technology will
occur, but only following the transition from magnetic stripe only
infrastructure to one that includes both magnetic stripe and smart cards. Major
credit card companies and large banking institutions have shown an interest in
smart card technology because the technology makes small-value monetary
transactions feasible, faster and more economically processed. Use of smart
cards reduces the need for signature, verification of credit availability,
receipts and paperwork. The 1996 Olympic smart card pilot in Atlanta, Georgia by
several banks in association with Visa demonstrated the need for considerable
consumer education before widespread acceptance and utilization will occur.
We believe that closed-area smart card systems will serve as a transitional
or interim phase to widespread smart card utilization and acceptance. A
closed-area system is a limited venue, including a sports arena, a university or
college campus, or a limited access entertainment event. There are several
reasons for this.
- - First, open systems require huge investments in both infrastructure and
marketing. As with most technology implementation, especially point-of-
sale and other transaction technology, there is reluctance to invest in the
requisite infrastructure.
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Also, there is reluctance on the part of consumers to purchase and use the
cards if widespread utilization does not exist. In a closed-area, the
consumer may be required to use a smart card for purchases or access.
- - Second, the security and monitored-controlled access to a defined area
provided. A closed-area by its nature is a controlled environment where
security issues can be monitored easily and reacted to quickly should the
need arise. Smart card technology is well suited for monitoring and
controlling access for security purposes.
- - Third, the scale of infrastructure required for implementation. Within a
defined area the required scale of infrastructure is limited and
consequently results in more immediate implementation, either mandatory or
voluntary, requiring consumer acceptance and use.
We anticipate that significant short-term opportunities exist in the
development of closed-area systems including stored-value cards for events or
entertainment venues, individual store or franchise- wide loyalty applications
in retail, and access control and security applications for corporations.
Multiple-application systems for groups including hospitals, corporate
campuses, schools, colleges and universities can provide further market
opportunity.
We believe we are well positioned to take advantage of the developing smart
card technology and utilization based upon a number of factors. These factors
include
- - our reputation as a market leader and innovator,
- - our knowledge and understanding of the technology and market,
- - our successful development, implementation and sales of our products,
- - our commitment to quality and innovation in our product line, and
- - our ability to create applications quickly for a rapidly changing industry.
In addition, a major factor in the rapid growth of smart card usage is the
ability to process small transactions. Smart card technology can eliminate the
need to carry cash and coins for many day-to-day transactions. By enabling an
individual to exchange information and payment through the smart card microchip
technology, we expect that this technology will open up new opportunities with
regard to the way people interact with financial institutions, healthcare
providers, retailers and others. Most information-based industries are
candidates for smart card conversion and utilization.
We anticipate that significant additional revenue growth opportunities
exist in a variety of markets that we do not at present serve. We believe that
these opportunities include the academic campus, transportation and
telecommunications.
During the year ended December 31, 1998 and the nine months ended
September 30, 1999, we had revenue of $322,483 and $48,513, respectively.
Revenue during the nine months ended September 30, 1999, decreased $247,203, a
83.6% decrease, to $48,513 from $295,716 during the nine months ended September
30, 1998. This decrease was attributable to our lack of financial resources to
support marketing of our products during the 1999 nine-month period.
Consequently, during the 1999 nine-month period we did not replace the revenue
from implementation during the 1998 nine-month period 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
believes that these programs will lead to the national introduction and
installation of these products.
WHAT PRODUCTS ARE OFFERED BY PRECIS?
PRECISCACHE-TM-. Our fixed stored-value product is known as
PrecisCache-TM-. This product is designed to be used in stadiums, arenas,
corporate or educational campuses, festivals, events, specific retail sites or
communities and other closed-area environments. This protected memory card
stores monetary value or tokens to be used within a designated card reader
system. This reader system can include portable (stand-alone) computer terminals
as well as terminals connected to existing point-of-sale computer network
systems. The stored-value smart card system also includes a "back- office"
processing system to account for transactions, create reports and provide other
data base information.
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Use of the PrecisCache-TM- system greatly reduces the cost of handling
cash, while expediting transaction processing. Cards and reader sites can serve
as marketing or advertising media for clients and outside sponsors. Many of the
cards issued will have an intrinsic collectible value based on their limited
distribution, the fan/collector oriented artwork on the card and the novelty of
the new technology.
The smart card systems implemented for Major League Baseball's Chicago
White Sox, the 1998 PGA Championship, the Oklahoma State University Athletic
Department, the Main Street Fort Worth Arts Festival, Demo '97, National
Football League's Carolina Panthers, National Hockey League's St. Louis Blues,
and First Chicago NBO are stored-value systems based on the PrecisCache-TM-
product technology. With respect to each of these installations, the engineering
and managerial approach to implementation resulted in timely and expeditious
installation. The Chicago White Sox system was developed and installed in five
months as compared to 12 to 18 months for similar installations by our
competitors. The Oklahoma State University project was implemented in 60 days
using prototype VeriFone-TM- Omni 1250 readers for which documentation had not
yet been printed. The Fort Worth project was implemented in 75 days. Enormously
successful, the 10,000 allocated cards were sold during the four-day festival.
More than 34,000 transactions were logged during the event. Finally, in a period
of five days, at the request of VeriFone, we customized the PrecisCache-TM-
system for use throughout the hotel/resort hosting the Demo '97 conference. Demo
'97 is the leading computer industry conference focused exclusively on emerging
technologies.
The most significant ongoing installation of the PrecisCache-TM- system was
implemented in July of 1998. This project, at Ericsson Stadium in Charlotte,
North Carolina, for the Carolina Panthers of the National Football League, was
completed in cooperation with NationsBank. The Precis system replaced an earlier
smart card system that had been developed by two much larger competitors.
PRECIS HEALTH CARD SYSTEMS-TM- . The Precis Health Card System (formerly
MediCard) was developed and installed in 1993 by our predecessor Advantage Data
Systems. Currently, there are no hospitals, healthcare organizations and
insurance companies using the Precis Health Card System.
The Precis Health Card System was the first healthcare smart card system
that linked patients with emergency response personnel, physicians, hospitals
and pharmacies. The card stored a patient's personal information and medical
history. It included patient demographics, family and physician contacts, blood
type, last hospital admission, allergies, medications, procedures, diagnoses,
primary and secondary insurance status, along with other pertinent information.
Card readers were located at healthcare facilities, including hospitals,
physician offices, mobile emergency units and pharmacies.
The Precis Health Card System expedites the delivery of medical care while
reducing administrative time and cost because it provides accurate information,
reduces redundant testing and procedures, decreases the likelihood of harmful
drug interactions, improves the provider/patient relationship and provides a
private and secure information storage system. With the addition of biometrics
technology and electronic date interchange processes, the Precis Health Card
System will provide a powerful mechanism to reduce insurance fraud. We plan to
integrate these additional capabilities into our health card system through
customized software development or interfacing with existing systems.
PRECISRESERVE-TM-. Our reloadable stored-value system is PrecisReserve-TM-.
This product represents a significant modification to the PrecisCache-TM-
technology which, in addition to storing monetary value or tokens, can be
reloaded, facilitating extended use.
The PrecisReserve-TM- product is seen as a second stage product for many
venues that have already implemented the disposable stored-value product. Its
reusability also enables the expansion of our marketing efforts into corporate
campus and community-based applications. The reusability also allows for the
addition of other applications to be added and used on the same card, including
loyalty and security access.
PRECISPERSONA-TM-. Market trends toward loyalty and affinity products led
to the development of PrecisPersona-TM-, our smart card based loyalty
application. Rewarding frequent purchasers encourages repeat business and the
tracking capabilities of smart card technology provide opportunities to acquire
valuable customer preference and purchasing pattern information which marketers,
retailers, distributors and manufacturers can use to improve service, improve
existing products and develop new products.
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WHO ARE PRECIS PRINCIPAL CUSTOMERS?
During the nine months ended September 30, 1999, 52% of our revenues were
received from Entertainment Smart Systems and 48% 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 76% and 15% of our total revenues,
respectively. Historically, we have performed agreements with our customers
without execution of the proposed written agreements. Although we have not had
any disagreements, if we continue to perform agreements prior to execution,
disagreements with our customers may occur. A disagreement may result in
reduction of the amount we expected to receive from the customer under the oral
agreement or result in litigation possibly at substantial expense, and our loss
of the customer. During 1997, the Main Street Fort Worth Arts Festival accounted
for all of our revenues. The loss of Bank of America, Tangent Associates, or
Entertainment Smart Systems as a customer will have a material adverse effect on
our revenues and consequently our operations and financial condition.
HOW ARE PRECIS PRODUCTS DEVELOPED AND WHAT DO THE PRECIS PRODUCTS OFFER?
PrecisCache-TM-, PrecisReserve-TM-, Precis Health Card System-TM-,
PrecisPersona-TM- and all Precis products in the foreseeable future are
object-oriented programming applications. We have a number of products currently
in development. Physical access, network/intranet/Internet access, security,
identification and recognition applications using smart card technology are
expected to be leading areas of industry growth.
Our products are object-oriented programming computer applications. This
methodology allows our engineers and programmers to create sets of reusable
components, or building blocks, that may be combined to form a complex system.
Our developmental efforts have produced a library of reusable individual
software components for a variety of personal computer and smart card devices.
Using this extensive collection of software components or building blocks
provides:
- - a simpler system design, thus reducing system maintenance costs, as well as
allowing for the reusability of these building blocks across a wide range
of smart card systems;
- - the ability to respond rapidly to customers that have specialized smart
card needs; and
- - the ability to seamlessly integrate our software with all major operating
systems, office-management and point-of-sale systems.
We continue to have a significant commitment to innovation and quality in
the development of our products. We adhere to a stringent set of development
standards in the development of our products. These standards include the
following:
- - COMPATIBILITY WITH OPERATING SYSTEMS -- We design our software products to
be compatible with all major operating systems for the various system
architectures. The compatibility of our products is key to market
acceptance and provides a distinct advantage.
- - MARKET-DRIVEN ENHANCEMENTS AND PRODUCT OFFERINGS -- Our product design and
architecture provide flexibility and adaptability to emerging technologies.
- - SUPPORT FOR INDUSTRY STANDARDS -- Our development standards include
adherence to industry standards as promulgated by the International
Standards Organization. We also follow different operating systems
standards and recommended configurations when developing each product for
those operating systems.
DOES PRECIS HAVE ANY STRATEGIC BUSINESS RELATIONSHIPS?
We have established formal and informal strategic relationships with a
number of companies that are established leaders in their respective industries
to establish and maintain technological leadership, realize advantageous product
pricing structures and expand our marketing and distribution channels.
One of these strategic relationships is with Bank of America, formerly
NationsBank. Working with NationsBank's Strategic Technologies Group, we
received significant support in our efforts with consistent referrals based upon
this relationship. Most notable was the selection of the PrecisCache system to
replace the stored-value system previously implemented at Ericsson Stadium in
Charlotte, North Carolina. That implementation, known as FANCash-Registered
Trademark-, is a flagship project of NationsBank that illustrates the strength
of its ongoing commitment to smart card technology. We are currently exploring
opportunities to expand NationsBank's FANCash-Registered Trademark- stored-value
program throughout the bank's primary markets.
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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. We are currently serving as one of the first developers on
VeriFone's VeriSmart-Registered Trademark- system, which will provide personal
ATM access from homes, offices and digital phones throughout the world.
We are also working closely with Entertainment Smart Systems of Orlando,
Florida, on the development of a PrecisCache-TM- implementation to serve ESS'
tourism-based travel, theme park and resort infrastructures throughout Mexico
and the United States.
We also have long-standing strategic relationships with the two leading
developers and producers of smart cards and terminals--Schlumberger and Gemplus.
Gemplus has actively promoted our products, domestically and internationally
through sharing display space at conferences as well as producing and
distributing marketing literature on the Precis Health Card System. We, along
with Oracle, Sun Microsystems, International Business Machines and Apple are
referenced in a Gemplus educational booklet on smart card technology.
We are currently negotiating terms for Schlumberger Associates agreement.
Like other Schlumberger Associates, under this agreement we will become a
preferred customer and receive preferred pricing and VAR status with enhanced
access to proprietary information that will be useful in product development and
implementation. Schlumberger Associates has more than 45 associates.
WHAT IS PRECIS' BUSINESS STRATEGY AND PLANS FOR FURTHER PRODUCT
DEVELOPMENT?
Our objective is to become a leading provider of smart card solutions
across a wide range of applications. Our marketing strategy is to focus on
product development and innovation in the area of smart card technology. Our
market focus is on smart card applications for consumer situations that
necessitate card usage on a weekly or more frequent basis or on an event basis.
We have identified the following industries as those best suited to benefit from
smart card technology and have begun research and development efforts aimed at
meeting perceived needs of these industries:
- - HEALTHCARE -- We believe that the healthcare industry, with its millions of
participants and voluminous and individualized information and payment
requirements, can benefit significantly from smart card technology. Smart
cards can be designed to provide patient identification and medical record
storage and retrieval, as well as electronic benefit transfers,
determination of eligibility and drug interaction information. In an
emergency situation, a quick assessment of vital information including
allergies, prescriptions and immunizations is critical for effective
healthcare delivery. Additionally, patient cards can be used to improve and
streamline administrative and billing procedures as well as insurance
reimbursement.
- - TRAVEL AND ENTERTAINMENT -- The travel and entertainment industry holds
great promise with regard to smart card applications. All categories that
comprise this market, including air travel, car rentals, movie theaters,
sporting events, restaurants, casinos, video stores, sports arenas, hotels
and other venues would benefit from a multi-functional card. This is an
enormous global market with strong growth predicted for the near future.
Business travelers in particular are bogged down by paper-based expense
reimbursement. Paper-based reimbursement systems are hampered with the
potential for fraud in addition to being costly to administer. Smart cards
would enable businesses to more effectively monitor travel and
entertainment expenses.
Smart cards offer solutions in terms of their ability to collect and
disseminate data and conduct electronic commerce. Several major airlines
have initiated smart card pilot programs that allow ticketless travel,
store frequent flier miles and process payments. In a resort setting, a
multifunction card allows an individual access to restaurants, shopping,
sports and entertainment activities and lodging while keeping track of
loyalty points.
- - RETAILING -- All types of retailing can be embraced and enhanced with smart
card technology. The retail sector encompasses everything from locally
owned stores to national department stores. Retailers have been made
acutely aware of the value of their contact with the consumer. The key to
repeat business is to
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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 successes have been limited to the
arena/stadium, event, and the healthcare markets.
ARENA/STADIUM MARKET. Within the arena/stadium market there are more than
750 major arenas, stadiums, auditoriums and coliseums in the United States.
Aside from professional sports teams associated with those arenas and stadiums,
concerts and events constitute a large potential market for our products. Our
PrecisCache-TM- card systems and technology have been used in the stadiums and
arenas of the Carolina Panthers, Chicago White Sox, the St. Louis Blues and the
Oklahoma State University. For the nine months ended September 30, 1999 and the
year ended December 31, 1998, approximately $25,000 (52%) and $305,000 (94%),
respectively, of our revenues were attributable to this market.
The PrecisCache-TM- disposable store-value product is an appropriate
solution to the need for a convenient and secure cash handling process that we
believe will be favorably received by customers. For longer-term needs, enhanced
tracking capability and extended identity development potential, companies may
utilize the PrecisReserve-TM- reloadable card system. We believe our experience
with the Carolina Panthers, Chicago White Sox, the St. Louis Blues and the
Oklahoma State University has established our credibility within this market and
will be beneficial in any future discussions with prospects in this market.
One of our long-term goals is to capitalize on the name recognition and
positive association we achieve through our affiliation with professional
sports. It is reported that the likelihood of attending a baseball game
increases steadily with household income. By 2010 the largest growth area for
attendance in Major League Baseball will be in the 45 to 64 year-old population.
[Source: Shannon Dortch, "The Future of Baseball," AMERICAN DEMOGRAPHICS, April
1996.] Because baseball is the least expensive game to attend, the same
demographic expectations should hold for other major sports, including football,
basketball and hockey. We believe that through this marketing channel, we will
reach corporate America, our ultimate target audience.
EVENTS MARKET. There are approximately 10,000 festivals in the United
States each year. [Source: Festivals.com LLC, available from
http://www.festivals.com.] The scope of these of these festivals ranges from air
shows, art, food and music festivals, to state fairs and sporting events. Our
experience in the events market is limited to the Main Street Fort Worth Arts
Festival and the 1998 PGA Championship (at Sahalee Country Club, Redmond,
Washington). For the years ended December 31, 1998 and 1997, approximately
$17,500 (5%) and $40,800 (100%), respectively, of our revenues were attributable
to this market. Although limited, we believe that our experience with these
events demonstrates the successful application of the PrecisCache-TM- system.
One of our significant advantages in the festival- fair market is that the
product can be sold profitably and implemented with minimum cost and development
effort. Given the large number of festivals that occur each year, the
opportunity for steady and reliable cash flows form the sale of this product
could be considerable.
ADVERTISING MEDIUM AND CORPORATE SPONSORSHIP. As an adjunct to our efforts
to capture
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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
is the case in the "Allsports" series of cards for Oklahoma State University
that the Bank of Oklahoma sponsored.
In the sports market, sponsorships are providing new and significant
revenues for franchises and stadiums as well. The smart card may provide
another, possibly significant, vehicle for companies to deliver their messages
to the public. In the festivals-fairs market, where the audience is a more
mass-market group, the opportunity for sponsorship-advertising revenues is also
very good. Where a sponsor may spend a significant amount on a single,
one-location promotional presentation, a smart card offers a better opportunity
for repeated impressions when carried and used for purchases at the event. Many
festivals and fairs are financed in part by corporate sponsorships. The smart
card simply provides another sponsorship vehicle. As an example, PrimeCo, a
sponsor of and in connection with the Main Street Fort Worth Arts Festival,
appeared on the smart card. The funds from the sponsorship in part defrayed the
cost of implementation of the smart card system for this festival. We are
currently developing a sponsorship pricing strategy and contact list for the
purpose of enlisting major sponsors in the Company's efforts to approach the
sports and arena markets as well as schools, festivals, fairs, and others.
HEALTHCARE MARKET. Our first market segment focus was in healthcare. We
believe that every insurance company, HMO, PPO, hospital association, and
independent provider association which serves the United States healthcare
market can benefit from the use of a smart card system. Our advantage in this
market is based upon our position as the first to provide a healthcare smart
card implementation of its kind and the experience we gained from it. 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.
We continue to provide consulting to some of the major providers in the
healthcare industry in and out of the United States that are considering
implementation of a smart card system. A number of these companies have shown an
interest in the Precis Health Card System-TM-. These enquires have provided us
with important insight into many of the components that are necessary to succeed
in this market.
We conducted a limited project study in Oklahoma City, Oklahoma of the
potential benefits of the Precis Health Card System-TM-. The features of the
Oklahoma project, however, limited the collection and analysis of data including
actual reductions in costs and paperwork, rates of decrease of incidents of
harmful drug interactions, increases in the speed and quality of healthcare
delivery and payment, and quantifiable improvements in patient-provider
relationship. The best opportunity to gather this data, which is vital in making
the case to the healthcare industry, will come in a "closed-area-system
implementation" of the product which, although expensive, will provide the best
data for selling the system to the broader targeted market. We are currently
pursuing a number of organizations to serve as strategic alliance partners to
conduct the implementation and study.
Although we expect to continue to market smart card systems directly
through our management and employees, we intend to obtain the assistance of
unrelated third parties to assist our product marketing and to establish
strategic marketing alliances and licensing or other arrangements with systems
integrators, value-added resellers and other smart card vendors. Fulfillment of
product orders and installations will continue to be managed directly by our
staff.
Our marketing staff is currently in discussions and contact with a number
healthcare providers. These healthcare providers include 14 insurance companies,
9 managed healthcare organizations, 7 governmental agencies, 13 hospitals, and
16 other companies providing healthcare services and emergency medical
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response services. Following the offering, we expect to have the financial
resources to broaden our marketing efforts within the healthcare market.
WHAT IS THE NATURE AND EXTENT OF PRECIS' COMPETITION?
The environment within which we operate is intensely competitive and
subject to rapid change in general. To maintain or increase our market share
position in the smart card industry, we will continually need to enhance our
current product offerings, introduce new product features and enhancements, and
expand our professional service capabilities. We currently compete principally
on the basis of the specialized nature of our products and ability to
expeditiously install and implement a smart card system. Our product features
and functions facilitate integration with a wide range of operating systems and
platforms to insure product quality, ease of use and reliability. We believe we
compete favorably in all of these areas.
Our competitors vary in size and in the scope and breadth of the products
and services offered. We may encounter competition from a number of sources,
including International Business Machines, Inc., ICL, 3GI, CyberMark, Touch
Technology International, Inc., Sun MicroSystems, Inc., Technology @ Work, Bull,
Card Europe, Gemplus, Innovatron, Philips Electronics, Aladdin Systems, Pathways
Group, Inc., MONDEX, MasterCard, Microsoft, Motorola, Schlumberger, Siemens,
DigiCash, Leapfrog, Inc. We compete against numerous, smaller, privately-held
companies with fewer resources based on breadth of product features and
functionality, as well as larger, publicly-held companies with greater resources
and having greater product and market diversification.
Many of our current and potential competitors, both privately-held and
publicly-held, have greater financial, technical, marketing and distribution
resources than ours. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development and distribution of their products. In
addition, because there are relatively low barriers to entry in the software
marketplace, we expect additional competition from other established or emerging
companies as the smart card market continues to expand. Increased competition is
likely to result in pricing pressures, reduced gross margins and loss of market
share, any of which could materially adversely affect our business, financial
condition and results of operations. We also expect that competition will
increase as a result of software industry consolidations. There can be no
assurance that we will be able to compete successfully against current and
future competitors or that competitive pressures we encounter will not
materially adversely affect our business, financial condition and results of
operations.
DOES PRECIS HAVE ANY LICENSE AGREEMENTS AND INTELLECTUAL PROPERTY RIGHTS?
We regard our software as proprietary and license our products generally
under written license agreements executed by licensees. We also employ an
encryption system which restricts a user's access to source codes to further
protect our intellectual property. Because our products allow customers to
customize their applications without altering source codes, the source codes for
our products are typically neither licensed nor provided to customers.
We have applied for registration of our Precis Health Card System-TM-
trademark. Because of inadequate working capital and financial resources, we
have not applied for registration of our PrecisCache-TM-, PrecisReserve-TM-, and
PrecisPersona-TM- trademarks. We have no patents or patent applications pending.
Currently, we rely on a combination of copyright, trademark and trade secret
laws to protect our products. We also require employee and third-party non-
disclosure and confidentiality agreements. Despite these precautions, it may be
possible for unauthorized parties to copy portions of our products or reverse
engineer or obtain and use information that we regard as proprietary. Following
completion of the offering, we intend to take appropriate measures to register
our trademarks.
Because the software development industry is characterized by rapid
technological change, we believe that factors, including
- - the technological and creative skills of our personnel,
- - new product developments,
- - frequent product enhancements,
- - name recognition
- - and reliable product maintenance,
are more important to establishing and maintaining a technology leadership
position, than the various legal protections available for our technology.
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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 September 30, 1999, our product development staff consisted of three
employees. Our total expenses for product development and deployment during
1998, 1997 and the nine months ended September 30, 1999, were $389,586, $542,203
and $188,135, respectively. Our customers have not borne any portion of our
product development and deployment expenses. We anticipate that we will continue
to commit substantial resources to product development in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ARE THE OPERATIONS OF PRECIS SUBJECT TO GOVERNMENT REGULATION?
Our operations are subject to various federal, state and local requirements
which affect businesses generally, including taxes, postal regulations, labor
laws, and environment and zoning regulations and ordinances.
Furthermore, although there may be aspects of our services subject to
Regulation E promulgated by the Federal Reserve Board, we believe that most of
our services are not subject to Regulation E. Regulation E governs electronic
funds transfers made by regulated financial institutions and providers of access
devices and electronic fund transfer systems. Regulation E requires written
receipt for transactions, monthly statements, pre-transaction disclosures and
error resolution procedures. There can be no assurance that the Federal Reserve
Board will not require all of our services to comply with Regulation E, or
revise Regulation E, or adopt new rules and regulations for electronic funds
transfers that could result in an increase in our operating costs, reduce the
convenience and functionality of our services and products, possibly resulting
in reduced market acceptance and revenues which would have a material adverse
effect on our business, financial condition or operating results.
We believe that current state and federal regulations concerning electronic
commerce do not apply to our current product line. However, there is a move
towards taxation of Internet use by several states including the state of
Washington. There are some strategic plans under consideration to conduct
commerce on the Internet using our core technology. We have an ongoing
regulatory compliance program pertaining to transactions utilizing smart card
technology and subscribe to industry watch publications that address regulatory
issues.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. The Company is
not currently a party to any legal proceedings.
EMPLOYEES
As of September 30, 1999, we had a total of eight employees, of which two
were employed in sales and marketing, three were employed in product development
and one was employed in professional services and customer support, 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.
FACILITIES
The corporate headquarters of Precis are located at 11032 Quail Creek Road,
Suite 108, Oklahoma City, Oklahoma. This office facility consists of
approximately 3,150 square feet and occupied under a month-to-month unwritten
lease requiring monthly rental payments of $2,229.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to each of our
executive officers and directors. Our directors are generally elected at the
annual shareholders' meeting and hold office until the next annual shareholders'
meeting or until their successors are elected and qualified. Executive officers
are elected by our board of directors and serve at its discretion. Our bylaws
authorize the board of directors to be constituted of not less than one and the
number as our board of directors may determine by resolution or election. Our
board of directors currently consists of five members.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ---------
<S> <C> <C>
Kent H. Webb, M.D.(1)(2)................... 42 Chairman of the Board
Larry E. Howell(1)......................... 53 Chief Executive Officer and Director
Donald (Dan) A. Cunningham................. 56 President and Chief Operating Officer and Director
Mark R. Kidd(2)............................ 33 Chief Financial Officer 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 elated 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.
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MARK R. KIDD became our Chief Financial Officer and Controller and
Secretary in August 1999. Mr. Kidd began serving as President of PaceCo
Financial Services, Inc. and President of UniFin Inc. in March 1998, both are
privately held companies that provide various financial services. From January
1997 until March 1998, he served as Senior Vice President and Chief Financial
Officer of Republic Bank of Norman. From May 1988 through 1996, Mr. Kidd was
employed by the public accounting firm of Arthur Andersen LLP. Mr. Kidd is a
Certified Public Accountant and holds a B.B.A. in accounting from Southern
Methodist University in accounting.
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.
EXECUTIVE OFFICER 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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION(1) COMMON STOCK
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS
- --------------------------- ---- --------- -------- -------
<S> <C> <C> <C> <C>
James Lout(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, all stock options granted to Mr. Lout expired or terminated
without exercise.
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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 prospectus, no
options have been granted under the plan.
Our board of directors administers and interprets the plan (unless
delegated to a committee) and has authority to grant options to all eligible
participants and determine the types of options granted, the terms, restrictions
and conditions of the options at the time of grant.
The exercise price of options may not be less than 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 following the date of this prospectus, we have agreed with
Barron Chase Securities not to grant options or warrants having an exercise
price of less than $6.00 per share, without the written consent of Barron Chase
Securities.
Options qualifying as incentive stock options are exercisable only by an
optionee during the period ending three months after the optionee ceases to be
our employee, a director, or non-employee service provider. However, in the
event of death or disability of the optionee, the incentive stock options are
exercisable for one year following death or disability. In any event options may
not be exercised beyond the expiration date of the options. Options may be
granted to our key management employees, directors, key professional employees
or key professional non-employee service providers, although options granted
non-employee directors do not qualify as incentive stock options. No option may
be granted after December 31, 2008. Options are not transferable except by will
or by the laws of descent and distribution.
All outstanding options granted under the Plan will become fully vested and
immediately exercisable if (i) within any 12-month period, we sell an amount of
common stock that exceeds 50% of the number of shares of common stock
outstanding immediately before the 12-month period or (ii) a "change of control"
occurs. For purposes of the plan, a "change of control" is defined as the
acquisition in a transaction or series of transactions by any person, entity or
group (two or more persons acting as a partnership, limited partnership,
syndicate or other group for the purpose of acquiring our securities) of
beneficial ownership, of 50% or more (or less than 50% as determined by a
majority of our directors) of either the then outstanding shares of our common
stock or the combined voting power of our then outstanding voting securities.
DIRECTOR LIABILITY AND INDEMNIFICATION
As permitted by the provisions of the Oklahoma General Corporation Act, our
Certificate of Incorporation eliminates the monetary liability of our directors
for a breach of their fiduciary duty as directors. However, these provisions do
not eliminate our director's liability
- - for a breach of the director's duty of loyalty to us or our shareholders,
- - for acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law,
- - 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.
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Our bylaws require us to indemnify all of our directors and officers. Under
these provisions, when an individual in his or her capacity as an officer or a
director is made or threatened to be made, a party to any suit or proceeding,
the individual may be indemnified if he or she acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interest. Our
bylaws further provide that this indemnification is not exclusive of any other
rights to which the individual may be entitled. Insofar as indemnification for
liabilities arising under our bylaws or otherwise may be permitted to our
directors and officers, we have been advised that in the opinion of the
Securities and Exchange Commission the indemnification is against public policy
and is, therefore, unenforceable.
LACK OF EMPLOYMENT ARRANGEMENTS AND KEYMAN INSURANCE
We do not have employment agreements with our employees. We do not maintain
any keyman insurance on the life or in the event of disability of our executive
officer.
CERTAIN TRANSACTIONS
Contained below is a description of transactions we entered into with our
officers, directors, and shareholders during 1997, 1998 and 1999 to the date of
this prospectus. These transactions will continue in effect and may result in
conflicts of interest between us and these individuals. Although these persons
have fiduciary duties to us and our shareholders, there can be no assurance that
conflicts of interest will always be resolved in favor of us and our
shareholders.
Under 10 separate promissory notes, Dr. Webb loaned $254,743 to us from
1997 through June 30, 1999. These shareholder loans are evidenced by promissory
notes, currently bearing interest at 15% per annum. The principal amount of
those notes issued before September 30, 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 will become due
30 days following completion of the offering. We have not paid any interest on
the outstanding loans. During the nine months ended September 30, 1999, and the
year ended December 31, 1998, the interest accrued for payment to Dr. Webb was
$9,170 and $14,899, respectively.
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
prospectus, 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 in Oklahoma and a governance requirement of Nasdaq Stock Market,
Inc., we are required and undertake to have not less than two independent
directors serving on our board of directors at all times.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents, as of the date of this prospectus,
information related to the beneficial ownership of our common stock of (i) each
person who is known to us to be the beneficial owner of more than 5% thereof,
(ii) each of our directors and executive officers, and (iii) all of our
executive officers and directors as a group, together with their percentage
holdings of the outstanding shares, and, as adjusted to give effect to the
offering. All persons listed have sole voting and investment power with respect
to their shares unless otherwise indicated, and there are no family
relationships amongst our executive officers and directors. For purposes of the
following table, the number of shares and percent of ownership of our
outstanding common stock that the named person beneficially owns includes shares
of our common stock that the person has the right to acquire within 60 days of
the date of this prospectus from exercise of stock
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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.
<TABLE>
<CAPTION>
AFTER THE
BEFORE THE OFFERING OFFERING
------------------- --------
SHARES PERCENT OF PERCENT OF
BENEFICIALLY OUTSTANDING OUTSTANDING
NAME (AND ADDRESS) OF BENEFICIAL OWNER OWNED(1) SHARES(1)(2) SHARES(1)(2)
- -------------------------------------- -------- ------------ ------------
<S> <C> <C> <C>
Kent H. Webb, M.D .................................................... 72,018 6.0% 3.3%
4221 South Western
Oklahoma City, Oklahoma 73109
Larry E. Howell ..................................................... 100,000 8.3% 4.5%
Donald (Dan) A. Cunningham ........................................... 697 (3) (3)
Mark R. Kidd ........................................................ -- --% --%
Lyle W. Miller ....................................................... -- --% --%
Michael E. Dunn ..................................................... -- --% --%
Michael R. Morrisett ................................................. 270,401 22.5% 12.3%
8626 South Florence Avenue
Tulsa, Oklahoma 74137
Executive Officer and Directors as a group (six persons)(3) .......... 172,715 14.4% 7.9%
</TABLE>
- ---------------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them within 60 days are treated as outstanding for
determining the amount and percentage of our common stock owned by the
person. To our knowledge, each named person has sole voting and sole
investment power with respect to the shares shown except as noted, subject
to community property laws, where applicable.
(2) The percentage shown was rounded to the nearest one-tenth of one percent,
based upon 1,200,000 shares of our common stock outstanding before the
offering and 2,200,000 shares of our common stock outstanding after the
offering.
(3) The percentage is less than 1.0%.
DESCRIPTION OF SECURITIES
Under our Certificate of Incorporation, we are authorized to issue up to
10,000,000 shares of capital stock, consisting of 8,000,000 shares of common
stock, $.01 par value per share, and 2,000,000 shares of preferred stock, $.01
par value per share. As of the date of this prospectus, our issued and
outstanding capital stock consists of 1,200,000 shares of common stock. We are
offering 1,000,000 shares of our common stock under the offering.
The following description of our common stock and preferred stock is a
summary and is qualified in its entirety by the provisions of our Certificate of
Incorporation and bylaws. Our Certificate of Incorporation and bylaws have been
filed as exhibits to the registration statement of which this prospectus is a
part. See "Where You Can Find Additional Information."
COMMON STOCK
As holders of our outstanding shares of the common stock, your rights,
privileges, disabilities and restrictions in general are as follows:
- - the right to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of assets legally available
therefor, subject to the payment of preferential dividends with respect to
our then outstanding preferred stock;
- - the right to share ratably in all assets available for distribution to the
Common Stock shareholders after payment of our liabilities in the event of
our liquidation, dissolution and winding-up, subject to the prior
distribution rights of the holders of our then outstanding preferred stock;
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- - the right to one vote per share on matters submitted to a vote by our
common stock shareholders;
- - no preferential or preemptive right and no subscription, redemption or
conversion privilege with respect to the issuance of additional shares of
our common stock; and
- - no cumulative voting rights, which means that the holders of a majority of
shares voting for the election of directors can elect all members of our
board of directors then subject to election.
In general, a majority vote of shares represented at a meeting of common stock
shareholders at which a quorum (a majority of the outstanding shares of common
stock) is present, is sufficient for all actions that require the vote or
concurrence of shareholders, subject to and possibly in connection with the
voting rights of the holders of our then outstanding preferred stock and
entitled to vote with the holders of our common stock. Upon issuance of the
common stock offered under the offering, all of the outstanding shares of our
common stock will be fully paid and non-assessable.
PREFERRED STOCK
Our authorized preferred stock may be issued from time to time in one or
more series. Our board of directors, without further approval of the common
stock shareholders, is authorized to fix the relative rights, preferences,
privileges and restrictions applicable to each series of our preferred stock. We
have agreed not to issue any preferred stock for three years from the date of
this prospectus without the consent of Barron Chase Securities. Furthermore, in
connection with the registration of our common stock in Oklahoma, we represent
that we will not offer preferred stock
- - to our 5% or greater shareholders, officers, and directors except on terms
that the preferred stock is offered to all other shareholders or to new
shareholders, or
- - unless the preferred stock is approved by a majority of our independent
directors who do not have an interest in the transaction and who have
access, at our expense, to our independent legal counsel.
We believe that having this a class of preferred stock provides greater
flexibility in financing, acquisitions and other corporate activities. While
there are no current plans, commitments or understandings, written or oral, to
issue any of our preferred stock, in the event of any issuance, our common stock
shareholders will not have any preemptive or similar rights to acquire any of
the preferred stock. Issuance of preferred stock could adversely affect
- - the voting power of the holders of our then outstanding common stock,
- - the likelihood that the holders will receive dividend payments and payments
upon liquidation and
- - could have the effect of delaying or preventing a change in shareholder and
management control.
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. is the registrar and transfer agent
of our Common Stock. The mailing address of UMB
Bank, N.A. is Security Trust Division, 28 Grand
Boulevard, 13th Floor, Kansas City, Missouri 64106.
UNDERWRITERS' WARRANTS
In part for their underwriting services, we have agreed to sell to the
managing underwriter, other underwriters, members of the selling group and/or
related persons, for nominal consideration, common stock underwriter warrants
(the "underwriters' warrants"). These warrants are exercisable for the
purchase of 100,000 shares of our common stock for $9.00 each for a four-year
period beginning one year after the date of this prospectus. The
underwriters' warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for one year from the date of
this prospectus, except
- - to the managing underwriter, other underwriters, or member of the
selling group or officer or partner thereof, or
- - by will, or
- - by operation of law.
The number of shares purchasable under these warrants will be appropriately
adjusted in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction.
The underwriters' warrants may be exercised using shares of common stock to
be received upon exercise for payment of the exercise price of the warrants.
This type of exercise is referred to as a cashless exercise or net issuance
exercise. This type of exercise has the effect of requiring us to issue shares
of
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our common stock without a corresponding increase in capital. A net exercise
of the underwriters' warrants will have the same dilutive effect on our
shareholders' interests as will a cash exercise. The underwriters' warrants and
the securities issuable upon their exercise may not be offered for sale except
in compliance with the applicable provisions of federal securities laws.
For a seven-year period, we have agreed to include the underwriter warrants
or common stock underlying these warrants in any amendment to the registration
statement of which this prospectus is a part or any new registration statement
filed with the United States Securities and Exchange Commission at our expense.
We have registered the common stock underlying the underwriters' warrants and
intend to maintain this registration at our expense for the seven- year period.
The foregoing is a summary of the principal terms of the underwriters'
warrants and does not purport to be complete. Reference is made to a copy of
the underwriters' warrants which is filed as exhibits to the registration
statement. See "Where You Can Find Additional Information."
OUTSTANDING STOCK OPTIONS
As of the date of this prospectus, we have outstanding stock options
exercisable for the purchase of 50,000 shares of our common stock during various
periods which expire December 31, 2007 through January 1, 2008, at an exercise
price of $5.22 per share. The exercise prices of the stock options were equal to
the estimated fair market value of the common stock on the date of the grant of
each stock option as determined by our board of directors. In addition, we have
reserved 95,211 shares of our common stock for issuance upon the vesting and
exercise of outstanding stock options. Our board of directors is also authorized
to issue additional stock options exercisable for the purchase of 145,000 shares
of our common stock under our stock option plan. As a condition of registration
of our common stock in Oklahoma, we will not grant any options or warrants with
an exercise price of less that 85% of the fair market value of our shares of
common stock on the date of grant.
SHAREHOLDER ACTION
Under our bylaws, the affirmative vote of the holders of a majority of our
outstanding shares of the common stock entitled to vote thereon is sufficient to
authorize, affirm, ratify or consent to any act or action required of or by the
holders of the common stock, except as otherwise provided by the Oklahoma
General Corporation Act.
Under the Oklahoma General Corporation Act, our shareholders may take
actions without the holding of a meeting by written consent. The written consent
must be signed by the holders of a sufficient number of shares to approve the
act or action had all of our outstanding shares of capital stock entitled to
vote thereon been present at a meeting. In this event, we are required to
provide prompt notice of any corporate action taken without a meeting to our
shareholders who did not consent in writing to the act or action. However, any
time that we have 1,000 or more shareholders of record, any act or action
required of or by the holders of our capital stock entitled to vote thereon may
only be taken by unanimous affirmative written consent of the shareholders or a
shareholder meeting.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation and the Oklahoma General Corporation Act
include a number of provisions which may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral takeover proposals to
negotiate with our board of directors rather than pursue non-negotiated takeover
attempts. We believe that the benefits of these provisions outweigh the
potential disadvantages of discouraging the proposals because, among other
things, negotiation of the proposals might result in an improvement of their
terms. The description below related to provisions of our Certificate of
Incorporation is intended as a summary only and is qualified in its entirety by
reference to our Certificate of Incorporation filed as an exhibit to the
registration statement of which this prospectus is a part. See "Where You Can
Find Additional Information."
PREFERRED STOCK. Our Certificate of Incorporation authorizes the issuance
of the preferred stock in classes. Our board of directors is authorized to set
and determine the voting rights, redemption rights, conversion rights and other
rights relating to the class of preferred stock. In some circumstances, the
preferred stock could be issued and have the effect of preventing a merger,
tender offer or other takeover attempt which our board of directors opposes.
OKLAHOMA ANTI-TAKEOVER STATUTES. Following the offering, we may be subject
to Section 1090.3 and Sections 1145 through 1155 of the Oklahoma General
Corporation Act.
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Section 1090.3 of the Oklahoma General Corporation Act prohibits a
publicly-held Oklahoma corporation from engaging in a "business combination"
with an "interested shareholder." This prohibition is for a three-year period
following the date of the transaction in which the person became an interested
shareholder. This prohibition does not apply to a transaction if the interested
shareholder attained this status with approval of our board of directors or the
business combination is approved by our shareholders. A "business combination"
includes mergers, asset sales, and other transactions resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a person
who, together with affiliates and associates, owns, or within three years did
own, 15% or more of our common stock.
In general, Sections 1145 through 1155 of the Oklahoma General Corporation
Act provide that shares ("interested shares") of voting stock acquired (within
the meaning of a "control share acquisition") become nonvoting stock for the
three-year period following the control share acquisition. This loss of voting
rights does not apply if a majority of the holders of non- interested shares
approve a resolution reinstating the interested shares with the same voting
rights that the shares had before the interested shares became control shares.
Any person ("acquiring person") who proposes to make a control share
acquisition may, at the person's election, and any acquiring person who has made
a control share acquisition is required to deliver an acquiring person statement
to us disclosing prescribed information regarding the acquisition. We are
required to present to the next annual meeting of the shareholders the
reinstatement of voting rights with respect to the control shares that resulted
in the control share acquisition. Alternatively, an acquiring person may request
a special meeting of shareholders for this purpose; however, the acquiring
person must undertake to pay the costs and expenses of the special meeting. In
the event voting rights of control shares acquired in a control share
acquisition are reinstated in full and the acquiring person has acquired control
shares with a majority or more of all voting power, you and the other
shareholders will have dissenters' rights entitling you and the other
shareholders to receive the fair value of the shares of the Common Stock held.
In this case, the fair value will not be less than the highest price paid per
share by the acquiring person in the control share acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, control shares (generally shares
having more than 20% of all voting power in the election of directors of a
publicly held corporation), subject to the following exceptions
- - an acquisition under an agreement of merger, consolidation, or share
acquisition to which we are a party and is effected in compliance with the
Oklahoma General Corporation Act,
- - an acquisition by a person of additional shares within the range of voting
power for which the person has received approval by the majority of the
holders of non-interested shares,
- - an increase in voting power resulting from any action taken by us, provided
the person whose voting power is thereby affected is not our affiliate,
- - an acquisition by proxy solicitation under and in accordance with the
Securities Exchange Act of 1934, as amended, or the laws of Oklahoma, and
- - an acquisition from any person whose previous acquisition of shares did not
constitute a control share acquisition, provided the acquisition does not
result in the acquiring person holding voting power within a higher range
of voting power than that of the person from whom the control shares were
acquired.
The anti-takeover provisions of the Oklahoma General Corporation Act may
have the effect of discouraging a third party from acquiring large blocks of the
common stock within a short period or attempting to obtain control of us, even
though the attempt might be beneficial to us and our shareholders. Accordingly,
you and our other shareholders could be deprived of the opportunities to sell
the shares of the common stock held at a higher market price than might
otherwise be the case.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we have 1,200,000 outstanding shares of
our common stock. Upon completion of the offering, we will have 2,200,000 shares
of common stock outstanding and outstanding stock options and warrants
exercisable for the purchase of 86,398 shares of common stock. No prediction can
be made as to the effect, if any, that future sales or the availability of
shares for sale will
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have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the prevailing market price of our common stock
and could impair our ability to raise capital through sales of our equity
securities.
The 1,000,000 shares of common stock offered in the offering will be
immediately eligible for resale in the public market without restriction or
further registration under the Securities Act of 1933, except for shares
purchased by an "affiliate" (as that term is defined under the Securities Act of
1933) of ours. Any sales of our common stock by an affiliate will be subject to
the resale limitations of Rule 144 promulgated under the 1933 Act. There are
443,116 outstanding shares of our common stock held by our executive officers,
directors and affiliates. These shares are subject to the resale limitations of
Rule 144 promulgated under 1933 Act described below. Also, there are 300,000
shares of our outstanding common stock that are subject to the resale
limitations of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
unregistered shares of common stock for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of
- - 1% of the then outstanding shares of our Common Stock or
- - an amount equal to the average weekly reported volume of trading in the
shares during the four calendar weeks preceding the date on which notice of
the sale is filed with the U.S. Securities and Exchange Commission.
Sales under Rule 144 are also subject to the manner of sale limitations, notice
requirements and the availability of current public information about us.
Shares of common stock properly sold in reliance on Rule 144 are thereafter
freely tradable without restrictions or registration under the Securities Act of
1933, unless thereafter held by an affiliate of ours. In addition, our
affiliates must comply with the restrictions and requirements of Rule 144, other
than the one-year holding period requirement, in order to sell shares of common
stock which are not restricted shares within the meaning of Rule 144 (including
shares of common stock acquired by our affiliates in the offering). As defined
in Rule 144, an "affiliate" is a person that directly, or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with us. If two years have elapsed since the later of the date of any
acquisition of unregistered shares of common stock from us or from any of our
affiliates, and the acquiror or later holder thereof is deemed not to have been
our affiliate at any time during the 90 days preceding the sale, the person
would be entitled to sell the shares in the public market under Rule 144(k).
Under Rule 144(k) unregistered shares of common stock may be sold without regard
to volume limitations, manner of sale restrictions, or public information or
notice requirements. There are 456,884 outstanding shares of our common stock
that may be sold under Rule 144(k).
LOCK-UP AGREEMENTS
During the two-year period following the date of this prospectus, our
executive officers, directors, and shareholders have agreed not to sell or
otherwise dispose of the shares of common stock beneficially own by them on the
date of this prospectus without the prior written consent of Barron Chase
Securities. The agreement covers in the aggregate 1,200,000 shares of our common
stock.
STATE IMPOSED LOCK-IN ARRANGEMENT
In connection with the registration of the offering in Oklahoma, our
executive officers and directors (and their wives) and Michael R. Morrisett (a
greater than 5% shareholder) have agreed to escrow 443,116 shares of our common
stock under a promotional shares lock-in agreement (the "lock-in agreement").
The lock-in agreement was imposed by the Administrator of the Oklahoma
Department of Securities as a condition of the registration for the protection
and benefit of the initial purchasers of our common stock sold under the
offering (the "public shareholders").
Under lock-in agreement, the owners (the "depositors") of the common stock
(the "subject securities") agreed that in event of a "distribution" (as defined
below) respecting the subject securities:
- - The public shareholders will share on a pro rata, per share basis in the
distribution to the exclusion of the depositors, in proportion to the
public offering price of our common stock until the public shareholders
have received, or have had irrevocably set aside for them, an amount equal
to the per share $6.00 public offering price of our common stock.
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- - Thereafter, the depositors and the other holders of our equity securities
(including the public shareholders) will participate on an equal, per share
basis in the remaining amount of the distribution.
The distribution may be on lesser terms and conditions if a majority of the
holders of our common stock that are not held by the depositors and our officers
and directors or their associates or affiliates approve.
A "distribution" means a distribution of our assets or securities to our
shareholders as a result of our dissolution, liquidation, merger, consolidation
or reorganization or the sale or exchange of our assets or securities (including
by way of tender offer), or any other transaction or proceeding with a person
other than the depositors. In the event a public shareholder sells or otherwise
disposes of the shares of common stock purchased in the offering will cease to
be entitled to the distribution benefits of the escrow agreement.
The shares of common stock will remain subject to the escrow agreements for
a four-year period following the date of this prospectus. However, after two
years, 2.5% of the shares of common shares subject to the lock-in agreement will
be released and become available for transfer and resale.
UNDERWRITING
Barron Chase Securities, Inc., as the managing underwriter, and Emerson
Bennett & Associates have agreed severally to purchase under our underwriting
agreement the following shares of our common stock:
<TABLE>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Barron Chase Securities............
Emerson Bennett & Associates.......
---------
Total......................... 1,000,000
---------
---------
</TABLE>
In consideration for their purchase of our common stock under the our
underwriting agreement:
- - Barron Chase Securities and Emerson Bennett & Associates purchase the
1,000,000 shares at $5.40 per share or at 90% of the public offering price.
- - We grant to Barron Chase Securities a 45 day- option to purchase up to
150,000 shares of our common stock for $5.40 each to cover over-allotments
in the sale of our common stock in this offering (the "over-allotment
option").
- - We agree to pay Barron Chase Securities a non-accountable expense allowance
of 3% of the gross proceeds of the offering of which we have paid $50,000.
- - We sell to the managing underwriter, other underwriters, members of the
selling group and related persons, for nominal consideration, common stock
underwriter warrants (the "underwriters' warrants") exercisable for the
purchase of 100,000 shares of our common stock for $9.00 each for a
four-year period beginning one year after the date of this prospectus.
- - We register the common stock underlying the underwriters' warrants and
maintain this registration at our expense for a maximum period of seven
years.
- - We engage Barron Chase Securities for $108,000 to advice us concerning
potential merger and acquisition and financing proposals.
- - We pay Barron Chase Securities for services rendered in connection with
completed corporate transactions (only if introduced to us by Barron Chase
Securities during the next five years) a fee of
- 5% of up to $1 million of value paid or
received in the transaction,
- 4% of the next $1 million of value,
- 3% of the next $1 million of value,
- 2% of the next $1 million of value, and
- 1% of the value in excess of $4 million.
- - We indemnify each of Barron Chase Securities and Emerson Bennett &
Associates against any costs or liabilities incurred by it by reason of
misstatements or omissions to state material facts in connection with the
offering.
- - Each of Barron Chase Securities and Emerson Bennet & Associates indemnifies
us against any liabilities by reason of misstatements or omissions to state
material facts in connection with the statements made in this prospectus
and the registration statement of which this prospectus is a part, based on
information relating to Barron Chase Securities or Emerson Bennett &
Associates and furnished in writing by it.
-38-
<PAGE>
- - For a seven-year period, we include the underwriter warrants or common
stock underlying these warrants in any amendment to the registration
statement of which this prospectus is a part or any new registration
statement filed with the United States Securities and Exchange Commission
at our expense.
Each of Barron Chase Securities and Emerson Bennett & Associates has
advised or informed us that:
- - it proposes to offer the common stock to the public at the $6.00 offering
price through members of the National Association of Securities Dealers,
Inc. (the "NASD") who agree to sell the common shares in conformity with
the NASD Conduct Rules.
- - it may discretionarily allow a concession to selected NASD members, but not
in excess of the $.60 per share of the common stock sold.
- - it does not expect sales to discretionary customer accounts to exceed 5% of
the total number of shares of common stock offered under to the offering.
The initial public offering price or our common stock has been determined
by negotiation between us and Barron Chase Securities. Among the factors
considered in determining the public offering price were
- - the history of, and the prospects for, our business ,
- - an assessment of our management ,
- - our past and present operations and development, and
- - the general condition of the securities market.
The initial public offering price does not necessarily bear any
relationship to our assets, book value, earnings or other established criterion
of value. The price is subject to change as a result of market conditions and
other factors. We provide no assurance that
- - a public market for our common stock will develop after the close of the
offering, or
- - if a public market in fact develops, that the public market will be
sustained, or
- - that the shares of common stock you purchase under the offering can be
resold at any time at the offering or any other price.
Our common stock is offered by each of Barron Chase Securities and Emerson
Bennett & Associates subject to prior sale, when, as and if delivered to and
accepted by it. To facilitate the offering of our common stock, each of Barron
Chase Securities and Emerson Bennett & Associates
- - may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock;
- - may over-allot in connection with the offering, creating a short position
in our common stock for its own account;
- - may also bid for, and purchase, shares of our common stock in the open
market to cover over-allotments or to stabilize the price of our common
stock;
- - may reclaim selling concessions allowed to a dealer for distributing our
common stock in the offering, if Barron Chase Securities or Emerson Bennett
& Associates repurchases previously distributed common stock in
transactions to cover its short position, in stabilization transactions or
otherwise.
Any of these activities may stabilize or maintain the market price of the our
common stock above independent market levels. Each of Barron Chase Securities
and Emerson Bennett & Associates is not required to engage in these activities,
and may end any of these activities at any time.
To the extent that the indemnification provisions of our underwriting
agreement with Barron Chase Securities and Emerson Bennett & Associates purports
to provide exculpation from possible liabilities arising from the federal
securities laws, in the opinion of the Securities and Exchange Commission, these
indemnification provisions are contrary to public policy and therefore
unenforceable.
The underwriters' warrants provide the following:
- - although the common stock underlying the warrants have been registered
under the registration statement of which this prospectus is a part, the
warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for one year from the date of this
prospectus, except
- the managing underwriters, other underwriters,
-39-
<PAGE>
members of the selling group and/or officers and partners thereof, or
- by will, or
- by operation of law; and
- - the number of shares of common stock underlying the warrants are
appropriately adjusted in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction.
The warrants may be exercised using shares of common stock to be received upon
exercise for payment of the exercise price of the warrants. This type of
exercise is referred to as a cashless exercise or net issuance exercise. This
type of exercise has the effect of requiring us to issue shares of our common
stock without a corresponding increase in capital. A net exercise of the
underwriters' warrants will have the same dilutive effect on our shareholders'
interests as will a cash exercise. The underwriters' warrants and the securities
issuable upon their exercise may not be offered for sale except in compliance
with the applicable provisions of federal securities laws.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each agreement which is filed as exhibits to the registration statement. See
"Where You Can Find Additional Information."
LEGAL MATTERS
The validity of issuance of the shares of the common stock offered
hereby will be passed upon for us by our counsel, Dunn Swan & Cunningham, A
Professional Corporation, of Oklahoma City, Oklahoma. Certain legal matters
will be passed upon for the underwriters by David A. Carter, P.A., Boca
Raton, Florida.
EXPERTS
The balance sheets as of December 31, 1998 and 1997, and the statements of
operations and accumulated deficit, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1998, included in this
prospectus, have been included herein in reliance on the report of Murrell,
Hall, McIntosh & Co., PLLP, independent public accountants, given on authority
of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2, of which this
Prospectus constitutes a part, with the Securities and Exchange Commission in
Washington, D.C. under the Securities Act of 1933, as amended, with respect to
the securities offered by this prospectus. As permitted by the rules and
regulations of the SEC, this prospectus does not contain all of the information
included in the registration statement and in the exhibits thereto. The
statements contained in this prospectus as to the contents of any contract or
other document referenced herein are not necessarily complete, and in each
instance, if the contract or document was filed as an exhibit, reference is
hereby made to the copy of the contract or other document filed as an exhibit to
the registration statement and each statement is qualified in all respects by
the reference. The registration statement (including the exhibits thereto) may
be inspected at the office of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004, and at its regional offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the registration statement and
the exhibits and schedules thereto may be obtained from the SEC at these
offices, upon payment of prescribed rates. In addition, the registration
statements as filed with the SEC through its Electronic Data Gathering, Analysis
and Retrieval (known as "EDGAR") system are publicly available through the SEC's
site on the World Wide Web on the Internet, located at HTTP://WWW.SEC.GOV. We
will provide without charge to you, upon written or oral request, a copy of any
information incorporated by reference in this prospectus (excluding exhibits to
information incorporated by reference unless these exhibits are themselves
specifically incorporated by reference).
-40-
<PAGE>
We have not previously been subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended. Following completion of the
offering, we will be subject to the informational reporting requirements of the
Securities Exchange Act as a "small business issuer" as defined under Regulation
S-B promulgated under the Securities Exchange Act. In accordance with the
Securities Exchange Act, we will file reports and other information with the
SEC, and these reports and other information can be inspected and copied at, and
copies of these materials can be obtained at prescribed rates from, the Public
Reference Section of the SEC in Washington, D.C. We will distribute to our
shareholders annual reports containing financial statements audited by our
independent public accountants and, upon request, quarterly reports for the
first three quarters of each fiscal year containing unaudited consolidated
financial information.
Any requests for copies of information, reports or other filings with the
SEC should be directed to Precis Smart Card Systems, Inc. at 11032 Quail Creek
Road, Suite 108, Oklahoma City, Oklahoma 731120, telephone: (405) 752-5550.
-41-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................ F-2
Balance Sheets as of December 31, 1998 and 1997, and as of September 30, 1999
and 1998 (Unaudited)............................................................ F-3
Statements of Operations and Accumulated Deficit for the Years Ended
December 31, 1998 and 1997, for the Nine Months Ended September 30,
1999 and 1998 (Unaudited) and from Inception
(April 1994) to September 30, 1999 (Unaudited).................................. F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997, and for the Nine Months Ended September 30, 1999 and 1998
(Unaudited) and from Inception
(April 1994) to September 30, 1999 (Unaudited).................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997,
for the Nine Months Ended September 30, 1999 and 1998 (Unaudited)
and from Inception (April 1994) to September 30, 1999 (Unaudited)............... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
of Precis Smart Card Systems, Inc.
We have audited the accompanying consolidated balance sheets of Precis
Smart Card Systems, Inc. (an Oklahoma Corporation in the development stage) as
of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Precis Smart Card Systems,
Inc. as of December 31, 1998 and 1997, and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered losses, has accumulated a
significant deficit, has negative working capital and is dependent on additional
borrowings and stock sales. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 8. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
MURRELL HALL MCINTOSH & CO., PLLP
Oklahoma City, Oklahoma
July 19, 1999
F-2
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1999 1998
----------------------------- -----------------------------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents ........................... $ -- $ 1,706 $ 164,480 $ 104,830
Inventory ........................................... 10,035 44,158 10,035 10,035
----------- ----------- ----------- -----------
Total Current Assets ............................ 10,035 45,864 174,515 114,865
----------- ----------- ----------- -----------
Property and Equipment:
Office Equipment .................................... 48,219 48,219 48,219 48,219
Computer Equipment .................................. 263,499 256,178 270,648 267,194
Furniture and Fixtures .............................. 6,890 6,674 7,736 6,890
----------- ----------- ----------- -----------
318,608 311,071 326,603 322,303
Less Accumulated Depreciation ....................... (254,390) (150,796) (318,608) (228,400)
----------- ----------- ----------- -----------
64,218 160,275 7,995 93,903
----------- ----------- ----------- -----------
Deferred Offering Costs ................................. -- -- 81,132 --
----------- ----------- ----------- -----------
Total Assets ............................................ $ 74,253 $ 206,139 $ 263,642 $ 208,768
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Book Overdraft ...................................... $ 27,513 $ -- $ -- $ --
Accounts Payable .................................... 265,012 186,933 425,838 270,283
Accrued Liabilities ................................. 46,110 11,250 94,835 4,869
Mezzanine Debt - Related Party ...................... 103,000 25,000 329,643 100,000
Current Portion of Capital Leases ................... 48,319 32,649 58,576 59,758
Current Portion of Long-Term Debt ................... 277,522 341,220 277,522 277,522
----------- ----------- ----------- -----------
Total Current Liabilities ....................... 767,476 597,052 1,186,414 712,432
----------- ----------- ----------- -----------
Long-Term Liabilities:
Capital Leases, Net of Current Portion .............. 41,570 89,889 -- 40,463
Long-Term Debt, Net of Current Portion .............. -- 183,780 -- --
----------- ----------- ----------- -----------
Total Long-Term Liabilities ..................... 41,570 273,669 -- 40,463
----------- ----------- ----------- -----------
Total Liabilities ............................... 809,046 870,721 1,186,414 752,895
----------- ----------- ----------- -----------
Stockholders' Deficit:
Preferred Stock, $.01 Par Value, 2,000,000 Shares
Authorized; No shares Issued and Outstanding at
December 31, 1998 and 1997 ...................... -- -- -- 4,968
Common Stock, $.01 Par Value, 8,000,000 Shares
Authorized; 900,000 and 2,040,350 Issued
and Outstanding at December 31, 1998 and 1997,
Respectively; 1,200,000 Issued and Outstanding at
September 30, 1999 (Unaudited) .................. 9,000 20,404 12,000 20,429
Additional Paid-In Capital .......................... 2,226,451 1,613,928 2,701,070 2,210,054
Deficit Accumulated During Development Stage ........ (2,970,244) (2,298,914) (3,635,842) (2,779,578)
----------- ----------- ----------- -----------
Total Stockholders' Deficit ..................... (734,793) (664,582) (922,722) (544,127)
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Deficit ............. $ 74,253 $ 206,139 $ 263,642 $ 208,768
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 YEAR ENDED FOR THE NINE MONTHS (APRIL 1994)
DECEMBER 31, ENDED SEPTEMBER 30, TO
--------------------------- --------------------------- SEPTEMBER 30,
1998 1997 1999 1998 1999
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product and Service Revenues ................ $ 322,483 $ 40,856 $ 48,513 $ 295,716 $ 428,479
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Product Deployment and Research
and Development ..................... 389,586 542,203 188,135 476,666 1,572,311
Sales and Marketing ..................... 147,411 148,885 131,819 127,564 587,481
General and Administrative .............. 399,756 472,320 340,870 155,133 1,675,070
----------- ----------- ----------- ----------- -----------
Total Expenses ...................... 936,753 1,163,408 660,824 759,363 3,834,862
----------- ----------- ----------- ----------- -----------
Operating Loss .............................. (614,270) (1,122,552) (612,311) (463,647) (3,406,383)
----------- ----------- ----------- ----------- -----------
Other Expense (Income):
Interest Expense ........................ 59,196 29,890 53,287 18,381 233,878
Interest Income ......................... (2,136) (2,282) -- (1,364) (4,419)
----------- ----------- ----------- ----------- -----------
57,060 27,608 53,287 17,017 229,459
----------- ----------- ----------- ----------- -----------
Net Loss - Deficit Accumulated During
Development Stage ....................... $ (671,330) $(1,150,160) $ (665,598) $ (480,664) $(3,635,842)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net Loss per Share .......................... $ (0.56) $ (0.96) $ (0.55) $ (0.40) $ (3.03)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted Average Number of
Common Shares Outstanding ............... 1,200,000 1,200,000 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
---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT 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 31,1997 ..... 2,040,350 20,404 -- -- $ 1,613,928 (2,298,914)
Sale of Stock ................. 2,500 25 4,968 4,968 596,127 --
Conversion of Preferred Stock . 298,060 2,980 (4,968) (4,968) 1,987 --
Reverse Stock Split ........... (1,440,910) (14,409) -- -- 14,409 --
Net Loss ...................... -- -- -- -- -- (671,330)
---------- ----------- ------- ------- ----------- ----------
Balance, December 31, 1998 .... 900,000 9,000 -- -- 2,226,451 (2,970,244)
Sale of Stock (unaudited) ..... 300,000 3,000 -- -- 512,425 --
Offering Costs (unaudited) .... -- -- -- -- (37,806) --
Net Loss (unaudited) .......... -- -- -- -- -- (665,598)
---------- ----------- ------- ------- ----------- ----------
Balance, September 30, 1999
(unaudited) ............... 1,200,000 $ 12,000 -- $ -- $ 2,701,070 $(3,635,842)
---------- ----------- ------- ------- ----------- ----------
---------- ----------- ------- ------- ----------- ----------
</TABLE>
See Accompanying Notes to Financial Statements
F-5
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE INCEPTION
FOR THE YEAR ENDED NINE MONTHS ENDED (APRIL 1994)
DECEMBER 31, SEPTEMBER 30, TO
--------------------------- --------------------------- SEPTEMBER 30,
1998 1997 1999 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss ............................... $ (671,330) $(1,150,160) $ (665,598) $ (480,664) $(3,635,842)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operations:
Depreciation ....................... 103,594 75,502 64,059 73,909 318,608
(Increase) Decrease -
Inventory ........................ 34,123 (9,731) -- 34,123 (10,035)
Other Assets ..................... -- 126,419 -- -- --
Increase (Decrease) -
Accounts Payable ............... 78,080 141,625 160,826 83,349 425,838
Accrued Liabilities ............ 34,859 (3,544) 48,725 (6,381) 94,835
----------- ----------- ----------- ----------- -----------
Net Cash Used by Operating
Activities ................. (420,674) (819,889) (391,988) (295,664) (2,806,596)
----------- ----------- ----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment ..... (7,537) (76,322) (7,836) (7,537) (326,603)
----------- ----------- ----------- ----------- -----------
Net Cash Used by Investing
Activities .................. (7,537) (76,322) (7,836) (7,537) (326,603)
----------- ----------- ----------- ----------- -----------
Cash Flows from Financing Activities:
Sale of Stock .......................... 601,119 325,501 396,487 601,120 2,631,938
Book Overdraft ......................... 27,513 -- (27,513) -- --
Payments on Long-Term Debt ............. (280,127) (7,571) (31,313) (269,795) (745,759)
Proceeds from Long-Term Debt ........... -- 525,000 -- -- 1,081,857
Proceeds from Short-Term Debt .......... 78,000 25,000 226,643 75,000 329,643
----------- ----------- ----------- ----------- -----------
Net Cash Provided by Financing
Activities .................. 426,505 867,930 564,304 406,325 3,297,679
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash .......... (1,706) (28,281) 164,480 103,124 164,480
Cash at Beginning of Period .............. 1,706 29,987 -- 1,706 --
----------- ----------- ----------- ----------- -----------
Cash at End of Period .................... $ -- $ 1,706 $ 164,480 $ 104,830 $ 164,480
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental Disclosure:
Interest Paid ............................ $ 25,884 $ 29,890
----------- -----------
----------- -----------
Property and Equipment Purchased with Debt $ -- $ 128,497
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to Financial Statements
F-6
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(SEPTEMBER 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 1 - Nature of Business
Precis Smart Card Systems, Inc. (the "Company") is a development stage
company. The Company develops and markets commercial software products used with
a technology referred to as "smart cards". The smart card contains an embedded
integrated circuit or microchip that serves as a programmable storage device
that performs limited computer functions. The Company's products include the
Precis Health Card System-TM-, a healthcare smart card system; PrecisCache-TM-,
a fixed-value smart card system; PrecisReserve-TM-, a reloadable stored-value
smart card system; and PrecisPersona-TM-, a smart card based customer loyalty
and rewards system.
Note 2 - Summary of Significant Accounting Policies
INTERIM FINANCIAL STATEMENTS - The financial statements as of September
30, 1999 and 1998, and for the nine months then ended and the inception (April
1994) to September 30, 1999 are unaudited and, in the opinion of management,
reflect all adjustments that are necessary for a fair presentation of the
financial position as of the date and the results of operations and cash flows
for the periods then ended. All of these adjustments are of a normal and
recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The results of operations for the nine
months ended September 30, 1999, and 1998 are not necessarily indicative of the
results that may be expected for the entire years ending December 31, 1999, and
1998.
DEVELOPMENT STAGE OPERATIONS - Precis is a development stage enterprise
engaging in developing and marketing "smart card" technology. The Company has
yet to generate any significant revenue from smart card sales and has no
assurance of future revenues from sales. The Company plans to spend significant
amounts on the development and marketing of its products. These costs require
the Company to raise additional capital through debt or equity financing. Such
additional financing may require the encumbrance of Company assets or agreements
with other parties where some of the costs of development are paid by others in
exchange for an interest in the product or Company.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management of
the Company to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
PROPERTY AND EQUIPMENT - Property and Equipment are carried at cost,
less accumulated depreciation. Depreciation is calculated using the
straight-line method based on useful lives of three to seven years.
INVENTORY - The Company has recorded its inventory held for resale at
its estimated value which is less than its actual cost.
NET LOSS PER SHARE - Net loss per share is calculated based on the
weighted average number of common, and dilutive, common equivalent shares
outstanding. There were no material differences between primary and fully
diluted earnings per share for the periods presented. The computation of net
loss per share gives retroactive effect for all periods presented to reflect the
1998 reverse stock split and nominal issuances of stock sold in contemplation of
a public offering (discussed in Notes 5 and 8).
CONCENTRATION OF CREDIT RISK - The Company maintains its cash in bank
deposit accounts which, at times, may exceed federal insured limits. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any significant risk.
F-7
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(SEPTEMBER 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 2 - Summary of Significant Accounting Policies (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded amounts of cash,
inventory, accounts payable, and accrued liabilities approximate fair value
because of the short-term maturity of these items.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company accounts for the
impairment and disposition of ling-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of" (FAS
121). In accordance with FAS 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. As of December 31, 1998, no impairment has been indicated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist primarily
of cash on deposit or cash investments purchased with original maturities of
three months or less.
REVENUE RECOGNITION - The Company recognizes revenues as the services
or products are provided. Amounts billed and received prior to services or
products being performed or provided are included in deferred revenues.
Note 3 - Debt
Long-term debt consists of unsecured project notes bearing interest at
10%, due to various investors. Interest only was due and payable beginning
September 1, 1997 through December 1, 1997. Amortization of the notes began
January 1, 1998. The final payment is due in 1999. The Company is in default on
these notes due to failure to make the required payments. The holders have the
right to declare the notes immediately due and payable. As such the entire
balance on these notes has been classified as current.
The mezzanine debt is unsecured and due to two shareholders, one of
which is Chairman of the Board of Directors. Interest on the mezzanine debt due
the Chairman was 25% per annum through September 30,1998, and 15% per annum
thereafter. The remaining mezzanine debt bears interest at 25% per annum. All
mezzanine debt carried maturity dates as of the later of June 30, 1999, or 30
days after the Company's planned initial public offering (discussed in Note 9).
In the event the debt is not repaid by maturity, all notes will bear interest at
the rate of 30% per annum thereafter.
Note 4 - Adoption of New Accounting Standard
The Company has adopted Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities", issued by the American Institute of Certified
Public Accountants. This statement requires that the costs of start-up
activities and organization costs, as defined, be expensed as incurred.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION ("SOP 97-2"). SOP 97-2 focuses on when and
the amount of revenue that should be recognized for licensing, selling, leasing
or otherwise marketing computer software and is effective for transactions enter
into in fiscal years beginning after December 15, 1997. In March 1998, the
Accounting Standards Executive Committee issued Statement of Position 98-4,
DEFERRAL OF THE EFFECTIVE DATE OF PROVISION OF SOP 97-2, MODIFICATION OF SOP
97-2, SOFTWARE REVENUE RECOGNITION ("SOP 98-4"). SOP 98-4 defers for one year
specific provision of SOP 97-2. In December 1998, the Accounting Standards
Executive Committee issued Position 98-9, Modification of SOP 97-2, SOFTWARE
REVENUE RECOGNITION, with respect to Certain Transactions ("SOP 98-9"). SOP 98-9
also amended specific provisions of SOP 98-4 through fiscal years beginning on
or before March 15, 1999. Management believes that the adoption of SOP 97-2, as
amended, will not have a material effect on the financial position and results
of operations.
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
F-8
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(SEPTEMBER 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
2,000,000 shares of preferred stock, $1.00 par value per share (the "Preferred
Stock").
COMMON STOCK - The Company was operated historically (from
approximately April 1994 through June 1996) as a limited partnership (the "LP").
Effective July 1, 1996, the entire business of the LP was merged into the
Company (the "Merger"). The Company issued shares of common stock to the
partners of the LP in consideration of the Merger, thus, the partners of the LP
became the shareholders of the Company. The merger was accounted for as a
"pooling-of- interest." The Company conducted a private placement of common
stock during 1997, during which it issued and subscribed shares of common stock.
Such shares were issued and subscribed at $2.00 per share.
PREFERRED STOCK - During 1998, the Company conducted a private
placement of convertible redeemable, "putable" preferred stock. During this
period, the Company sold 4,967.67 shares of $120.00 face value, no coupon
preferred stock, generating total capital of $596,120. The total capital of
$596,120 was comprised of $406,080 in cash and $196,040 in conversions of
Project Notes. During 1998, and in accordance with their conversion rights, the
preferred shareholders elected to convert their preferred shares into 298,060
shares of common stock ( a conversion ratio of 1 preferred share for 60 shares
of common).
RESTRUCTURING PLAN - As a result of the conversion of the outstanding
preferred shares to common shares, the Company had 2,340,910 shares of common
stock outstanding on October 29, 1998. On October 30, 1998, the Company affected
a reverse split of the common stock such that immediately after the reverse
split there were 900,000 shares of common stock outstanding.
COMMON STOCK OPTIONS - Also, as part of the restructuring plan, the
Company obtained releases from its directors and Project Note holders that
cancelled all common stock options held by directors and Project Note holders.
After the reverse split discussed above and as of December 31, 1998, the Company
had the following common stock options outstanding to certain employees and
ongoing service providers:
<TABLE>
<CAPTION>
Exercise Expiration Vesting
Quantity Price Date Status
-------- ----- ---- ------
<S> <C> <C> <C>
86,471 $5.22 2006 - 2008 Vested
</TABLE>
The Company also has agreed to issue 122,031 of future stock options
after the Company reaches certain annual earnings levels. These future options
will have an exercise price based on current fair market value at the date the
earnings levels are met. These options expire 10 years from the date granted.
It is expected that the Company will make future stock option grants to
its employees pursuant to the Company's stock option plan established in January
1999. The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no
compensation expense is recognized when the exercise price of stock options
equals the market price of the underlying stock on the date of the grant.
F-9
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(SEPTEMBER 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 5 - Capital Structure and Stock Options (continued)
If the Company had elected to recognize compensation based on the fair
value of the options granted at the grant date as prescribed by "Statement of
Financial Accounting Standards No. 123, (SFAS 123) Accounting for Stock-Based
Compensation", net loss and net loss per share would have increased to the pro
forma amounts shown below for the years ending December 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Pro Forma Net Loss......................... $ (787,608) $ (1,359,878)
Pro Forma Net Loss Per Share............... $ (0.87) $ (1.51)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants during the year ended December 31, 1998: weighted average risk free
interest rate of 5.50%; no dividend yield; volatility of 40%; and expected life
less than six years. Consequently, the underlying common shares had no historic
volatility prior to October 13, 1998. The fair values of the options granted
prior to October 13, 1998 were based on the difference between the present value
of the exercise price of the option and the estimated fair value price of the
common share.
The intent of the Black-Scholes option valuation model is to provide
estimates of fair values of traded options that have no vesting restrictions and
are fully transferable. Option valuation models require the use of highly
subjective assumptions including expected stock price volatility. The Company
has utilized the Black-Scholes method to produce the pro forma disclosures
required under SFAS 123. In management's opinion, existing valuation models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options because the Company's employee stock options have
significantly different characteristics from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate. The effects of applying SFAS 123 in this pro forma are not indicative
of future amounts.
Note 6 - Income Taxes
There was no current or deferred provision for income taxes for the
years ended December 31, 1998 or 1997. No current provision was required because
tax losses were incurred in those years. Deferred tax assets result from
differences in the basis of assets and liabilities for tax and financial
statement purposes. The tax effects of the net operating loss carry forwards and
the valuation allowance established are summarized below:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Benefit of net operating loss carry forward........... $743,300 $488,100
Less: Valuation allowance............................. (743,300) (488,100)
-------- --------
Net deferred tax asset.............................. $ -- $ --
-------- --------
-------- --------
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1996 was
$86,800. The net change in the valuation allowance for the years ended December
31, 1998 and 1997 were increases of $255,200 and $401,300 respectively. At
December 31, 1998 and 1997 the Company had federal and state net operating loss
carry forwards of approximately $1,860,0000 expiring at various dates through
2013. The Company's ability to use these losses to offset future taxable income
would be subject to limitations under the Internal Revenue Code.
F-10
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(SEPTEMBER 30, 1999 AND 1998 INFORMATION IS UNAUDITED)
Note 7 - Year 2000 Risk
During recent years, there has been significant awareness raised
regarding the potential disruption of business operations worldwide resulting
from the inability of current technology to process properly the change in the
year 1999 to 2000. Based on a review of the Company's data processing, operating
systems, software and other technology already in place, we do not currently
believe the Company will experience any significant adverse effects or material
unbudgeted costs resulting therefrom. Nevertheless, we cannot provide any
assurance in this regard, and any such costs or effects could materially and
adversely affect the Company's operations and financial condition.
Note 8 - Operations and Borrowings
As of December 31, 1998, the Company had negative working capital of
$757,411 and accumulated deficit of $2,970,244. During 1999, the Company
completed a private placement of common stock. An initial public offering is
also planned to raise capital necessary to continue development efforts.
Note 9 - Contingencies
The Company operates in leased facilities. Management expects that
leases currently in effect will be renewed or replaced with other leases of a
similar nature and term. Rent expense under operating leases was $23,408 and
$19,304 for the years ended December 31, 1998 and 1997, respectively.
Capital lease obligations consist of non-cancelable equipment leases
expiring through September, 2001. These leases are payable in monthly
installments, aggregating $4,632 including imputed interest at 10.67%. These
leases are secured by certain equipment. The following is a schedule of future
lease payments under capital leases:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1999..................................................... $55,589
2000..................................................... 43,587
-------
Total minimum lease payments....................................... $99,176
Imputed interest................................................... (9,287)
------
Capital lease obligation (including current portion $48,319)....... $89,889
=======
</TABLE>
There has been no market for the Company's common stock. In the event
of an initial public offering, the offering price would not necessarily bear any
relationship to the Company's assets, book value, earnings or other established
criterion of value. Management provides no assurance that a public market for
their common stock will develop after the close of any offering, or if a public
market in fact develops, that such public market will be sustained, or that the
shares of common stock purchased pursuant to the offering can be resold at any
time at the offering price or any other stock price.
If the Company's initial public offering is completed, the Company has
agreed to sell to the underwriter warrants exercisable for the purchase of
100,000 shares of common stock for $9.00 per share during a five-year period.
The holders of these warrants will have the right, for seven years following the
effective date of the initial public offering, to include such warrants and the
shares of common stock issuable upon their exercise (the "registrable
securities") in any registration statement or amendment to a registration
statement of the Company at no expense to such holders. The Company also agreed
that, upon request by the holders of 50% or more of the underwriter's warrants
and registrable securities and expiring four years after the effective date of
the Company's initial public offering and under certain circumstances, the
Company will register the underwriter's warrants and the registrable securities.
F-11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF OUR COMMON STOCK ONLY IN THOSE JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THE
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,000,000 SHARES OF
COMMON STOCK
PRECIS SMART
CARD SYSTEMS, INC.
------------
PROSPECTUS
------------
BARRON CHASE
S E C U R I T I E S I N C
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boston, Massachusetts
Brooklyn, New York
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrouk Heights, New Jersey
La Jolla, California
New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
West Boca Raton, Florida
EMERSON BENNETT
& ASSOCIATES
6261 Northwest 6th Way, Suite 207
Ft. Lauderdale, Florida 33309
(800) 652-8262
Harrison, New York
Newark, Delaware
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and
Registrant's Certificate of Incorporation and Bylaws, which are incorporated by
reference herein, authorize) indemnification of directors and officers of
Registrant and officers and directors of another corporation, partnership, joint
venture, trust or other enterprise who serve at the request of Registrant,
against expenses, including attorneys fees, judgments, fines and amount paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding in which such person is a party by reason of such
person being or having been a director or officer of Registrant or at the
request of Registrant, if he conducted himself in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Registrant,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. Registrant may not indemnify an officer or
a director with respect to any claim, issue or matter as to which such officer
or director shall have been adjudged to be liable to Registrant, unless and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper. To
the extent that an officer or director is successful on the merits or otherwise
in defense on the merits or otherwise in defense of any action, suit or
proceeding with respect to which such person is entitled to indemnification, or
in defense of any claim, issue or matter therein, such person is entitled to be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection therewith.
The circumstances under which indemnification is granted with an action
brought on behalf of Registrant are generally the same as those set forth above;
however, expenses incurred by an officer or a director in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
final disposition upon receipt of an undertaking by or on behalf of such officer
or director to repay such amount if it is ultimately determined that such
officer or director is not entitled to indemnification by Registrant.
These provisions may be sufficiently broad to indemnify such persons
for liabilities arising under the Securities Act of 1933, as amended (the
"Act"), in which case such provision is against public policy as expressed in
the 1933 Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
S.E.C. Registration Fees..................................... $ 2,169
N.A.S.D. Filing Fees......................................... 1,232
*State Securities Laws Filing Fees............................ 15,000
*Printing and Engraving....................................... 25,000
*Legal Fees................................................... 73,799
*Accounting Fees and Expenses................................. 30,000
*Transfer Agent's Fees and Costs of Certificates.............. 2,000
*Miscellaneous................................................ 1,000
----------
Total.................................................... $150,000
----------
----------
</TABLE>
- ----------------------------------------
*Estimated
II-I
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Registrant has sold and issued the securities described below pursuant
to and in accordance with Regulation D under the Securities Act of 1933, as
amended (the "Act") within the past three years which were not registered under
the Act:
<TABLE>
<CAPTION>
NUMBER OF
PURCHASE SHARES PURCHASED REGULATION
DATE OF PRICE PER ---------------------- D NET
NAME PURCHASE SHARE PREFERRED(1) COMMON(2) RULE PROCEEDS
- ---- -------- ----- ------------ --------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Smith, William 9/12/97 $2.00 5,000 506 $10,000
Martin, David 9/12/97 2.00 1,250 506 2,500
Dalton, W. Edward 9/12/97 2.00 5,000 506 10,000
Bowers, John 9/23/97 2.00 2,500 506 5,000
Dalton, Anne 9/23/97 2.00 2,500 506 5,000
Smith, Larry 10/16/97 2.00 5,000 506 10,000
O'Dell, Richard 12/11/97 2.00 2,500 506 5,000
Cunningham, Dan 12/29/97 2.00 5,000 506 10,000
Huffmyer, Joe 1/7/98 2.00 22,500 506 45,000
LaRoche, Richard 1/14/98 120.00 300.00 505 36,000
Sherman, Nolan 1/14/98 120.00 416.67 505 50,000
Sherman, Nolan 1/14/98 120.00 .33 505 40
McClary, David 1/14/98 120.00 416.67 505 50,000
McClary, David 1/14/98 120.00 83.33 505 10,000
Webb, Kent 1/14/98 120.00 416.67 505 50,000
Hale, Ron and Rochelle 1/15/98 120.00 500.00 505 60,000
Liff, Adam 1/15/98 120.00 500.00 505 60,000
Liff, Daniel 1/15/98 120.00 500.00 505 60,000
Austin, John 1/15/98 120.00 250.00 505 30,000
Lynn, C. Stephen 1/15/98 120.00 834.00 505 100,080
Preston, Tom 3/31/98 120.00 250.00 505 30,000
Kelly, James 4/27/98 120.00 500.00 505 60,000
Milton, Walter J. or Margaret 4/1/99 2.00 5,000 506 10,000
Brunner, Dennis or Julie 4/1/99 2.00 5,000 506 10,000
Lestino, John R. 4/1/99 2.00 5,000 506 10,000
Maddux, Jerry 4/1/99 2.00 5,000 506 10,000
Garber, Martin D., Jr. 4/5/99 2.00 5,000 506 10,000
McNitt, Kelly J. 4/5/99 2.00 5,000 506 10,000
Thompson, Steven R. 4/12/99 2.00 5,000 506 10,000
Richards, John M., Jr. 4/12/99 2.00 5,000 506 10,000
Howell, Tom 4/14/99 2.00 5,000 506 10,000
Bell, Terry 4/14/99 2.00 5,000 506 10,000
Kelly Banking Services, Inc. 4/15/99 2.00 32,500 506 65,000
Warren H. Carey IRA 4/15/99 2.00 10,000 506 20,000
Richards, John M., III 4/16/99 2.00 5,000 506 10,000
Plender, Arlin 4/20/99 2.00 5,000 506 10,000
W. Garner & Co. 4/26/99 2.00 10,000 506 20,000
Frechette, Robert 4/28/99 2.00 10,000 506 20,000
Watson, Arch 4/28/99 2.00 5,000 506 10,000
Wimberley, Carl 4/30/99 2.00 5,000 506 10,000
Bird, Phillip 4/30/99 2.00 10,000 506 20,000
Benge, James 4/30/99 2.00 5,000 506 10,000
Lamance Family Trust (Cathy) 5/3/99 2.00 5,000 506 10,000
II-II
<PAGE>
<CAPTION>
PURCHASE NUMBER OF REGULATION
DATE OF PRICE PER SHARES PURCHASED D NET
NAME PURCHASE SHARE PREFERRED(1) COMMON(2) RULE PROCEEDS
- ---- -------- ----- ------------ --------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Lamance Family Trust 5/3/99 $2.00 10,000 506 20,000
Lamance Family Trust (Chris) 5/3/99 2.00 5,000 506 10,000
Morris, Walter 5/5/99 2.00 10,000 506 20,000
Fiserv Cor. Ser. 5/12/99 2.00 5,000 506 $10,000
Cus. For Roth
IRA-J. Brown
Gronbach, Arthur 5/24/99 2.00 5,000 506 10,000
Hi-Tel Group, Inc. 5/25/99 2.00 15,000 506 30,000
Nowalsky, Leon 5/27/99 2.00 5,000 506 10,000
Lustigman, Andrew 6/2/99 2.00 5,000 506 10,000
Mathews & 6/7/99 2.00 5,000 506 10,000
Associates, Inc.
Dumont, Gordon C. 6/7/99 2.00 2,500 506 5,000
Traffas, Francis C. 6/14/99 2.00 5,000 506 10,000
Eric Stein Revocable 6/18/99 2.00 12,500 506 25,000
Trust
Hadde, Bill 6/25/99 2.00 10,000 506 20,000
Ozner, David 6/29/99 2.00 10,000 506 20,000
Mathers Associates 7/20/99 2.00 42,500 506 85,000
</TABLE>
- ------------------------
(1) Each share of preferred stock was converted into 60 shares of
Registrant's common stock pursuant to the conversion privilege of such
preferred stock.
(2) Each 2.61 outstanding shares of common stock was reverse split one
share of common stock on October 29, 1998.
The shares of common stock sold during 1999 were sold with the
assistance of Barron Chase Securities, Inc. For its services, Registrant paid
Barron Chase Securities, Inc. aggregate sales commissions of $60,000 ($.20 per
share) and a non-accountable expense allowance of $18,000 ($.06 per share).
Registrant relied on Rules 505 and 506 of Regulation D and Sections
3(b) and 4(2) of the Act for exemption from the registration requirements of the
Act. Each purchaser Registrant's common and preferred stock was furnished
information concerning the operations of Registrant, and each had the
opportunity to verify the information supplied. Additionally, Registrant
obtained a signed representation from each of the above named persons in
connection with the offer of Registrant's common and preferred stock of his, her
or its intent to acquire such stock for the purpose of investment only, and not
with a view toward the subsequent distribution thereof; each of the certificates
representing Registrant's common and preferred stock was stamped with a legend
restricting transfer of the securities represented thereby, and registrant
issued stop transfer instructions to UMB Bank, N.A., the transfer agent and
registrant of Registrant's common stock, with respect to all certificates
representing the common stock of Registrant held by the aforementioned
shareholders of Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
-----------
1.1 Form of Underwriting Agreement between Barron Chase
Securities, Inc. and Registrant.
1.2 Form of Selected Dealer Agreement between Barron Chase
Securities, Inc. and selected dealers.
1.3 Form of Agreement Among Underwriters.
3.1 Registrant's Certificate of Incorporation.*
3.2 Registrant's Bylaws.*
4.1 Form of Certificate of Common Stock of Registrant.*
II-III
<PAGE>
4.2 Form of Underwriter's Warrant and Warrant Certificate.
4.3 Form of Promotional Shares Lock-In Agreement among Kent H.
Webb, Larry E. Howell, Donald A. Cunningham, Michael R.
Morrisett and Registrant.
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities
covered by this Registration Statement.
10.1 Precis Smart Card, Inc. 1999 Stock Option Plan (amended and
restated).*
10.2 Form of Financial Advisor Agreement.
10.3 Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and Registrant.
10.4 Master Equipment Purchase and Maintenance Agreement, dated
June 29, 1999, between NationsBanc Services, Inc. and
Registrant.*
10.5 Smart Card Agreement, dated July 8, 1999, between
Entertainment Smart Systems, Inc. and Registrant.*
10.6 The unexecuted form of Advertising Agreement between
Registrant and Bank of Oklahoma, N.A.*
10.7 Independent Contractor Agreement, dated April 5,1997, between
Downtown Fort Worth, Inc. and Registrant.*
10.8 Contract Proposal for Sahalee Country Club Clubhouse Script
Cash Card, Order Number: 80th, dated May 6, 1998, between
Anything's Possible! and Sahalee Country Club.*
10.9 The unexecuted draft form of Smart Card System Agreement to be
entered into between Registrant and Chicago White Sox, Ltd.*
10.10 The unexecuted draft form of the Agreement between Tangent
Associates, Inc. and Registrant.*
10.11 VeriFone VeriSmart Application Developer's Kit License
Agreement between VeriFone, Inc. and Registrant, dated January
27, 1999.*
23.1 Consent of Independent Public Accountants, dated January 17,
2000.
23.2 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated January 17, 2000.
27 Financial Data Schedule.*
- ------------------------
* Previously furnished.
** To be furnished by amendment.
ITEM 28. UNDERTAKINGS
(A) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
II-IV
<PAGE>
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement
to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
end of the offering.
(d) EQUITY OFFERINGS OF NONREPORTING SMALL BUSINESS ISSUERS.
The Registrant will provide to the underwriter at the closing
specified in the underwriting agreement the certificates in such
denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of Registrant pursuant to
the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred
or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(f) RELIANCE ON RULE 430A.
Registrant hereby undertakes that it will (i) for determining
any liability under the Securities Act, treat the information omitted
from the form of prospectus filed as a part of this Registration
Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Registrant under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as a part of this Registration Statement as of
the time the Commission declared it effective, and (ii) for determining
any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement for the securities offered in the Registration Statement, and
that offering of the securities at that time as the initial bona fide
offering of those securities.
II-V
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned in the City
of Oklahoma City, State of Oklahoma, on the 17th day of January, 2000.
PRECIS SMART CARD SYSTEMS, INC.
(Registrant)
By: /S/LARRY E. HOWELL
-----------------------------------------
Larry E. Howell, Chief
Executive Officer
By: /S/MARK R. KIDD
-----------------------------------------
Mark R. Kidd, Chief Financial Officer
and Controller and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ KENT H. WEBB Chairman of the Board January 17, 2000
- -------------------------------
Kent H. Webb
/S/ LARRY E. HOWELL Chief Executive Officer January 17, 2000
- ------------------------------- and Director
Larry E. Howell
/S/ DONALD A. CUNNINGHAM President, Chief Operating January 17, 2000
- ------------------------------- Officer and Director
Donald (Dan) A. Cunningham
/S/ MARK R. KIDD Chief Financial Officer and January 17, 2000
- ------------------------------- Controller, Secretary
Mark R. Kidd
/S/ LYLE W. MILLER Director January 17, 2000
- -------------------------------
Lyle W. Miller
/S/ MICHAEL E. DUNN Director January 17, 2000
- -------------------------------
Michael E. Dunn
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- --------
<S> <C> <C>
1.1 Form of Underwriting Agreement between Barron
Chase Securities, Inc. and Registrant......................................
1.2 Selected Dealer Agreement between Barron Chase
Securities, Inc. and selected dealers
1.3 Form of Agreement Among Underwriters.......................................
3.1 Registrant's Certificate of Incorporation*
3.2 Registrant's Bylaws*
4.1 Form of Certificate of Common Stock of Registrant*
4.2 Form of Underwriter's Warrant and Warrant Certificate......................
4.3 Form of Promotional Shares Lock-In Agreement among Kent H. Webb, Larry E.
Howell, Donald A. Cunningham, Michael R. Morrisett and Registrant..........
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities covered by
this Registration Statement................................................
10.1 Precis Smart Card, Inc. 1999 Stock Option Plan (Amended and Restated).*
10.2 Form of Financial Advisor Agreement........................................
10.3 Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and Registrant............................................
10.4 Master Equipment Purchase and Maintenance Agreement,
dated June 29, 1999, between NationsBanc Services, Inc. and Registrant*
10.5 Smart Card Agreement, dated July 8, 1999, between Entertainment
Smart Systems, Inc. and Registrant*
10.6 The unexecuted form of Advertising Agreement between Registrant and Bank of
Oklahoma, N.A.*
10.7 Independent Contractor Agreement, dated April 5,1997, between Downtown Fort
Worth, Inc. and Registrant.*
10.8 Contract Proposal for Sahalee Country Club Clubhouse Script Cash Card, Order
Number: 80th, dated May 6, 1998, between Anything's Possible! and Sahalee
Country Club.*
10.9 The unexecuted draft form of Smart Card System Agreement to be
entered into between Registrant and Chicago White Sox, Ltd.*
10.10 The unexecuted draft form of the Agreement between Tangent Associates,
Inc. and Registrant.*
<PAGE>
10.11 VeriFone VeriSmart Application Developer's Kit License Agreement
between VeriFone, Inc. and Registrant, dated January 27, 1999.*
23.1 Consent of Independent Public Accountants, dated January 17, 2000..........
23.2 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated January 17, 2000.....................................................
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously furnished.
** To be furnished by amendment.
<PAGE>
EXHIBIT 1.1
PRECIS SMART CARD SYSTEMS, INC.
1,000,000 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
Boca Raton, Florida
_____________, 2000
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Gentlemen:
Precis Smart Card Systems, Inc. (the "Company"), on the basis of the
representations, warranties, covenants and conditions contained herein, hereby
proposes to issue and sell to such Underwriters as named in Schedule A (the
"Underwriters") to the Underwriting Agreement (the "Agreement") for whom Barron
Chase Securities, Inc. is acting as a representative (the "Managing Underwriter"
or "you"), for sale in a proposed public offering (the "Offering") pursuant to
the terms of this Underwriting Agreement on a "firm commitment" basis, 1,000,000
shares of Common Stock (the "Shares") at $6.00 per Share. The Shares are also
referred to as the "Securities". The date upon which the Securities and Exchange
Commission ("Commission") shall declare the Registration Statement of the
Company effective shall be the "Effective Date". In addition, the Company
proposes to grant to the Underwriters the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 150,000 additional Shares (the
"Option Securities").
You have advised the Company that you and the other Underwriters desire
to purchase, severally, the Securities, and that you have been authorized by the
Underwriters to execute this Agreement on their behalf. The Company confirms the
agreements made by it with respect to the purchase of the Securities by the
several Underwriters on whose behalf you are signing this Agreement, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with each of the
Underwriters as of the Effective Date (as defined above), the Closing Date (as
hereinafter defined) and the Option Closing Date (as hereinafter defined) that:
(a) A registration statement (File No. 333-86643) on Form SB-2 relating
to the public offering of the Securities, including a preliminary form of the
prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Commission thereunder, and has been filed with the
Commission under the Act. The Company has prepared in the same manner and
proposes to file, prior to the Effective Date of such registration statement, an
additional amendment or amendments to such registration statement, including a
final form of Prospectus, copies of which shall be delivered to you.
"Preliminary Prospectus" shall mean each prospectus filed pursuant to the Rules
and Regulations under the Act prior to the Effective Date. The registration
statement (including all financial schedules and exhibits) as amended at the
time it becomes effective and the final prospectus included therein are
respectively referred to as the "Registration Statement" and the "Prospectus",
except that (i) if the prospectus first filed by the Company pursuant to Rule
424(b) of the Rules and Regulations shall differ from said prospectus as then
amended, the term "Prospectus" shall mean the prospectus first filed pursuant to
Rule 424(b), and (ii) if such registration statement or prospectus is amended or
such prospectus is supplemented, after the
1
<PAGE>
effective date of such registration statement and prior to the Option Closing
Date (as hereinafter defined), the terms "Registration Statement" and
"Prospectus" shall include such registration statement and prospectus as so
amended, and the term "Prospectus" shall include the prospectus as so
supplemented, or both, as the case may be.
(b) At the Effective Date and at all times subsequent thereto up to the
Option Closing Date, if any, and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriters or
Selected Dealers: (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein, in light of the
circumstances under which they are made, not misleading; provided, however, that
the Company makes no representations, warranty or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by the Underwriters specifically for use in the preparation thereof. It
is understood that the statements set forth in the Prospectus with respect to
stabilization, under the heading "Underwriting" and regarding the identity of
counsel to the Underwriters under the heading "Legal Matters" constitute the
only information furnished in writing by the Underwriters for inclusion in the
Registration Statement and the Prospectus.
(c) Each of the Company and each subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus and is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions in which the nature of its business
or the character or location of its properties requires such qualification,
except where failure to so qualify will not materially affect the Company's
business, properties or financial condition.
(d) The authorized, issued and outstanding securities of the Company as
of the date of the Prospectus is as set forth in the Prospectus under
"Capitalization"; all of the issued and outstanding securities of the Company
have been, or will be when issued as set forth in the Prospectus, duly
authorized, validly issued and fully paid and non-assessable; the issuances and
sales of all such securities complied in all material respect with, or were
exempt from, applicable Federal and state securities laws; the holders thereof
have no rights of rescission against the Company with respect thereto, and are
not subject to personal liability by reason of being such holders; none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by the
Company; except as set forth in the Prospectus, no options, warrants or other
rights to purchase, agreements or other obligations to issue, or agreements or
other rights to convert any obligation into, any securities of the Company have
been granted or entered into by the Company; and all of the securities of the
Company, issued and to be issued as set forth in the Registration Statement,
conform to all statements relating thereto contained in the Registration
Statement and Prospectus.
(e) The Shares are duly authorized, and when issued, delivered and paid
for pursuant to this Agreement, will be duly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights of any security holder of
the Company. Neither the filing of the Registration Statement nor the offering
or sale of the Securities as contemplated in this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any securities of the Company, except as described in the
Registration Statement.
The Common Stock Underwriter Warrants and the shares of Common Stock
issuable upon exercise of the Common Stock Underwriter Warrants (as defined in
the Underwriter's Warrant Agreement described in Section 12 herein), have been
duly authorized and, when issued, delivered and paid for, will be validly
issued, fully paid, non-assessable, free of pre-emptive rights and no personal
liability will attach to the ownership thereof, and will constitute valid and
legally binding obligations of the Company enforceable in accordance with their
terms and entitled to the benefits provided by the Underwriter's Warrant
Agreement.
2
<PAGE>
(f) This Agreement, the Financial Advisory Agreement, the Merger and
Acquisition Agreement (the "M/A Agreement") and the Underwriter's Warrant
Agreement have been duly and validly authorized, executed and delivered by the
Company, and assuming due execution of this Agreement by the other party hereto,
constitute valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, except as enforceability may be limited
by bankruptcy, insolvency or other laws affecting the rights of creditors
generally. The Company has full power and authority to authorize, issue and sell
the Securities to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the
Securities or the securities to be issued pursuant to the Underwriter's Warrant
Agreement, except such as may be required under the Act or state securities
laws, or as otherwise have been obtained.
(g) Except as described in the Prospectus, neither the Company nor any
subsidiary is in material violation, breach of or default under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach of, or
constitute a material default under, or result in the creation or imposition of
any material lien, charge or encumbrance upon any property or assets of the
Company or any subsidiary or any of the terms or provisions of any material
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any subsidiary is a party or by which the
Company or any subsidiary may be bound or to which any of the property or assets
of the Company or any subsidiary is subject, nor will such action result in any
material violation of the provisions of the Articles of Incorporation or ByLaws
of the Company or any subsidiary, as amended, or any statute or any order, rule
or regulation applicable to the Company or subsidiary of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company or each subsidiary.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each subsidiary have good and marketable title to all properties and assets
described in the Prospectus as owned by each of them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not material to
its business, financial condition or results of operation; all of the material
leases and subleases under which the Company or each subsidiary is the lessor or
sublessor of properties or assets or under which the Company or each subsidiary
holds properties or assets as lessee or sublessee as described in the Prospectus
are in full force and effect, and, except as described in the Prospectus,
neither the Company nor each subsidiary is in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or any subsidiary as lessor, sublessor, lessee, or sublessee under any
of the leases or subleases mentioned above, or affecting or questioning the
right of the Company or any subsidiary to continued possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and the Company and each subsidiary
owns or leases all such properties described in the Prospectus as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Murrell, Hall, McIntosh & Co., PLLP, who has given its report on
certain financial statements filed and to be filed with the Commission as part
of the Registration Statement, and which are included in the Prospectus, is with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(j) The financial statements and schedules, together with related
notes, set forth in the Prospectus and the Registration Statement present fairly
the financial condition, results of operations and cash flows of the Company on
the basis stated in the Registration Statement, at the respective dates and for
the respective periods to which they apply. Said financial statements and
related notes and schedules have been prepared in accordance with generally
accepted accounting principles applied on a basis which is consistent during the
periods involved. The Company's internal accounting controls and procedures are
sufficient to cause the Company and each subsidiary to prepare financial
statements which comply in all material respects with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved. During the preceding five (5) year period, nothing has been brought to
the attention of the Company's management that would result in any material
reportable condition relating to the Company's internal accounting procedures,
weaknesses or controls.
3
<PAGE>
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) neither the Company nor any subsidiary has
incurred and will not have incurred any material liabilities or obligations,
direct or contingent, and has not entered into and will not have entered into
any material transactions other than in the ordinary course of business and/or
as contemplated in the Registration Statement and the Prospectus; (ii) neither
the Company nor any subsidiary has and will not have paid or declared any
dividends or have made any other distribution on its capital stock; (iii) there
has not been any change in the capital stock of, or any incurrence of long-term
debt by, the Company or any subsidiary; (iv) neither the Company nor any
subsidiary has issued any options, warrants or other rights to purchase the
capital stock of the Company or any subsidiary; and (v) there has not been and
will not have been any material adverse change in the business, financial
condition or results of operations of the Company or any subsidiary, or in the
book value of the assets of the Company or any subsidiary, arising for any
reason whatsoever.
(l) Except as set forth in the Prospectus, there is not pending or, to
the knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), business prospects, net worth, or properties of
the Company or any subsidiary.
(m) Except as disclosed in the Prospectus, each of the Company and each
subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any subsidiary that has not been provided for in
the financial statements.
(n) Except as set forth in the Prospectus, each of the Company and each
subsidiary has sufficient licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property as described in the Prospectus and is in all material
respects in compliance therewith and owns or possesses adequate right to use all
material patents, patent applications, trademarks, service marks, trade-names,
trademark registrations, service mark registrations, copyrights, and licenses
necessary for the conduct of such business and has not received any notice of
conflict with the asserted rights of others in respect thereof. To the best of
the Company's knowledge, none of the activities or business of the Company or
any subsidiary are in violation of, or cause the Company or any subsidiary to
violate, any law, rule, regulation or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality, the violation of which would have a material adverse
impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company and any
subsidiary.
(o) Neither the Company nor any subsidiary has, directly or indirectly,
at any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution, in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public of quasi-public duties, other than
payments or contributions required or allowed by applicable law.
(p) On the Closing Dates (herein defined) all transfer or other taxes
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction) if any, which are required to be paid in connection
with the sale and transfer of the Securities to the Underwriters hereunder will
have been fully paid or provided for by the Company and all laws imposing such
taxes will have been fully complied with.
(q) All contracts and other documents which are required to be
described in or filed as exhibits to the Registration Statement have been so
described and/or filed.
(r) Except as described in the Registration Statement and Prospectus,
no holders of Common Stock or of any other securities of the Company have the
right to include such Common Stock or other securities in the Registration
Statement and Prospectus.
4
<PAGE>
(s) Except as set forth in or contemplated by the Registration
Statement and the Prospectus, neither the Company nor any subsidiary has any
material contingent liabilities.
(t) The Company has no subsidiary corporations except as disclosed in
the Registration Statement and Prospectus, nor has it any equity interest in any
partnership, joint venture, association or other entity except as disclosed in
the Registration Statement or Prospectus. Except as described in the
Registration Statement and Prospectus, the Company owns all of the outstanding
securities of each of its subsidiaries.
(u) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
(v) Neither the Company, nor, to the Company's knowledge, any of its
officers, directors, employees or stockholders, have taken or will take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any of the securities of the
Company.
(w) Item 26 of Part II of the Registration Statement accurately
discloses all unregistered securities sold by the Company within the three year
period prior to the date as of which information is presented in the
Registration Statement. All of such securities were sold in transactions which
were exempt from the registration provisions of the Act and not in violation of
Section 5 thereof.
(x) Other than as set forth in the Prospectus, the Company has not
entered into any agreement pursuant to which any person is entitled, either
directly or indirectly, to compensation from the Company for services as a
finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless the Underwriters against any losses, claims, damages
or liabilities, joint or several, which shall include, but not be limited to,
all costs to defend against any such claim, so long as such claim arises out of
agreements made or allegedly made by the Company.
(y) Based upon written representations received by the Company, no
officer, director or beneficial owner of five percent (5%) or more of the
securities of the Company or any subsidiary has any direct or indirect
affiliation or association with any member of the National Association of
Securities Dealers, Inc. ("NASD"), except as disclosed to the Managing
Underwriter in writing, and no beneficial owner of the Company's unregistered
securities has any direct or indirect affiliation or association with any NASD
member except as disclosed to the Managing Underwriter in writing. The Company
will advise the Managing Underwriter and the NASD if any five percent (5%) or
greater shareholder of the Company or any subsidiary is or becomes an affiliate
or associated person of an NASD member participating in the distribution.
(z) The Company and each subsidiary is in compliance in all material
respects with all federal, state and local laws and regulations respecting the
employment of its employees and employment practices, terms and conditions of
employment and wages and hours relating thereto. There are no pending
investigations involving the Company or any subsidiary by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company or any subsidiary pending before the
National Labor Relations Board or any strike, picketing, boycott, dispute,
slowdown or stoppage pending or to the knowledge of the Company, threatened
against or involving the Company or any subsidiary or any predecessor entity. No
question concerning representation exists respecting the employees of the
Company or any subsidiary and no collective bargaining agreement or modification
thereof is currently being negotiated by the Company or any subsidiary. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company or any subsidiary, if any.
5
<PAGE>
(aa) Except as disclosed in the Prospectus, neither the Company nor any
subsidiary maintains, sponsors nor contributes to, nor is it required to
contribute to, any program or arrangement that is an "employee pension benefit
plan", an "employee welfare benefit plan", or a "multi-employer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). Except as disclosed in the Prospectus, neither the Company nor any
subsidiary maintained or contributed to a defined benefit plan, as defined in
Section 3(35) of ERISA.
(ab) Based upon written representations received from the officers and
directors of the Company and each subsidiary, except as disclosed in the
Prospectus, during the past five years, none of the officers or directors of the
Company or any subsidiary have been:
(1) The subject of a petition under the federal
bankruptcy laws or any state insolvency law filed by or
against them, or by a receiver, fiscal agent or similar
officer appointed by a court for their business or property,
or any partnership in which any of them was a general partner
at or within two years before the time of such filing, or any
corporation or business association of which any of them was
an executive officer at or within two years before the time of
such filing;
(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
any of them from, or otherwise limiting, any of the following
activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in
securities, or as an affiliated person, director or
employee of any investment company, bank, savings and
loan association or insurance company, or engaging in
or continuing any conduct or practice in connection
with any such activity;
(ii) engaging in any type of business
practice; or
(iii) engaging in any activity in connection
with the purchase or sale of any security or
commodity or in connection with any violation of
federal or state securities law or federal commodity
laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or
state authority barring, suspending or otherwise limiting for
more than sixty (60) days their right to engage in any
activity described in paragraph (3)(i) above, or be associated
with persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission to
have violated any federal or state securities law, and the
judgment in such civil action or finding by the Commission has
not been subsequently reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any federal commodities law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
6
<PAGE>
(ac) Based upon written representations received from the officers and
directors of the Company, each of the officers and directors of the Company has
reviewed the sections in the Prospectus relating to their biographical data and
equity ownership position in the Company, and all information contained therein
is true and accurate.
2. PURCHASE, DELIVERY AND SALE OF THE SECURITIES.
(a) Subject to the terms and conditions of this Agreement and based
upon the representations, warranties and agreements herein contained, the
Company hereby agrees to issue and sell to the Underwriters an aggregate of
1,000,000 Shares at $5.40 per Share (the public offering price less ten percent
(10%)) at the place and time hereinafter specified in accordance with the number
of Shares set forth opposite the names of the Underwriters in Schedule A
attached hereto (the "Securities") plus any additional Securities which such
Underwriters may become obligated to purchase pursuant to the provisions of
Section 9 hereof. The Securities shall consist of 1,000,000 Shares to be
purchased from the Company and the price at which the Underwriters shall sell
the Securities to the public shall be $6.00 per Share.
Delivery of the Securities against payment therefor shall take place at
the offices of Barron Chase Securities, Inc., 7700 West Camino Real, Boca Raton,
Florida 33433 (or at such other place as may be designated by the Managing
Underwriter) at 10:00 a.m., Eastern Time, on such date after the Registration
Statement has become effective as the Managing Underwriter shall designate, but
not later than ten (10) business days (holidays excepted) following the first
date that any of the Securities are released to you, such time and date of
payment and delivery for the Securities being herein called the "Closing Date".
(b) In addition, subject to the terms and conditions of this Agreement,
and based upon the representations, warranties and agreements herein contained,
the Company hereby grants an option to the Underwriters (or at the option of the
Managing Underwriter, to the Managing Underwriter, individually) to purchase all
or any part of an aggregate of an additional 150,000 Shares at the same price
per Share as the Underwriters shall pay for the Securities being sold pursuant
to the provisions of subsection (a) of this Section 2 (such additional
Securities being referred to herein as the "Option Securities"). This option may
be exercised within forty-five (45) days after the Effective Date of the
Registration Statement upon notice by the Underwriters to the Company advising
as to the amount of Option Securities as to which the option is being exercised,
the names and denominations in which the certificates for such Option Securities
are to be registered and the time and date when such certificates are to be
delivered. Such time and date shall be determined by the Underwriters (or the
Managing Underwriter, individually) but shall not be later than ten (10) full
business days after the exercise of said option, nor in any event prior to the
Closing Date, and such time and date is referred to herein as the "Option
Closing Date". Delivery of the Option Securities against payment therefor shall
take place at the offices of the Managing Underwriter. The Option granted
hereunder may be exercised only to cover overallotments in the sale by the
Underwriters of the Securities referred to in subsection (a) above. In the event
the Company declares or pays a dividend or distribution on its Common Stock,
whether in the form of cash, shares of Common Stock or any other consideration,
prior to the Option Closing Date, such dividend or distribution shall also be
paid on the Option Closing Date.
(c) The Company will make the certificates for the Securities to be
sold hereunder available to you or your representative for inspection at least
two (2) full business days prior to the Closing Date at the offices of the
Managing Underwriter, and such certificates shall be registered in such names
and denominations as you may request. Time shall be of the essence and delivery
at the time and place specified in this Agreement is a further condition to the
obligations of the Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the account of the several Underwriters against payment of the purchase
price by the several Underwriters by wire transfer in New York Clearing House
funds to the account of the Company.
In addition, in the event the Underwriters (or the Managing
Underwriter, individually) exercises the option to purchase from the Company all
or any portion of the Option Securities pursuant to the provisions of subsection
(b)
7
<PAGE>
above, payment for such Securities shall be made by wire transfer at the time
and date of delivery of such Securities as required by the provisions of
subsection (b) above, against receipt of the certificates for such Securities by
the Managing Underwriter for the respective accounts of the several Underwriters
registered in such names and in such denominations as the Managing Underwriter
may request.
It is understood that the Managing Underwriter, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the Managing
Underwriter at the time of delivery of the Securities to be purchased by such
Underwriter or Underwriters. Any such payment by the Managing Underwriter shall
not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder. It is also understood that the Managing Underwriter
individually, rather than all of the Underwriters, may (but shall not be
obligated to) purchase the Option Securities referred to in subsection (b) of
this Section 2, but only to cover overallotments.
It is understood that the several Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement is
declared effective by the Commission.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriters that:
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously been advised and furnished with a copy or to which you or your
counsel shall have objected in writing, acting reasonably, or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (i) the completion by the Underwriters of the distribution of the
Securities as contemplated hereby; or (ii) 25 days after the date on which the
Registration Statement shall have become or been declared effective, the Company
will prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary or advisable in connection with the distribution of the Securities
and as mutually agreed by the Company and the Managing Underwriter.
After the Effective Date and as soon as the Company is advised thereof,
the Company will advise you, and confirm the advice in writing, of the receipt
of any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such purposes,
and will use its best efforts to prevent the issuance of any such order, and, if
issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus and Definitive Prospectus, and the Company has consented
and hereby consents to the use of such copies for the purposes permitted by the
Act. The Company authorizes the Underwriters and Selected Dealers to use the
Prospectus in connection with the sale of the Securities for such period as in
the opinion of counsel to the Underwriters the use thereof is required to comply
with the applicable provisions of the Act and the Rules and Regulations. In case
of the happening, at any time within such period as a Prospectus is required
under the Act to be delivered in connection with sales by the Underwriters or
Selected Dealers, of any event of which the Company has knowledge and which in
the opinion of counsel for the Company or counsel for the Underwriters should be
set forth in an amendment to the Registration Statement or a supplement to the
Prospectus, in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Securities, or in
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case it shall be necessary to amend or supplement the Prospectus to comply with
law or with the Act and the Rules and Regulations, the Company will notify you
promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriters.
The Company will comply with the Act, the Rules and Regulations
thereunder, and the provisions of the Securities Exchange Act of 1934 (the "1934
Act"), and the rules and regulations thereunder in connection with the offering
and issuance of the Securities.
(b) The Company will act in good faith and use its best efforts and
cooperate with you and your counsel to qualify to register the Securities for
sale under the securities or "blue sky" laws of such jurisdictions as the
Managing Underwriter may designate and will make such applications and furnish
such information as may be required for that purpose and to comply with such
laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent to service
of process in any jurisdiction in any action other than one arising out of the
offering or sale of the Securities. The Company will, from time to time, prepare
and file such statements and reports as are or may be required to continue such
qualification in effect for so long a period as the Underwriters may reasonably
request.
(c) If the sale of the Securities provided for herein is not
consummated, the Company shall pay all costs and expenses incident to the
performance of the Company's obligations hereunder, including, but not limited
to, all such expenses itemized in Section 8(a) and 8(c) hereof, and either (i)
the out-of-pocket expenses of the Managing Underwriter, not to exceed the
$50,000 previously paid if the Managing Underwriter elects to terminate the
offering for any reason; or (ii) the out-of-pocket expenses of the Managing
Underwriter if the Company elects to terminate the offering for any reason. For
the purposes of this sub-section, the Managing Underwriter shall be deemed to
have assumed such expenses when they are billed or incurred, regardless of
whether such expenses have been paid. The Managing Underwriter shall not be
responsible for any expenses of the Company or others, or for any charges or
claims relative to the proposed public offering if it is not consummated.
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the several Underwriters, from time
to time until the Effective Date of the Registration Statement, as many copies
of any Preliminary Prospectus filed with the Commission prior to the Effective
Date of the Registration Statement as the Underwriters may reasonably request.
The Company will deliver to the Underwriters on the Effective Date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Definitive
Prospectus, or as thereafter amended or supplemented, as the several
Underwriters may from time to time reasonably request.
(e) For so long as the Company is a reporting company under either
Section 12 or 15 of the 1934 Act, the Company, at its expense, will furnish to
the Managing Underwriter during the period ending five (5) years from the
Effective Date, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any of its subsidiaries as at the end of such
fiscal year, together with statements of income, surplus and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as they are available, a copy of all reports
(financial or other) mailed to security holders; (iii) as soon as they are
available, a copy of all non-confidential documents, including annual reports,
periodic reports and financial statements, furnished to or filed with the
Commission under the Act and the 1934 Act; (iv) copies of each press release,
news item and article with respect to the Company's affairs released by the
Company; and (v) such other information as you may from time to time reasonably
request.
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(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will make generally available to its stockholders and
deliver to the Managing Underwriter as soon as it is practicable, but in no
event later than the first day of the sixteenth full calendar month following
the Effective Date, an earnings statement (which need not be audited) covering a
period of at least twelve consecutive months beginning with the Effective Date
of the Registration Statement, which shall satisfy the requirements of Section
11(a) of the Act or Rule 158 promulgated thereunder.
(h) On the Closing Date, the Company shall have taken the necessary
action to become a reporting company under Section 12 of the 1934 Act, and the
Company will make all filings required to and will have obtained approval for
the listing of the Shares on The Nasdaq SmallCap Market System, and will use its
best efforts to maintain such listing for at least seven (7) years from the date
of this Agreement.
(i) For a period of seven (7) years following the Effective Date, the
Company will hold an annual meeting of stockholders for the election of
Directors within 180 days after the end of each of the Company's fiscal years
and, within nine (9) months after the end of each of the Company's fiscal years
will provide the Company's stockholders with the audited financial statements of
the Company as of the end of the fiscal year just completed prior thereto. Such
financial statements shall be those required by Rule 14a-3 under the 1934 Act
and shall be included in an annual report pursuant to the requirements of such
Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption "Use
of Proceeds" in the Prospectus, and will file such reports with the Commission
with respect to the sale of the Securities and the application of the proceeds
therefrom as may be required by the Act or the 1934.
(k) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of counsel to the Underwriters and the Company may be
reasonably necessary or advisable in connection with the distribution of the
Securities and will use its best efforts to cause the same to become effective
as promptly as possible.
(l) On the Closing Date, the Company shall execute and deliver to you
the Underwriter's Warrant Agreement. The Underwriter's Warrant Agreement and
Warrant Certificates will be substantially in the form of the Underwriter's
Warrant Agreement filed as an exhibit to the Registration Statement.
(m) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued securities which are issuable upon
exercise of the Underwriter's Warrants outstanding from time to time.
(n) All beneficial owners of the Company's securities (including
warrants, options and Preferred Stock of the Company) as of the Effective Date
shall agree in writing, in a form satisfactory to the Managing Underwriter, not
to sell, transfer or otherwise dispose of any of such securities (or underlying
securities) of the Company for a period of twenty-four (24) months from the
Effective Date or any longer period required by the NASD, Nasdaq or any State,
without the written consent of the Managing Underwriter.
(o) The Company will obtain, on or before the Closing Date, key person
life insurance on each of the lives of Dr. Kent Webb and Larry E. Howell, in an
amount of not less than $1,000,000 each, and will use its best efforts to
maintain such insurance for a period of at least five (5) years from the
Effective Date.
(p) Prior to the Closing Date, the Company shall, at its own expense,
undertake to list the Company's securities in the appropriate recognized
securities manual or manuals published by Standard & Poor's Corporation and
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such other manuals as the Managing Underwriter may designate, such listings to
contain the information required by such manuals and the Uniform Securities Act.
The Company hereby agrees to use its best efforts to maintain such listing for a
period of not less than five (5) years. The Company shall take such action as
may be reasonably requested by the Managing Underwriter to obtain a secondary
market trading exemption in such states as may be reasonably requested by the
Underwriters.
(q) During the one (1) year period commencing on the Closing Date, the
Company will not, without the prior written consent of the Managing Underwriter,
grant options or warrants to purchase the Company's Common Stock at a price less
than the initial per share public offering price.
(r) Prior to the Closing Date, neither the Company nor any subsidiary
will issue, directly or indirectly, without your prior consent, any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering of the Securities other than routine
customary advertising of the Company's products and services, and except as
required by any applicable law or the directives of any relevant regulatory
authority in any relevant jurisdiction.
(s) At the Closing Date, the Company will engage the Managing
Underwriter as a non-exclusive financial advisor to the Company for a period of
twelve (12) months commencing on the first day of the month following the
Company's receipt of the proceeds of this offering, at an aggregate fee of
$108,000, all of which shall be payable to the Managing Underwriter on the
Closing Date. The financial advisory agreement will provide that the Managing
Underwriter shall, at the Company's request, provide advice and consulting
services to the Company concerning potential merger and acquisition proposals
and the obtaining of short or long-term financing for the Company, whether by
public financing or otherwise.
(t) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the financial
statements to be included in any registration statement or similar disclosure
document to be filed by the Company hereunder, or any amendment or supplement
thereto. For a period of five (5) years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's quarterly report
and the mailing of quarterly financial information to stockholders.
(u) The Company shall retain UMB Bank, N.A. as the transfer agent for
the securities of the Company, or such other transfer agent as you may agree to
in writing. In addition, the Company shall direct such transfer agent to furnish
the Managing Underwriter with daily transfer sheets as to each of the Company's
securities as prepared by the Company's transfer agent and copies of lists of
stockholders as reasonably requested by the Managing Underwriter, for a five (5)
year period commencing from the Closing Date.
(v) The Company shall cause the Depository Trust Company, and any other
depository of the Company's securities, to furnish special security position
reports and special DTC Tracking Reports to the Managing Underwriter on a daily
and weekly basis at the expense of the Company, for a five (5) year period from
the Effective Date. The DTC Tracking Reports will be furnished for the initial
two (2) month period from the Effective Date, after which time the Company's
obligation to furnish such tracking reports will be reviewed by the Company and
the Managing Underwriter.
(w) Following the Effective Date, the Company shall, at its sole cost
and expense, prepare and file such Blue Sky applications with such jurisdictions
as the Managing Underwriter shall designate and the Company may reasonably
agree.
(x) On the Effective Date and for a period of three (3) years
thereafter, the Company's Board of Directors shall consist of a minimum of five
(5) persons, two (2) of whom shall be independent and not otherwise affiliated
with
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the Company or associated with any of the Company's affiliates. The Managing
Underwriter shall have the opportunity to invite an observer to attend Board of
Directors meetings of the Company at the expense of the Company.
(y) On the Closing Date, the Company shall execute and deliver to you a
non-exclusive M/A Agreement with the Managing Underwriter in a form satisfactory
to the Managing Underwriter, providing:
(1) that the Managing Underwriter will be paid a finder's fee,
of from five percent (5%) of the first $1,000,000 ranging in $1,000,000
increments down to one percent (1%) of the excess, if any, over
$4,000,000 of the consideration involved in any transaction introduced
by the Managing Underwriter (including mergers, acquisitions, joint
ventures, and any other business for the Company introduced by the
Managing Underwriter) consummated by the Company, as an "Introduced,
Consummated Transaction", by which the Managing Underwriter introduced
the other party to the Company during a period ending five (5) years
from the date of the M/A Agreement; and
(2) that any such finder's fee due to the Managing Underwriter
will be paid in cash or stock as mutually agreed at the closing of the
particular Introduced, Consummated Transaction for which the finder's
fee is due.
(z) After the Closing Date, the Company shall prepare and publish
"tombstone" advertisements of at least 5 x 5 inches in publications to be
designated by the Managing Underwriter at a total cost not to exceed $15,000.
(aa) Until such time as the securities of the Company are listed or
quoted on either the New York Stock Exchange or the American Stock Exchange, the
Company shall engage the Company's legal counsel to deliver to the Managing
Underwriter a written opinion detailing those states in which the Shares of the
Company may be traded in non-issuer transactions under the Blue Sky laws of the
fifty states ("Secondary Market Trading Opinion"). The initial Secondary Market
Trading Opinion shall be delivered to the Managing Underwriter on the Effective
Date, and the Company shall continue to update such opinion and deliver same to
the Managing Underwriter on a timely basis, but in any event at the beginning of
each fiscal quarter, for a five (5) year period, if required.
(ab) As promptly as practicable after the Closing Date, the Company
will prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute such volumes to the individuals designated by the
Managing Underwriter or counsel to the Managing Underwriter.
4. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligation of the
several Underwriters to purchase and pay for the Securities which the several
Underwriters have agreed to purchase hereunder from the Company is subject, as
of the date hereof and as of the Closing Date and the Option Closing Date, to
the execution of this Agreement by the Managing Underwriter, to the continuing
accuracy of, and compliance with, the representations and warranties of the
Company herein, to the accuracy of statements of officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) (i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such
later time or on such later date as you may agree to in writing; (ii) at or
prior to the Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceeding for that purpose shall have been initiated or pending, or shall be
threatened, or to the knowledge of the Company, contemplated by the Commission;
(iii) no stop order suspending the effectiveness of the qualification or
registration of the Securities under the securities or "blue sky" laws of any
jurisdiction (whether or not a jurisdiction which you shall have specified)
shall be threatened or to the knowledge of the Company contemplated by the
authorities of any such jurisdiction or shall have been issued and in effect;
(iv) any request for additional information on the part of the Commission or any
such authorities shall have been complied with to the satisfaction of the
Commission and any such authorities, and to the satisfaction of counsel to the
Underwriters; and (v) after the date hereof no amendment or supplement to the
Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Underwriters and the Underwriters did not
object thereto.
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(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any subsidiary or any material adverse change in
the long-term debt of the Company or any material subsidiary except as set forth
in or contemplated by the Registration Statement, (ii) there shall not have been
any material adverse change in the general affairs, business, properties,
condition (financial or otherwise), management, or results of operations of the
Company or any subsidiary, whether or not arising from transactions in the
ordinary course of business, in each case other than as set forth in or
contemplated by the Registration Statement or Prospectus; (iii) neither the
Company nor any subsidiary shall have sustained any material interference with
its business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not set
forth in the Registration Statement and Prospectus; and (iv) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstance under which they are made, not misleading.
(c) Except as set forth in the Prospectus, there shall not be pending
or, to the knowledge of the Company or any subsidiary, threatened, any material
action, suit, proceeding, inquiry, arbitration or investigation against the
Company or any subsidiary, or any of the officers or directors of the Company or
any subsidiary, or any material action, suit, proceeding, inquiry, arbitration,
or investigation, which is likely to result in any material adverse change in
the condition (financial or other), business prospects, net worth, or properties
of the Company or any subsidiary.
(d) Each of the representations and warranties of the Company contained
herein shall be true and correct as of this date and at the Closing Date as if
made at the Closing Date, and all covenants and agreements herein contained to
be performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing Date
shall have been duly performed, fulfilled or complied with.
(e) At the Closing Date, the Managing Underwriter shall have received
the opinion, together with copies of such opinion for each of the other several
Underwriters, dated as of the Closing Date, from Dunn Swan & Cunningham, counsel
for the Company, in form and substance satisfactory to counsel for the
Underwriters, which in the aggregate shall state:
(i) the Company and each subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, with full corporate power
and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign corporation and is in
good standing in each other jurisdiction in which the ownership or
leasing of its properties or conduct of its business requires such
qualification except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company and
each subsidiary as a whole;
(ii) the authorized capital of the Company is as set forth
under "Capitalization" in the Prospectus; all shares of the Company's
outstanding stock and other securities requiring authorization for
issuance by the Company's Board of Directors have been duly authorized,
validly issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the outstanding shares
of Common Stock of the Company and other securities have not been
issued in violation of the preemptive rights of any shareholder and the
shareholders of the Company do not have any preemptive rights or, to
such counsel's knowledge, other rights to subscribe for or to purchase
securities of the Company, nor, to such counsel's knowledge, are there
any restrictions upon the voting or transfer of any of the securities
of the Company, except as disclosed in the Prospectus; the Common
Stock, the Shares and the securities contained in the Underwriter's
Warrant Agreement conform to the respective descriptions thereof
contained in the Prospectus; the Common Stock, the Shares and the
securities contained in the Underwriter's Warrant Agreement, have
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been duly authorized and, when issued, delivered and paid for, will be
duly authorized, validly issued, fully paid, non-assessable, free of
pre-emptive rights and no personal liability will attach to the
ownership thereof; all prior sales by the Company of the Company's
securities complied in all material respects with, or were exempt from,
applicable federal and state securities laws; no shareholders of the
Company have any rescission rights against the Company with respect to
the Company's securities; a sufficient number of shares of Common Stock
has been reserved for issuance upon exercise of the Underwriter
Warrants, and to the best of such counsel's knowledge, neither the
filing of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which have been
waived or satisfied or described in the Registration Statement;
(iii) this Agreement, the Underwriter's Warrant Agreement, the
Financial Advisory Agreement, and the M/A Agreement have been duly and
validly authorized, executed and delivered by the Company and, assuming
the due authorization, execution and delivery of this Agreement by the
Managing Underwriter, are the valid and legally binding obligations of
the Company, enforceable in accordance with their terms, except (a) as
such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws from time to
time in effect which effect creditors' rights generally; and (b) no
opinion is expressed as to the enforceability of the indemnity
provisions or the contribution provisions contained in this Agreement;
(iv) the certificates evidencing the outstanding securities of
the Company and the Shares are in valid and proper legal form;
(v) to the best of such counsel's knowledge, except as set
forth in the Prospectus, there is not pending or threatened any
material action, suit, proceeding, inquiry, arbitration or
investigation against the Company or any subsidiary or any of the
officers of directors of the Company or any subsidiary, nor any
material action, suit, proceeding, inquiry, arbitration, or
investigation, which might materially and adversely affect the
condition (financial or otherwise), business prospects, net worth, or
properties of the Company or any subsidiary;
(vi) the execution and delivery of this Agreement, the
Underwriter's Warrant Agreement, the Financial Advisory Agreement, and
the M/A Agreement, and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions herein or
therein contemplated, will not result in a violation of, or constitute
a default under (a) the Articles of Incorporation or By-Laws of the
Company and each subsidiary; (b) to the best of such counsel's
knowledge, any material obligations, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the
Company or any subsidiary is a party or by which it or any of its
material properties is bound; or (c) to the best of such counsel's
knowledge, any material order, rule, regulation, writ, injunction, or
decree of any government, governmental instrumentality or court,
domestic or foreign;
(vii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission; the Registration
Statement and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations; and
(viii) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or delivery
of the Securities by the Company in connection with the execution,
delivery and performance of this Agreement by the Company or in
connection with the taking of any action contemplated herein, or the
issuance of the Underwriter's Warrants or the Securities underlying the
Underwriter's Warrants, other than registrations or
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qualifications of the Securities under applicable state or foreign
securities or Blue Sky laws and registration under the Act.
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriters or counsel for the Underwriters shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law, upon opinions of counsel
satisfactory to you and counsel to the Underwriters. The opinion of such counsel
to the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Underwriters and they are justified in
relying thereon.
Such counsel shall also include a statement to the effect that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus and nothing has come to the attention of such counsel to lead
such counsel to believe that the Registration Statement or any amendment thereto
at the time it became effective contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading or that the Prospectus or any supplement
thereto contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make
statements therein, in light of the circumstances under which they are made, not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
financial statements, notes thereto and other financial information and
statistical data contained therein, as to which such counsel need express no
opinion).
(f) You and the several Underwriters shall have received on the Closing
Date, a certificate dated as of the Closing Date, signed by the Chief Executive
Officer and the Chief Financial Officer of the Company and such other officers
of the Company as the Underwriters may reasonably request, certifying that:
(i) No Order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the Securities is in
effect and no proceedings for such purpose are pending or are, to their
knowledge, threatened by the Commission;
(ii) They do not know of any litigation instituted or, to
their knowledge, threatened against the Company or any subsidiary or
any officer or director of the Company or any subsidiary of a character
required to be disclosed in the Registration Statement which is not
disclosed therein; they do not know of any contracts which are required
to be summarized in the Prospectus which are not so summarized; and
they do not know of any material contracts required to be filed as
exhibits to the Registration Statement which are not so filed;
(iii) They have each carefully examined the Registration
Statement and the Prospectus and, to the best of their knowledge,
neither the Registration Statement nor the Prospectus nor any amendment
or supplement to either of the foregoing contains an untrue statement
of any material fact or omits to state any material fact required to be
stated therein or necessary to make the statement therein, in light of
the circumstances under which they are made, not misleading; and since
the Effective Date, to the best of their knowledge, there has occurred
no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth;
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change in the condition of the Company or any
subsidiary, financial or otherwise, or in the results of its
operations, except as reflected in or contemplated by the Registration
Statement and the Prospectus;
(v) The representations and warranties set forth in this
Agreement are true and correct in all material respects, and the
Company has complied with all of its agreements herein contained;
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(vi) Neither the Company nor any subsidiary is delinquent in
the filing of any federal, state and other tax return or the payment of
any federal, state or other taxes; they know of no proposed
redetermination or re-assessment of taxes, adverse to the Company or
any subsidiary, and the Company and each subsidiary has paid or
provided by adequate reserves for all known tax liabilities;
(vii) They know of no material obligation or liability of the
Company, contingent or otherwise, not disclosed in the Registration
Statement and Prospectus;
(viii) This Agreement, the Underwriter's Warrant Agreement,
the Financial Advisory Agreement, and the M/A Agreement, the
consummation of the transactions therein contemplated, and the
fulfillment of the terms thereof, will not result in a breach by the
Company of any terms of, or constitute a default under, the Company's
Articles of Incorporation or By-Laws, any indenture, mortgage, lease,
deed of trust, bank loan or credit agreement or any other material
agreement or undertaking of the Company or any subsidiary including, by
way of specification but not by way of limitation, any agreement or
instrument to which the Company or any subsidiary is now a party or
pursuant to which the Company or any subsidiary has acquired any
material right and/or obligations by succession or otherwise;
(ix) The financial statements and schedules filed with and as
part of the Registration Statement present fairly the financial
position of the Company as of the dates thereof all in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved. Since the respective dates of such
financial statements, there have been no material adverse change in the
condition or general affairs of the Company, financial or otherwise,
other than as referred to in the Prospectus;
(x) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, except as may
otherwise be indicated therein or contemplated thereby, neither the
Company nor any subsidiary has, prior to the Closing Date, either (i)
issued any securities or incurred any material liability or obligation,
direct or contingent, for borrowed money, or (ii) entered into any
material transaction other than in the ordinary course of business. The
Company has not declared, paid or made any dividend or distribution of
any kind on its capital stock;
(xi) They have reviewed the sections in the Prospectus
relating to their biographical data and equity ownership position in
the Company, and all information contained therein is true and
accurate; and
(xii) Except as disclosed in the Prospectus, during the past
five years, they have not been:
(1) The subject of a petition under the federal
bankruptcy laws or any state insolvency law filed by or
against them, or by a receiver, fiscal agent or similar
officer appointed by a court for their business or property,
or any partnership in which any of them was a general partner
at or within two years before the time of such filing, or any
corporation or business association of which any of them was
an executive officer at or within two years before the time of
such filing;
(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
any of them from, or otherwise limiting, any of the following
activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer
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in securities, or as an affiliated person, director
or employee of any investment company, bank, savings
and loan association or insurance company, or
engaging in or continuing any conduct or practice in
connection with any such activity;
(ii) engaging in any type of business
practice; or
(iii) engaging in any activity in connection
with the purchase or sale of any security or
commodity or in connection with any violation of
federal or state securities law or federal commodity
laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or
state authority barring, suspending or otherwise limiting for
more than sixty (60) days their right to engage in any
activity described in paragraph (3)(i) above, or be associated
with persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission to
have violated any federal or state securities law, and the
judgment in such civil action or finding by the Commission has
not been subsequently reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any federal commodities law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
(g) The Underwriters shall have received from Murrell, Hall, McIntosh &
Co., PLLP, independent auditors to the Company, certificates or letters, one
dated and delivered on the Effective Date and one dated and delivered on the
Closing Date, in form and substance satisfactory to the Underwriters, stating
that:
(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) the financial statements and the schedules included in
the Registration Statement and the Prospectus were examined by them
and, in their opinion, comply as to form in all material respects with
the applicable accounting requirements of the Act, the Rules and
Regulations and instructions of the Commission with respect to
Registration Statements on Form SB-2;
(iii) on the basis of inquiries and procedures conducted by
them (not constituting an examination in accordance with generally
accepted auditing standards), including a reading of the latest
available unaudited interim financial statements or other financial
information of the Company (with an indication of the date of the
latest available unaudited interim financial statements), inquiries of
officers of the Company who have responsibility for financial and
accounting matters, review of minutes of all meetings of the
shareholders and the Board of Directors of the Company and other
specified inquiries and procedures, nothing has come to their attention
as a result of the foregoing inquiries and procedures that causes them
to believe that:
(a) during the period from (and including) the date
of the financial statements in the Registration Statement and
the Prospectus to a specified date not more than five days
prior to the date of such letters, there has been any change
in the Common Stock, long-term debt or other securities of the
Company (except as specifically contemplated in the
Registration Statement and Prospectus) or any material
decreases in net current assets, net assets, shareholder's
equity, working capital or in any other item appearing in the
Company's financial statements as to which the
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Underwriters may request advice, in each case as compared with
amounts shown in the balance sheet as of the date of the most
recent financial statements in the Prospectus, except in each
case for changes, increases or decreases which the Prospectus
discloses have occurred or will occur;
(b) during the period from (and including) the date
of the financial statements in the Registration Statement and
the Prospectus to such specified date there was any material
decrease in revenues or in the total or per share amounts of
income or loss before extraordinary items or net income or
loss, or any other material change in such other items
appearing in the Company's financial statements as to which
the Underwriters may request advice, in each case as compared
with the fiscal period ended as of the date of the most recent
financial statements in the Prospectus, except in each case
for increases, changes or decreases which the Prospectus
discloses have occurred or will occur;
(c) the unaudited interim financial statements of the
Company appearing in the Registration Statement and the
Prospectus (if any) do not comply as to form in all material
respects with the applicable accounting requirements of the
Act and the Rules and Regulations or are not fairly presented
in conformity with generally accepted accounting principles
and practices on a basis substantially consistent with the
audited financial statements included in the Registration
Statements or the Prospectus.
(iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letters and found them to be in agreement; and
(v) they have not during the immediately preceding five (5)
year period brought to the attention of the Company's management any
reportable condition related to the Company's internal accounting
procedures, weaknesses and/or controls. Such letters shall also set
forth such other information as may be requested by counsel for the
Underwriters.
Any changes, increases or decreases in the items set forth in such letters
which, in the judgment of the several Underwriters, are materially adverse with
respect to the financial position or results of operations of the Company shall
be deemed to constitute a failure of the Company to comply with the conditions
of the obligations to the several Underwriters hereunder.
(h) Upon exercise of the option provided for in Section 2(b) hereof,
the obligation of the several Underwriters (or at its option, the Managing
Underwriter, individually) to purchase and pay for the Option Securities
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose
shall have been instituted or shall be pending, or, to your knowledge
or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission
for additional information shall have been complied with to the
satisfaction of counsel to the Underwriters.
(ii) At the Option Closing Date, there shall have been
delivered to you the signed opinion from Dunn Swan & Cunningham,
counsel for the Company, dated as of the Option Closing Date, in form
and substance satisfactory to counsel to the Underwriters, which
opinion shall be substantially the same in scope and substance as the
opinion furnished to you at the Closing Date pursuant to Section 4(e)
hereof, except that such opinion, where appropriate, shall cover the
Option Securities.
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(iii) At the Option Closing Date, there shall have been
delivered to you a certificate of the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Option Closing Date, in
form and substance satisfactory to counsel to the Underwriters,
substantially the same in scope and substance as the certificate
furnished to you at the Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date, there shall have been
delivered to you a letter in form and substance satisfactory to you
from Murrell, Hall, McIntosh & Co., PLLP, independent auditors to the
Company, dated the Option Closing Date and addressed to the several
Underwriters confirming the information in their letter referred to in
Section 4(g) hereof and stating that nothing has come to their
attention during the period from the ending date of their review
referred to in said letter to a date not more than five business days
prior to the Option Closing Date, which would require any change in
said letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Securities
shall be satisfactory in form and substance to the Underwriters, and
the Underwriters and counsel to the Underwriters shall have been
furnished with all such documents, certificates, and opinions as you
may request in connection with this transaction in order to evidence
the accuracy and completeness of any of the representations, warranties
or statements of the Company or its compliance with any of the
covenants or conditions contained herein.
(i) No action shall have been taken by the Commission or the NASD, the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Shares and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the several Underwriters
or the Company, shall be contemplated by the Commission or the NASD. The Company
represents that at the date hereof it has no knowledge that any such action is
in fact contemplated by the Commission or the NASD. The Company shall advise the
Managing Underwriter of any NASD affiliations of any of its officers, directors,
or stockholders of the Company's securities or their affiliates in accordance
with Section 1(y) of this Agreement.
(j) At the Effective Date, you shall have received from counsel to the
Company, dated as of the Effective Date, in form and substance satisfactory to
counsel for the Underwriters, a written Secondary Market Trading Opinion
detailing those states in which the Shares may be traded in non-issuer
transactions under the Blue Sky laws of the fifty (50) states after the
Effective Date, in accordance with Section 3(ab) of this Agreement.
(k) The authorization and issuance of the Securities and delivery
thereof, the Registration Statement, the Prospectus, and all corporate
proceedings incident thereto shall be satisfactory in all respects to counsel
for the Underwriters, and such counsel shall be furnished with such documents,
certificates and opinions as they may reasonably request to enable them to pass
upon the matters referred to in this sub-section.
(l) Prior to the Effective Date, the Managing Underwriter shall have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Underwriters, as described in the Registration Statement.
(m) If any of the conditions provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the several Underwriters under this Agreement may be canceled at, or at any
time prior to, the Closing Date and/or the Option Closing Date by the Managing
Underwriter notifying the Company of such cancellation in writing or by
facsimile at or prior to the applicable Closing Date or Option Closing Date. Any
such cancellation shall be without liability of the several Underwriters to the
Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of the
Company to sell and deliver the Securities is subject to the execution of this
Agreement by the Company, and to the following conditions:
(i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or
on such later time or date as the Company and the Managing Underwriter
may agree in writing; and
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(ii) At the Closing Date and the Option Closing Date, no stop
orders suspending the effectiveness of the Registration Statement shall
have been issued under the Act or any proceedings therefore initiated
or threatened by the Commission.
If the conditions to the obligations of the Company provided for in
this Section have been fulfilled on the Closing Date but are not fulfilled after
the Closing Date and prior to the Option Closing Date, then only the obligation
of the Company to sell and deliver the Securities on exercise of the option
provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION. (a) The Company indemnifies and holds harmless each
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
(i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, (ii) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such cases to the extent, but only to the
extent, that any such losses, claim, damages or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Underwriters specifically for use in
the Registration Statement or any amendment or supplement thereof or any Blue
Sky Application or any Preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto. Notwithstanding the foregoing, the Company
shall have no liability under this Section if such untrue statement or omission
made in a Preliminary Prospectus is cured in the Prospectus and the Prospectus
is not delivered to the person or persons alleging the liability upon which
indemnification is being sought. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter, severally but not jointly, indemnifies and holds
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of the persons who have signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, signer of the Registration Statement, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statements or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, in reliance upon and in conformity with
written information furnished to the Company by you or by any Underwriter
through you specifically for use in such Registration Statement or Prospectus.
Notwithstanding the foregoing, the Underwriters shall have no liability under
this section if such untrue statement or omission made in a Preliminary
Prospectus is cured in the Prospectus and the Prospectus is not delivered to the
person or persons alleging the liability upon which indemnification is being
sought through no fault of the Underwriter. This indemnity agreement will be in
addition to any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, promptly notify in writing the indemnifying party of the commencement
thereof; but the omission so to
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notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party other than indemnification under this Section.
In case any such action is brought against any indemnified party, and it
promptly notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the reasonable judgment of
the Managing Underwriter, it is advisable for the Managing Underwriter or such
Underwriters or controlling persons to be represented by separate counsel (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the Underwriters or such controlling person). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnifying party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnifying and
indemnified parties.
7. CONTRIBUTION.
(a) If the indemnification provided for in this Agreement is
unavailable to any indemnified party in respect to any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party, will contribute to the amount paid
or payable by such indemnified party, as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand, and by
the Underwriters on the other hand, from the Offering, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above, but also the relative fault of the Company on the one
hand, and of the Underwriters on the other hand, in connection with any
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses as well as any other relevant equitable considerations;
provided, that any contribution hereunder by the Underwriters shall not exceed
the amount of consideration received by the Underwriters hereunder. The relative
benefits received by the Company on the one hand, and by the Underwriters on the
other hand, shall be deemed to be in the same proportion as the total proceeds
from the Offering (net of sales commissions, and the non-accountable expense
allowance, but before deducting expenses) received by the Company, bear to the
commissions and the non-accountable expense allowance received by the
Underwriters. The relative fault of the Company on the one hand, and of the
Underwriters on the other hand, will be determined with reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
Company, and its relative intent, knowledge, access or information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section were determined by pro rata allocation or by any other
method of allocation which does not take into account the equitable
considerations referred to in this paragraph.
(b) Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any action,
suit, or proceeding, such party will, if a claim for contribution in respect
thereof is to be made against another party ("Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission to so notify
the Contributing Party will not relieve it from any liability which it may have
to any other party other than for contribution hereunder. In case any such
action, suit or proceeding is brought against any party, and such party notifies
a Contributing Party or its representative of the commencement thereof within
the aforesaid fifteen (15) days, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing Party
similarly notified. Any such Contributing Party shall not be liable to any party
seeking contribution
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on account of any settlement of any claim, action or proceeding which was
effected by such party seeking contribution on account of any settlement of any
claim, action or proceeding effected by such party seeking contribution without
the prior written consent of such Contributing Party. The contribution
provisions contained in this Section are intended to supersede, to the extent
permitted by law, any right to contribution under the Act, the Exchange Act or
otherwise available.
8. COSTS AND EXPENSES. (a) Whether or not this Agreement becomes
effective or the sale of the Securities to the Underwriters is consummated, the
Company will pay all costs and expenses incident to the performance of this
Agreement by the Company including but not limited to the fees and expenses of
counsel to the Company and of the Company's accountants; the costs and expenses
incident to the preparation, printing, filing and distribution under the Act of
the Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), Preliminary Prospectus and the Prospectus, as
amended or supplemented; the fee of the National Association of Securities
Dealers, Inc. ("NASD") in connection with the filing required by the NASD
relating to the offering of the Securities contemplated hereby; all state filing
fees, expenses and disbursements and legal fees of counsel to the Company in
their capacity as Blue Sky counsel to the Company in connection with the filing
of applications to register the Securities under the state securities or blue
sky laws; the cost of printing and furnishing to the several Underwriters copies
of the Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Selected Dealers Agreement, the Agreement Among Underwriters,
Underwriter's Questionnaire, Underwriter's Power of Attorney, and the Blue Sky
Memorandum; the cost of printing the certificates evidencing the securities
comprising the Securities; the cost of preparing and delivering to the Managing
Underwriter and its counsel bound volumes containing copies of all documents and
appropriate correspondence filed with or received from the Commission and the
NASD and all closing documents; and the fees and disbursements of the transfer
agent for the Company's securities. The Company shall pay any and all taxes
(including any original issue, transfer, franchise, capital stock or other tax
imposed by any jurisdiction) on sales to the Underwriters hereunder. The Company
will also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus. The Company
shall also engage the Company's counsel to provide the Managing Underwriter with
a written Secondary Market Trading Opinion in accordance with Section 3(ab) and
4(j) of this Agreement.
(b) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Managing Underwriter a non-accountable expense allowance
equal to three percent (3%) of the gross proceeds received from the sale of the
Securities, of which an advance of $50,000 has been paid to date. In the event
the overallotment option is exercised, the Company shall pay to the Managing
Underwriter at the Option Closing Date an additional amount equal to three
percent (3%) of the gross proceeds received upon exercise of the overallotment
option.
(c) Other than as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Managing Underwriter or from any other person for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Managing Underwriter and the other Underwriters against any
losses, claims, damages or liabilities, joint or several, which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees, to which the Managing Underwriter or
such other Underwriter may become subject insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon the claim of any person (other than an employee of the party claiming
indemnity) or entity that he or it is entitled to a finder's fee in connection
with the proposed offering by reason of such person's or entity's influence or
prior contact with the indemnifying party.
9. SUBSTITUTION OF UNDERWRITERS. If any of the Underwriters shall for
any reason not permitted hereunder cancel their obligations to purchase the
Securities hereunder, or shall fail to take up and pay for the number of
Securities set forth opposite their respective names in Schedule A hereto upon
tender of such Securities in accordance with the terms hereof, then:
(a) if the aggregate number of Securities which such Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent (10%) of
the total number of Securities, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Securities which such defaulting Underwriter or Underwriters agreed but
failed to purchase.
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(b) If any Underwriter or Underwriters so default and the agreed number
of Securities with respect to which such default or defaults occurs is more than
ten percent (10%) of the total number of Securities, the remaining Underwriters
shall have the right to take up and pay for (in such proportion as may be agreed
upon among them) the Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase, the time for delivery
of the Securities shall be extended to the next business day to allow the
several Underwriters the privilege of substituting within twenty-four hours
(including non-business hours) another Underwriter or Underwriters satisfactory
to the Company. If no such Underwriter or Underwriters shall have been
substituted as aforesaid, within such twenty-four period, the time of delivery
of the Securities may, at the option of the Company, be again extended to the
next following business day, if necessary, to allow the Company the privilege of
finding within twenty-four hours (including non-business hours) another
Underwriter or Underwriters to purchase the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted Underwriters to take up
the Securities of the defaulting Underwriter or Underwriters as provided in this
Section, (i) the Company or the Representative shall have the right to postpone
the time of delivery for a period of not more than seven (7) business days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary; and (ii) the respective numbers of Securities to be purchased by
the remaining Underwriters or substituted Underwriters shall be taken at the
basis of the underwriting obligation for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and the
remaining Underwriters shall not take up and pay for all the Securities agreed
to be purchased by the defaulting Underwriters or substitute another Underwriter
or Underwriters as aforesaid, and the Company shall not find or shall not elect
to seek another Underwriter or Underwriters for such Securities as aforesaid,
then this Agreement shall terminate.
If, following exercise of the option provided in Section 2(b) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Securities at the Option Closing
Date, or shall fail to take up and pay for the number of Option Securities,
which they become obligated to purchase at the Option Closing Date upon tender
of such Option Securities in accordance with the terms hereof, then the
remaining Underwriters or substituted Underwriters may take up and pay for the
Option Securities of the defaulting Underwriters in the manner provided in
Section 9(b) hereof. If the remaining Underwriters or substituted Underwriters
shall not take up and pay for all Option Securities, the Underwriters shall be
entitled to purchase the number of Option Securities for which there is no
default or, at their election, the option shall terminate, the exercise thereof
shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. EFFECTIVE DATE. The Agreement shall become effective upon its
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the execution
of this Agreement; or at such earlier time after the Effective Date of the
Registration Statement as you in your discretion shall first commence the public
offering of any of the Securities. The time of the public offering shall mean
the time after the effectiveness of the Registration Statement when the
Securities are first generally offered by you to the Selected Dealers and/or the
public. This Agreement may be terminated by you at any time before it becomes
effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14, 15,
16 and 17 shall remain in effect notwithstanding such termination.
11. TERMINATION. (a) This Agreement, except for Sections 3(c), 6, 7, 8,
12, 13, 14, 15, 16, and 17 hereof, may be terminated at any time prior to the
Closing Date, and the option referred to in Section 2(b) hereof, if exercised,
may be cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriters for the resale of the Securities agreed to be purchased
hereunder by reason of: (i) the Company having sustained a material adverse
loss, whether or not insured, by reason
23
<PAGE>
of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (ii) trading in
securities on the New York Stock Exchange or the American Stock Exchange having
been suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by Federal or New York
or Florida state authorities; (v) an outbreak of major international hostilities
or other national or international calamity having occurred; (vi) the passage by
the Congress of the United States or by any state legislative body of similar
impact, of any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is likely to have a material
adverse impact on the business, financial condition or financial statements of
the Company or the market for the Securities offered hereby; (vii) any material
adverse change in the financial or securities markets beyond normal market
fluctuations having occurred since the date of this Agreement; (viii) any
material adverse change having occurred, since the respective dates as of which
information is given in the Registration Statement and Prospectus, in the
earnings, business prospects or general condition of the Company, financial or
otherwise, whether or not arising in the ordinary course of business; (ix) a
pending or threatened legal or governmental proceeding or action relating
generally to the Company's business, or a notification having been received by
the Company of the threat of any such proceeding or action, which could
materially adversely affect the Company; (x) except as contemplated by the
Prospectus, the Company is merged or consolidated into or acquired by another
company or group or there exists a binding legal commitment for the foregoing or
any other material change of ownership or control occurs; or (xi) the Company
shall not have complied in all material respects with any term, condition or
provisions on its part to be performed, complied with or fulfilled (including
but not limited to those set forth in this Agreement) within the respective
times therein provided.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
12. UNDERWRITER'S WARRANT AGREEMENT. At the Closing Date, the Company
will issue to the Managing Underwriter and/or persons related to the Managing
Underwriter, for an aggregate purchase price of $10, and upon the terms and
conditions set forth in the form of Underwriter's Warrant Agreement annexed as
an exhibit to the Registration Statement, Underwriter Warrants to purchase up to
an aggregate of 100,000 Shares, in such denominations as the Managing
Underwriter shall designate. In the event of conflict in the terms of this
Agreement and the Underwriter's Warrant Agreement, the language of the form of
Underwriter's Warrant Agreement shall control.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its principal officers, where appropriate, and the
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriters, the Company or any of its officers or directors or any controlling
person and will survive delivery of and payment for the Securities and the
termination of this Agreement.
14. NOTICE. All communications hereunder will be in writing and, except
as otherwise expressly provided herein, will be mailed, delivered or telefaxed,
and confirmed:
If to the Underwriters: Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Copy to: David A. Carter, P.A.
2300 Glades Road
Suite 210, West Tower
Boca Raton, Florida 33431
24
<PAGE>
If to the Company: Larry E. Howell
Chief Executive Officer
Precis Smart Card Systems, Inc.
11032 Quail Creek Road, Suite 108
Oklahoma City, OK 73120
Copy to: Michael E. Dunn, Esq.
Dunn Swan & Cunningham
2800 Oklahoma Tower
210 Park Avenue
Oklahoma City, OK 73102-5604
15. PARTIES IN INTEREST. This Agreement herein set forth is made solely
for the benefit of the several Underwriters, the Company and, to the extent
expressed, the holders of the Underwriter Warrants, any person controlling the
Company or the Underwriters, and directors of the Company, nominees for director
(if any) named in the Prospectus, each person who has signed the Registration
Statement, and their respective executors, administrators, successors, assigns
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser of
the Securities, as such purchaser, from the several Underwriters. All of the
obligations of the Underwriters hereunder shall be several and not joint.
16. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Florida applicable to contracts made
and to be performed entirely within the State of Florida. The parties agree that
any action brought by any party against another party in connection with any
rights or obligations arising out of this Agreement shall be instituted properly
in a federal or state court of competent jurisdiction with venue only in the
Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida or the
United States District Court for the Southern District of Florida, West Palm
Beach Division. A party to this Agreement named as a Defendant in any action
brought in connection with this Agreement in any court outside of the above
named designated county or district shall have the right to have the venue of
said action changed to the above designated county or district or, if necessary,
have the case dismissed, requiring the other party to refile such action in an
appropriate court in the above designated county or federal district.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
18. ENTIRE AGREEMENT. This Agreement and the agreements referred to
within this Agreement constitute the entire agreement of the parties, and
supersedes all prior agreements, understandings, negotiations and discussions,
whether written or oral, of the parties hereto.
19. MANAGING UNDERWRITER AS UNDERWRITER. In the event the Managing
Underwriter acts as the sole Underwriter in connection with the underwriting of
the securities being offered pursuant to the Registration Statement, all
references to the Managing Underwriter in this Agreement shall be replaced by
reference to the "Underwriter", and (i) any consents required to be obtained
from the Managing Underwriter shall be required to be obtained solely from the
Underwriter; (ii) all compensation to be received by the Managing Underwriter
shall instead be received by the Underwriter; and (iii) the provisions of
section nine (9) of this Agreement shall not apply.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this Agreement, whereupon it will become a
binding Agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
PRECIS SMART CARD SYSTEMS, INC.
25
<PAGE>
BY:
----------------------------
Larry E. Howell
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
BARRON CHASE SECURITIES, INC.
BY:
----------------------------
Robert T. Kirk, President
For itself and as Managing
Underwriter for several Underwriters
26
<PAGE>
SCHEDULE A
TO THE UNDERWRITING AGREEMENT
<TABLE>
<CAPTION>
UNDERWRITER SHARES
<S> <C>
Barron Chase Securities, Inc. . . . . . . . . . .
Emerson Bennett & Associates. . . . . . . . . . .
---------
1,000,000
</TABLE>
27
<PAGE>
EXHIBIT 1.2
PRECIS SMART CARD SYSTEMS, INC.
1,000,000 Shares of Common Stock
SELECTED DEALER AGREEMENT
Boca Raton, Florida
____________, 2000
Gentlemen:
1. Barron Chase Securities, Inc. (the "Managing Underwriter") and the
other Underwriters named in the Prospectus (collectively the "Underwriters"),
acting through us, are severally offering for sale an aggregate of 1,000,000
Shares of Common Stock (the "Shares" or the "Firm Securities") of Precis Smart
Card Systems, Inc. (the "Company"), which the Underwriters have agreed to
purchase from the Company, and which are more particularly described in the
Registration Statement, Underwriting Agreement and Prospectus. In addition, the
several Underwriters (or the Managing Underwriter individually) have been
granted an option to purchase from the Company up to an additional 150,000
Shares (the "Option Securities") to cover overallotments in connection with the
sale of the Firm Securities. The Firm Securities and any Option Securities
purchased are herein called the "Securities". The Securities and the terms under
which they are to be offered for sale by the several Underwriters is more
particularly described in the Prospectus.
2. The Securities are to be offered to the public by the several
Underwriters at the price per Share set forth on the cover page of the
Prospectus (the "Public Offering Price"), in accordance with the terms of
offering set forth in the Prospectus.
3. Some or all of the several Underwriters are severally offering,
subject to the terms and conditions hereof, a portion of the Securities for
sale to certain dealers who are actually engaged in the investment banking or
securities business and who are either (a) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"), or (b) dealers
with their principal places of business located outside the United States,
its territories and its possessions and not registered as brokers or dealers
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), who
have agreed not to make any sales within the United States, its territories
or its possessions or to persons who are nationals thereof or residents
therein (such dealers who shall agree to sell Securities hereunder being
herein called "Selected Dealers") at the public offering price, less a
selling concession (which may be changed) of not in excess of $ per
Share payable as hereinafter provided, out of which concession an amount not
exceeding $ per Share may be reallowed by Selected Dealers to members
of the NASD or foreign dealers qualified as aforesaid. The Selected Dealers
who are members of the NASD agree to comply with all of the provisions of the
NASD Conduct Rules. Foreign Selected Dealers agree to comply with the
provisions of Rule 2740 of the NASD Conduct Rules, and, if any such dealer is
a foreign dealer and not a member of the NASD, such Selected Dealer also
agrees to comply with the NASD's Interpretation with Respect to Free-Riding
and Withholding, and to comply, as though it were a member of the NASD, with
the provisions of Rules 2730 and 2750 of the NASD Conduct Rules, and to
comply with Rule 2420 thereof as that Rule applies to non-member foreign
dealers. Some or all of the Underwriters may be included among the Selected
Dealers. Each of the Underwriters has agreed that, during the term of this
Agreement, it will be governed by the terms and conditions hereof whether or
not such Underwriter is included among the Selected Dealers.
4. Barron Chase Securities, Inc. shall act as Managing Underwriter and
shall have full authority to take such action as it may deem advisable in
respect to all matters pertaining to the public offering of the Securities.
1
<PAGE>
5. If you desire to act as a Selected Dealer and purchase any of the
Securities, your application should reach us promptly by facsimile or letter at
the offices of Barron Chase Securities, Inc., 7700 West Camino Real, Boca Raton,
Florida 33433, Attention: Robert T. Kirk. We reserve the right to reject
subscriptions in whole or in part, to make allotments, and to close the
subscription books at any time without notice. The Securities allotted to you
will be confirmed, subject to the terms and conditions of this Selected Dealers
Agreement (the "Agreement").
6. The privilege of subscribing for the Securities is extended to you
only on the condition that the participating Underwriters may lawfully sell the
Securities to Selected Dealers in your state or other applicable jurisdiction.
7. Any Securities to be purchased by you under the terms of this
Agreement may be immediately reoffered to the public in accordance with the
terms of offering as set forth herein and in the Prospectus, subject to the
securities or Blue Sky laws of the various states or other jurisdictions.
You agree to pay us on demand for the accounts of the several
Underwriters an amount equal to the Selected Dealer concession as to any
Securities purchased by you hereunder which, prior to the completion of the
public offering as defined in paragraph 8 below, we may purchase or contract to
purchase for our account and, in addition, we may charge you with any broker's
commission and transfer tax paid in connection with such purchase or contract to
purchase. Certificates for Securities delivered on such repurchases need not be
the identical certificates originally purchased.
You agree to advise us from time to time, upon request, of the number
of Securities purchased by you hereunder and remaining unsold at the time of
such request, and, if in our opinion any such Securities shall be needed to make
delivery of the Securities sold or overallotted for the account of one or more
of the Underwriters, you will, forthwith upon our request, grant to us for the
account or accounts of the Underwriter or Underwriters the right, exercisable
promptly after receipt of notice from you that such right has been granted, to
purchase, at the Public Offering Price less the selling concession or such part
thereof as we shall determine, such number of Securities owned by you as shall
have been specified in our request.
No expenses shall be charged to Selected Dealers. A single transfer
tax, if payable, upon the sale of the Securities by the respective Underwriters
to you will be paid when such Securities are delivered to you. However, you
shall pay any transfer tax on sales of Securities by you and you shall pay your
proportionate share of any transfer tax (other than the single transfer tax
described above) in the event that any such tax shall from time to time be
assessed against you and other Selected Dealers as a group or otherwise.
Neither you nor any other person is or has been authorized to give any
information or to make any representation in connection with the sale of the
Securities other than as contained in the Prospectus.
8. By accepting this Agreement, the Selected Dealer has assumed full
responsibility for proper training and instruction of its representatives
concerning the selling methods to be used in connection with the offer and sale
of the Company's Securities, giving special emphasis to the principles of
suitability and full disclosure to prospective investors and prohibitions
against "free-riding and withholding".
9. For the purpose of stabilizing the market in the Securities, we have
been authorized to make purchases and sales of the Securities of the Company, in
the open market or otherwise, for long or short account, and, in arranging for
sales, to overallot.
10. On becoming a Selected Dealer, and in offering and selling the
Securities, you agree to comply with all the applicable requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and the 1934 Act. You
confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to
the distribution of preliminary and final prospectuses for securities of an
issuer (whether or not the issuer is subject to the reporting requirements of
Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will
comply therewith.
2
<PAGE>
We hereby confirm that we will make available to you such number of
copies of the Prospectus (as amended or supplemented) as you may reasonably
request for the purposes contemplated by the 1933 Act or the 1934 Act, or the
rules and regulations thereunder.
11. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Securities are qualified
for sale under the respective securities or Blue Sky laws of such states and
other jurisdictions, but we shall not assume any obligation or responsibility as
to the right of any Selected Dealer to sell the Securities in any state or other
jurisdiction or as to the eligibility of the Securities for sale therein. We
will, if requested, file a Further State Notice in respect of the Securities
pursuant to Article 23-A of the General Business Law of the State of New York.
12. No Selected Dealer is authorized to act as agent for any
Underwriter, or otherwise to act on our behalf, in offering or selling the
Securities to the public or otherwise or to furnish any information or make any
representation except as contained in the Prospectus.
13. Nothing will constitute the Selected Dealers an association or
other separate entity or partners with the Underwriters, or with each other, but
you will be responsible for your share of any liability or expense based on any
claim to the contrary. We shall not be under any liability for or in respect of
value, validity or form of the Securities, or the delivery of the certificates
for the Securities, or the performance by anyone of any agreement on its part,
or the qualification of the Securities for sale under the laws of any
jurisdiction, or for or in respect of any other matter relating to this
Agreement, except for lack of good faith and for obligations expressly assumed
by us or by the Underwriters in this Agreement and no obligation on our part
shall be implied herefrom. The foregoing provisions shall not be deemed a waiver
of any liability imposed under the 1933 Act.
14. Payment for the Securities sold to you hereunder is to be made at
the Public Offering Price less the above-mentioned selling concession on such
time and date as we may advise, at the office of Barron Chase Securities, Inc.,
7700 West Camino Real, Boca Raton, Florida 33433, Attention: Robert T. Kirk, by
wire transfer to the account of the Managing Underwriter against delivery of
certificates for the Securities so purchased. If such payment is not made at
such time, you agree to pay us interest on such funds at the prevailing broker's
loan rate.
15. Notices to us should be addressed to us at the offices of Barron
Chase Securities, Inc., 7700 West Camino Real, Boca Raton, Florida 33433,
Attention: Robert T. Kirk. Notices to you shall be deemed to have been duly
given if telephoned, telefaxed or mailed to you at the address to which this
Agreement or accompanying Selected Dealer Letter is addressed.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to the choice of law
or conflicts of law principles thereof.
17. If you desire to purchase any Securities and act as a Selected
Dealer, please confirm your application by signing and returning to us your
confirmation on the duplicate copy of the Selected Dealer Letter enclosed
herewith, even though you may have previously advised us thereof by telephone,
telefax or letter. Our signature hereon may be by facsimile.
Very truly yours,
BARRON CHASE SECURITIES, INC.
BY:
-------------------
Authorized Officer
3
<PAGE>
SELECTED DEALER LETTER
Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
We hereby subscribe for Shares of Precis Smart Card Systems,
Inc. in accordance with the terms and conditions stated in the foregoing
Selected Dealers Agreement and this Selected Dealer letter. We hereby
acknowledge receipt of the Prospectus referred to in the Selected Dealers
Agreement and Selected Dealer letter. We further state that in purchasing
said Shares we have relied upon said Prospectus and upon no other statement
whatsoever, whether written or oral. We confirm that we are a dealer actually
engaged in the investment banking or securities business and that we are
either (i) a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD"); or (ii) a dealer with its principal place
of business located outside the United States, its territories and its
possessions and not registered as a broker or dealer under the Securities
Exchange Act of 1934, as amended, who hereby agrees not to make any sales
within the United States, its territories or its possessions or to persons
who are nationals thereof or residents therein. As a member of the NASD, we
hereby agree to comply with all of the provisions of NASD Conduct Rules. If
we are a foreign Selected Dealer, we agree to comply with the provisions of
Rule 2740 of the NASD Conduct Rules, and if we are a foreign dealer and not a
member of the NASD, we agree to comply with the NASD's interpretation with
respect to free-riding and withholding, and agree to comply, as though we
were a member of the NASD, with provisions of Rules 2730 and 2750 of the NASD
Conduct Rules, and to comply with Rule 2420 of the NASD Conduct Rules as that
Rule applies to non-member foreign dealers.
Firm:
--------------------------
By:
----------------------------
(Name and Position)
Address:
-----------------------
Telephone No.:
-----------------------
Dated: ______________________, 2000
4
<PAGE>
EXHIBIT 1.3
PRECIS SMART CARD SYSTEMS, INC.
1,000,000 SHARES OF COMMON STOCK
AGREEMENT AMONG UNDERWRITERS
Boca Raton, Florida
_____________, 2000
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Dear Sirs:
1. UNDERWRITING AGREEMENT. We understand that Precis Smart Card
Systems, Inc. (the "Company"), proposes to enter into an underwriting agreement
attached hereto as Exhibit A (the "Underwriting Agreement") with Barron Chase
Securities, Inc. (the "Managing Underwriter") and the other underwriters named
in Schedule A to the Underwriting Agreement (the "Underwriters"), acting
severally and not jointly, with respect to the purchase of an aggregate of
1,000,000 Shares of Common Stock (the "Shares"). The Shares are hereinafter also
referred to as the "Securities". The Securities and the terms under which they
are to be offered for sale by the several Underwriters are more particularly
described in the Registration Statement, Underwriting Agreement and Prospectus.
Unless the context indicates otherwise, the term Securities shall also
include an additional 150,000 Shares (the "Option Securities"), all or any part
of which the Managing Underwriter and/or the Underwriters are entitled to
purchase from the Company upon exercise of the Managing Underwriter's
over-allotment option referred to in Section 2(b) of the Underwriting Agreement.
This is to confirm that we agree to purchase, in accordance with the
terms hereof and of the Underwriting Agreement, the number of Securities set
forth opposite our name in Schedule A, plus such number of Securities, if any,
which we may become obligated to purchase pursuant to Section 2(b) of the
Underwriting Agreement and Section 4 hereof ("our Securities"). The ratio which
the number of our Securities bears to the total number of Securities purchased
pursuant to the Underwriting Agreement is herein called "our underwriting
proportion".
2. REGISTRATION STATEMENT AND PROSPECTUS. We have heretofore received
and examined a copy of the registration statement, as amended to the date
hereof, and the related Prospectus in respect of the Securities, as filed with
the Securities and Exchange Commission. The registration statement as amended at
the time it becomes effective, including financial statements and exhibits, is
hereafter referred to as the "Registration Statement", and the Prospectus in the
form first filed with the Securities and Exchange Commission pursuant to its
Rule 424(b) after the Registration Statement becomes effective is referred to as
the "Prospectus".
We confirm that the information furnished to you by us for use in the
Registration Statement and in the Prospectus is correct and is not misleading
insofar as it relates to us. We consent to being named as an Underwriter in such
Registration Statement and we are willing to accept our responsibilities under
the Securities Act of 1933 (the "Act"), as a result thereof. We confirm that we
have authorized you to advise the Company on our behalf (a) as to the statements
to be included in any Preliminary Prospectus and in the Prospectus under the
heading "Underwriting" insofar as they relate to us and (b) that there is no
other information about us required to be stated in the Registration Statement
or Prospectus. We further confirm that, upon request by you as Managing
Underwriter, we have furnished a copy of any amended Preliminary Prospectus to
each person to whom we have furnished a copy of any previous Prospectus, and we
confirm that we have delivered, and we agree that we will deliver, all
preliminary and final Prospectuses required for compliance with the provisions
of Rule 15c2-8 under the Securities Exchange Act of 1934 (the "1934 Act").
1
<PAGE>
3. AUTHORITY OF THE MANAGING UNDERWRITER. We authorize you, acting as
Managing Underwriter of the Underwriters, to execute and deliver on our behalf,
the Underwriting Agreement, and to agree to any variation of its terms (except
as to the purchase price and the number of our Securities) which, in your
judgment, is not a variation which materially and adversely affects our rights
and obligations. We also authorize you, in your discretion and on our behalf,
with approval of counsel for the Underwriters, to approve the Prospectus and to
approve of, or object to, any further amendments to the Registration Statement,
or amendments or supplements to the Prospectus. We further authorize you to
exercise all the authority and discretion vested in the Underwriters and in you
by the provisions of the Underwriting Agreement and to take all such action as
you in your discretion may believe desirable to carry out the provisions of the
Underwriting Agreement and of this Agreement including the extension of any date
specified in the Underwriting Agreement, the exercise of any right of
cancellation or termination and to determine all matters relating to the public
advertisement of the Securities; provided, however, that, except with the
consent of Underwriters who shall have agreed to purchase in the aggregate 50%
or more of the Securities, no extension of the time by which the Registration
Statement is to become effective as provided in the Underwriting Agreement shall
be for a period in excess of two business days. We authorize you to take such
action as in your discretion may be necessary or desirable to effect the sale
and distribution of the Securities, including, without limiting the generality
of the foregoing, the right to determine the terms of any proposed offering, the
concession to Selected Dealers (as hereinafter defined) and the reallowance, if
any, to other dealers and the right to make the judgments provided for in the
Underwriting Agreement.
4. AUTHORITY OF MANAGING UNDERWRITER AS TO DEFAULTING UNDERWRITERS.
Until the termination of this Agreement, we authorize you to arrange for the
purchase by other persons, who may include you or any of the other Underwriters,
of any Securities not taken up by any defaulting Underwriter. In the event that
such arrangements are made, the respective amounts of the Securities to be
purchased by the non-defaulting Underwriters and by such other person or
persons, if any, shall be taken as the basis for all rights and obligations
hereunder; but this shall not in any way affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from its default,
nor shall any such default relieve any other Underwriter of any of its
obligations hereunder or under the Underwriting Agreement except as herein or
therein provided.
In the event of default by one or more Underwriters in respect of their
obligations (a) under the Underwriting Agreement to purchase the Securities
agreed to be purchased by them thereunder, (b) under this Agreement to take up
and pay for any Securities purchased or (c) to deliver any Securities sold or
over-allotted by you for the respective accounts of the Underwriters pursuant to
this Agreement, or to bear their respective share of expenses or liabilities
pursuant to this Agreement, and to the extent that arrangements shall not have
been made by you for any persons to assume the obligations of such defaulting
Underwriter or Underwriters, we agree to assume our proportionate share of the
obligations of each defaulting Underwriter (subject in the case of clause (a)
above to the limitations contained in the Underwriting Agreement) without
relieving any such defaulting Underwriter of its liability therefor.
5. OFFERING OF SECURITIES. We understand that you will notify us when
the public offering of the Securities is to be made and of the initial public
offering price. We hereby authorize you to fix the concession to dealers and the
reallowance to dealers and in your sole discretion after the public offering to
change the public offering price, the concession and the reallowance. The
offering price at any time in effect is hereinafter referred to as the "public
offering price". We agree that we will not offer any of the Securities for sale
at a price other than the public offering price or allow any discount therefrom
except as herein otherwise specifically provided.
We agree that public advertisement of the offering shall be made by you
on behalf of the Underwriters on such date as you shall determine. We have not
advertised the offering and will not do so until after such date. We understand
that any advertisement we may then make will be on our own responsibility and at
our own expense.
We authorize you to reserve and offer for sale to institutions and
other retail purchasers and to dealers (the "Selected Dealers") to be selected
by you (such dealers may include any Underwriter ) such of our Securities as you
in your sole discretion shall determine. Any such offering to Selected Dealers
may be made pursuant to a Selling Agreement, in the form attached hereto as
Exhibit B, or otherwise , as you may determine. The form of Selling Agreement
attached hereto as Exhibit B is satisfactory to us.
We authorize you to make purchases and sales of the Securities from or
to any Selected Dealers or Underwriters at the public offering price less all or
any part of the concession and, with your consent, any Underwriter
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may make purchases or sales of the Securities from or to any Selected Dealer or
Underwriter at the public offering price less all or any of the concession.
We understand that you will notify each Underwriter promptly upon the
release of the Securities for public offering as to the amount of Securities
reserved for sale to Selected Dealers and retail purchasers. Securities not so
reserved may be sold by each Underwriter for its own account, except that from
time to time you may, in your discretion, add to the Securities reserved for
sale to Selected Dealers and retail purchasers any Securities retained by an
Underwriter remaining unsold. We agree to notify you from time to time upon
request of the amount of our Securities retained by us remaining unsold. If all
the Securities reserved for offering to Selected Dealers and retail purchasers
are not promptly sold by you, any Underwriter may from time to time, with your
consent, obtain a release of all or any Securities of such Underwriter then
remaining unsold and Securities so released shall thereafter be deemed not to
have been reserved. Securities of any Underwriter so reserved which remain
unsold, or, if sold, have not been paid for at any time prior to the termination
of this Agreement may, in your discretion or upon the request of such
Underwriter, be delivered to such Underwriter for carrying purposes only, but
such Securities shall remain subject to redelivery to you upon demand for
disposition by you until this Agreement is terminated.
We agree that in connection with sales and offers to sell the
Securities, if any, made by us outside the United States or its territories or
possessions, (a) we will furnish to each person to whom any such offer or sale
is made such Prospectus, advertisement or other offering document containing
information relating to the Securities or the Company as may be required under
the laws of the jurisdiction in which such offer or sale is made and (b) we will
furnish to each person to whom any such offer is made a copy of the then current
Preliminary Prospectus and to each person to whom any such sale is made a copy
of the Prospectus referred to in the Underwriting Agreement (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto). Any Prospectus, advertisement or other offering document (other than
any such preliminary Prospectus or Prospectus) furnished by us to any person in
accordance with the preceding sentence and all such additional offering
material, if any, as we may furnish to any person (i) shall comply in all
respects with the laws of the jurisdiction in which it is so furnished, (ii)
shall be prepared and so furnished at our sole risk and expense, and (iii) shall
not contain information relating to the Securities or the Company which is
inconsistent in any respect with information contained in the then current
Preliminary Prospectus or in the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto), as the
case may be.
We recognize the importance of a broad distribution of the Securities
among bona fide investors and we agree to use our best efforts to obtain such
broad distribution and to that end, to the extent we deem practicable, to give
priority to small orders.
We agree that we will not sell to any account over which we exercised
discretionary authority any of the Securities which we have agreed to purchase
pursuant to the Underwriting Agreement.
6. COMPENSATION TO MANAGING UNDERWRITER. We authorize you to charge
to our account, as compensation for your services as Managing Underwriter in
connection with this offering, including the purchase from the Company of the
Securities and the management of the offering, an amount equal to $ per
Share in respect to our securities.
7. PAYMENT AND DELIVERY. At or about 9:00 a.m., Eastern Time, on the
Closing Dates (including the first Closing Date and any Option Closing Date, as
defined in the Underwriting Agreement), we agree to deliver to you at your
office by wire transfer to the account of the Managing Underwriter an amount
equal to the initial public offering price, less the concession to the Selected
Dealers in respect of that portion of our Securities which has been retained by
or released to us for direct sales.
In the event that our funds are not received by you when required, you
are authorized, in your discretion, but shall not be obligated, to make payment
for our account pursuant to the Underwriting Agreement by advancing your own
funds. Any such payment by you shall not relieve us from any of our obligations
hereunder or under the Underwriting Agreement.
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We authorize you to hold and deliver against payment any of our
Securities which have been sold or reserved for sale to Selected Dealers or
retail purchasers. Any of our Securities not sold or reserved by you as
aforesaid, will be available for delivery to us at your office as soon as
practicable after such Securities have been delivered to you.
Upon the termination of this Agreement, or prior thereto at your
discretion, you will deliver to us any of our Securities reserved by you for
sale to Selected Dealers or retail purchasers but not sold and paid for against
payment by us of an amount equal to the initial public offering price of such
Securities, less the concession to the Selected Dealers in respect thereof.
8. AUTHORITY TO BORROW. We authorize you to arrange loans for our
account and to execute and deliver any notes or other instruments in connection
therewith, and to pledge as security therefor all or any part of our Securities,
as you may deem necessary or advisable to carry out the purchase, carrying and
distribution of the Securities, and to advance your own funds, charging current
interest rates.
9. OVER-ALLOTMENT; STABILIZATION. We authorize you, for the account of
each Underwriter, prior to the termination of this Agreement, and for such
longer period as may be necessary to cover any short position incurred for the
accounts of the several Underwriters pursuant to this Agreement, (a) to
over-allot in arranging for sales of Securities to Selected Dealers and others
and, if necessary, to purchase Securities (whether pursuant to exercise of the
option set forth in Section 2(b) of the Underwriting Agreement or otherwise) at
such prices as you may determine for the purpose of covering such
over-allotments, and (b) for the purpose of stabilizing the market in the
Securities, to make purchases and sales of Securities on the open market or
otherwise, for long or short account, on a when-issued basis or otherwise, at
such prices, in such amounts and in such manner as you may determine; provided,
however, that at no time shall our net commitment, either for long or short
account, under this Section exceed 15% of the amount of our Securities. Such
purchases, sales and over-allotments shall be made for the respective accounts
of the several Underwriters as nearly as practicable to their respective
underwriting proportions. We agree to take up on demand at cost any Securities
so purchased for our account and deliver on demand any Securities so sold or
over-allotted for our account. We authorize you to sell for the account of the
Underwriters any Securities purchased pursuant to this Section, upon such terms
as you may deem advisable, and any Underwriter, including yourselves, may
purchase such Securities. You are authorized to charge the respective accounts
of the Underwriters with broker's commissions or dealer's mark-up on purchases
and sales effected by you.
If pursuant to the provisions of the preceding paragraph and prior to
the termination of this Agreement (or prior to such earlier date as you may have
determined) you purchase or contract to purchase for the account of any
Underwriter in the open market or otherwise any Securities which were retained
by, or released to, us for direct sale, or any Securities which may have been
issued in exchange for such Securities, we authorize you either to charge our
account with an amount equal to the concession to Selected Dealers with respect
thereto, which amount shall be credited against the cost of such Securities, or
to require us to repurchase such Securities at a price equal to the total cost
of such purchase, including transfer taxes and broker's commissions or dealer's
mark-up, if any. In lieu of such action you may, in your discretion, sell for
our account the Securities so purchased and debit or credit our account for the
loss or profit resulting from such sale.
You will notify us promptly if and when you engage in any stabilization
transaction pursuant to this Section or otherwise and will notify us of the date
of termination of stabilization. We agree to file with you any reports required
of us including "Not as Manager" reports pursuant to Rule 17a-2 under the 1934
Act not later than five business days following the date upon which
stabilization was terminated, and we authorize you to file on our behalf with
the Securities and Exchange Commission any reports required by such Rule.
10. LIMITATION ON TRANSACTIONS BY UNDERWRITERS. Except as permitted by
you, we will not during the term of this Agreement bid for, purchase, sell or
attempt to induce others to purchase or sell, directly or indirectly, any
Securities other than (i) as provided in the Underwriting Agreement and in this
agreement, (ii) purchases from or sales to dealers of the Securities at the
public offering price less all or any part of the reallowance to dealers or
(iii) purchases or sales by us of any Securities as broker or unsolicited orders
for the account of others.
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We represent that we have not participated in any transaction
prohibited by the preceding paragraph and that we have at all times complied
with the provisions of Regulation M applicable to this offering.
We may, with your prior consent, make purchases of the Securities from
and sales to other Underwriters at the public offering price, less all or any
part of the concession to dealers.
11. ALLOCATION AND PAYMENT OF EXPENSES. We understand that all expenses
of a general nature incurred by you, as Managing Underwriter, in connection with
the purchase, carrying, marketing and sale of the Securities shall be borne by
the Underwriters in accordance with their respective share of the underwriting
obligations. We authorize you to charge our account with our share, based on our
underwriting obligation, of the aforesaid expenses including all transfer taxes
paid of our behalf on sales or transfers made for our account.
As promptly as possible after the termination of this Agreement, the
accounts arising pursuant hereto shall be settled and paid. Your ascertainment
of all expenses and the apportionment thereof shall be conclusive.
Notwithstanding any settlement or settlements hereunder, we will remain liable
for our share of all expenses and liabilities which may be incurred by or the
accounts of the Underwriters, including any expenses and liabilities referred to
in Sections 13 and 14 hereof, which shall be determined as provided in this
Section.
12. TERMINATION. Unless this Agreement or any provision hereof is
earlier terminated by you and except for provisions herein that contemplate
obligations surviving the termination hereof as noted in the next paragraph,
this Agreement will terminate at the close of business on the 45th day after the
date hereof, but in your discretion may be extended by you for a further period
not exceeding 30 days with the consent of the Underwriters who have agreed to
purchase in the aggregate 50% or more of the Securities. No termination or
suspension pursuant to this Section shall affect your authority to cover any
short position under this Agreement.
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder shall cease, except (i) the mutual obligations to settle
accounts under Section 11, (ii) our obligation to pay any transfer taxes which
may be assessed and paid on account of any sales thereunder for our account,
(iii) our obligation with respect to purchases which may be made by you from
time to time thereafter to cover any short position incurred under this
Agreement, (iv) the provisions of Sections 13 and 14 and (v) the obligations of
any defaulting Underwriter, all of which shall continue until fully discharged.
13. LIABILITY OF MANAGING UNDERWRITER AND UNDERWRITERS. Neither as
Managing Underwriter nor individually shall you be under any liability
whatsoever to any other Underwriter nor shall you be under any liability in
respect of any matters connected herewith or action taken by you pursuant
hereto, except for the obligations expressly assumed by you in this Agreement.
You shall be under no liability for or in respect of the value for the
Securities or the validity of the form thereof, the Registration Statement, the
Prospectus, or agreements or other instruments executed by the Company or
others; or for or in respect of the delivery of the Securities; or for the
performance by the Company or others of any agreement on its or their part.
Nothing herein contained shall constitute the several Underwriters an
association, or partners with us or with each other, or, except as herein
expressly provided, render any Underwriter liable for the obligation of any
other Underwriter. The rights, obligations and liabilities of each of the
Underwriters are several, in accordance with their respective obligations, and
not joint. Notwithstanding any settlement of accounts under this Agreement, we
agree to pay our underwriting proportion of the amount of any claim demand or
liability which may be asserted against and discharged by the Underwriters or
any of them, based on the claim that the Underwriters constitute an association,
unincorporated business or other entity, and also to pay our underwriting
proportion of expenses approved by you incurred by the Underwriters, or any of
them, in contesting any such claims, demands or liabilities. If the Underwriters
shall be deemed to constitute a partnership for income tax purposes, it is the
intent of each Underwriter to be excluded from the application of Subchapter K,
Chapter 1, Subtitle A of the Internal Revenue Code of 1954, as amended. Each
Underwriter elects to be so excluded and agrees not to take any position
inconsistent with such election. Each Underwriter authorizes you, in your
discretion, to execute and file on behalf of the Underwriters such evidence of
election as may be required by the Internal Revenue Service.
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14. INDEMNIFICATION AND FUTURE CLAIMS.
(a) We agree to indemnify and hold harmless you and each other
Underwriter, and each person, if any, who controls you and such other
Underwriter within the meaning of Section 15 of the Securities Act of 1933, and
to reimburse their expenses, to the extent and upon the terms that we agree to
indemnify and hold harmless the Company and to reimburse expenses as set forth
in the Underwriting Agreement. Our indemnity agreement set forth in this Section
remain in full force and effect regardless of any investigation made by or on
behalf of such other Underwriter or controlling person and shall survive the
delivery of and payment for the Securities and the termination of this
Agreement.
(b) In the event that at any time any claim or claims shall be asserted
against you, as Managing Underwriter, or otherwise involving the Underwriters
generally, relating to the Registration Statement or any Preliminary Prospectus
or the Prospectus, as such may be from time to time amended or supplemented, the
public offering of the Securities or any of the transactions contemplated by
this Agreement, we authorize you to take such other action as you shall deem
necessary or desirable under the circumstances, including settlement of any such
claim or claims if such course of action shall be recommended by counsel
retained by you. We agree to pay to you on request, our underwriting proportion
of all expenses incurred by you (including, but not limited to, disbursements
and fees of counsel so retained) in investigating and defending against such
claim or claims and our underwriting proportion of any liability incurred by you
in respect of such claim or claims, whether such liability shall be the result
of a judgment or as a result of any such settlement.
15. TITLE TO SECURITIES. The Securities purchased by, or on behalf of,
the respective Underwriters shall remain the property of such Underwriters until
sold, and title to any such Securities shall not in any event pass to the
Managing Underwriter by virtue of any of the provisions of this Agreement.
16. BLUE SKY MATTERS. It is understood that you assume no
responsibility with respect to the right of any Underwriter or other person to
offer or to sell Securities in any jurisdiction, not withstanding any
information which you may furnish as to the jurisdictions under the securities
laws of which it is believed the Securities may be sold.
17. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Florida.
18. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of our
obligation under this Agreement and under the Underwriting Agreement will not
place us in violation of the net capital requirements of Rule 15c3-1 under the
1934 Act or of any applicable rules relating to capital requirements of any
securities exchange to which we are subject.
19. MISCELLANEOUS. Any notice from you to us shall be deemed to have
been duly given if telefaxed or telephoned, and confirmed by mail to us at the
address set forth in the Underwriters Questionnaire furnished by us to you. Any
notice from us to you shall be deemed to have been duly given if telefaxed or
telegraphed, and confirmed by mail to you at 7700 West Camino Real, Boca Raton,
Florida 33433, Attn: Robert T. Kirk.
We understand that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"). We hereby confirm that we are
actually engaged in the investment banking or securities business and are either
(i) a member in good standing of the NASD or (ii) a dealer with its principal
place of business located outside the United States, its territories and its
possession and not registered as a broker or dealer under the 1934 Act who
agrees not to make any sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein (except
that we may participate in sales to Selected Dealers and others under Section 5
of this Agreement). We hereby agree that if we are members of the NASD, we will
comply with all of the provisions of the NASD Conduct Rules. If we are a foreign
dealer, we agree to comply with Rule 2740 of the NASD Conduct Rules. If we are a
foreign dealer and not a member of the NASD, we agree to comply with the NASD's
interpretation with respect to free-riding and withholding, as though we were a
member of the NASD, with the provisions of Rules 2730
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and 2750 of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD
Conduct Rules as that applies to a non-member foreign dealer. In connection with
sales and offers to sell Securities made by us outside the United States, its
territories and possessions (i) we will either furnish to each person to whom
any such sale or offer is made a copy of the then current Preliminary Prospectus
or the Prospectus, as the case may be, or inform such person that such
Preliminary Prospectus or Prospectus will be available upon request, and (ii) we
will furnish to each person to whom any such sale or offer is made such
Prospectus, advertisement or other offering document containing information
relating to the Securities or the Company as may be required under the law of
the jurisdiction in which such sale or offer is made. Any Prospectus,
advertisement or other offering document furnished by us to any person in
accordance with the preceding sentence and any such additional offering material
as we may furnish to any person (i) shall comply in all respects with the law of
the jurisdiction in which it is so furnished, (ii) shall be prepared and so
furnished at our sole risk and expenses and (iii) shall not contain information
relating to the Securities or the Company which is inconsistent in any respect
with the information contained in the then current preliminary Prospectus or in
the Prospectus, as the case may be.
We understand that, in consideration of your services in connection
with the public offering of the Securities, the Company has agreed with you
individually, and not as Managing Underwriter of the Underwriters (a) to sell to
you the Underwriter's Warrants referred to in the Underwriting Agreement for the
sum of $10; (b) to pay to you a non-accountable expense allowance referred to in
the Underwriting Agreement; (c) to pay you a financial advisory fee referred to
in the Underwriting Agreement; and (d) to enter into the Merger and Acquisition
Agreement (the "M/A Agreement") referred to in the Underwriting Agreement. In
addition, you may, at your sole discretion, elect to exercise the over-allotment
option individually. We confirm to you that we shall make no claim to the
Underwriter's Warrants (or any offering of the Company's securities related
thereto, or any right to participate in any capacity in any offering resulting
therefrom), any rights related thereto, the Company's securities underlying the
Underwriter's Warrants, the non-accountable expense allowance, the financial
advisory fee, or, to the over-allotment option to the extent you elect to
exercise such option individually, or the M/A Agreement. You confirm to us that
we shall have no obligation or liabilities with respect to the purchase of the
Underwriter's Warrants, the exercise thereof, the Company's securities
underlying the Underwriter's Warrants (or any offering of the Company's
securities related thereto, unless we shall subsequently agree to become an
underwriter for, or otherwise participate in any such offering) or the
non-accountable expense allowance, the financial advisory agreement, the M/A
Agreement, or, the over-allotment option, to the extent you elect to exercise
such option individually.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
By:
------------------------------------------------------
(Attorney-in-fact for each of the several Underwriters
named in Schedule A to the attached Underwriting
Agreement.)
Confirmed as of the date first above written:
BARRON CHASE SECURITIES, INC.
By:
-------------------------
Robert T. Kirk, President
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby
irrevocably constitute and appoint Robert T. Kirk and/or Barron Chase
Securities, Inc., the true and lawful agent and attorney-in-fact of the
undersigned with respect to all matters arising in connection with the
undersigned's acting as one of the Underwriters of the proposed offering of an
aggregate of
1,000,000 Shares of Common Stock
of
PRECIS SMART CARD SYSTEMS, INC.
(such securities being more fully described in the Registration Statement No.
333-86643 filed by Precis Smart Card Systems, Inc. pursuant to the Securities
Act of 1933) with full power and authority to execute and deliver for and on
behalf of the undersigned all such agreements, consents and documents in
connection therewith as said agent and attorney-in-fact may deem advisable. The
undersigned hereby gives to said agent and attorney-in-fact full power and
authority to act in the premises, including, but not limited to, the power an
authority to execute and deliver an Agreement Among Underwriters relating to
such financing, to agree to increase or decrease the size of the offering to an
amount as shall be approved by Barron Chase Securities, Inc., as Managing
Underwriter of the Underwriters, and to appoint a substitute or substitutes to
act hereunder with the same power and authority as said agent and
attorney-in-fact would have if personally acting. The undersigned hereby
ratifies and confirms all that said agent and attorney-in-fact, or any
substitute or substitutes, may do by virtue hereof.
WITNESS the due execution hereof at ___________________________________
(Street) (City)
this _______ day of ___________________, 2000.
----------------------------------
Firm Name
----------------------------------
By:
- ----------------------------- -------------------------------
Witness Partner, Officer or
Sole Proprietor
(indicate which)
CORPORATE ACKNOWLEDGEMENT
STATE OF )
) ss.:
COUNTY OF )
On this ________ day of _________________, 2000, before me personally
came ____________________________________, to me know, who being by me duly
sworn, deposes and say that he resides at No._________________________________:
that he is the ________ ___________________ of ________________________________,
the aforementioned corporation, which executed the foregoing instrument; that
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he knows the seal of said corporation; that the seal affixed to said instrument
is such corporate seal; and that it was so affixed by order the Board of
Directors of said corporation; and that he signed his name thereto by like
order.
-------------------------------
Notary Public
My Commission Expires:
- --------------------------
PARTNERSHIP ACKNOWLEDGEMENT
STATE OF )
) ss.:
COUNTY OF )
On this _____ day of _______________, 2000, before me personally came
________________, one of the members of the firm of _________________________,
to me known and known to me to be the individual who executed the foregoing
instrument and acknowledged that he executed, and was duly authorized to
execute, the same as and for the act and deed of said firm.
-------------------------------
Notary Public
My Commission Expires:
- --------------------------
Unless prior to 5:00 p.m. Eastern Time, on the date immediately
preceding the proposed public offering date, Robert T. Kirk of the Syndicate
Department of Barron Chase Securities, Inc., 7700 West Camino Real, Boca Raton,
Florida 33433 receives a telegram or letter from you revoking the Power of
Attorney, the power and authority granted by such Power of Attorney may be
exercised in accordance with the terms thereof.
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EXHIBIT 4.2
UNDERWRITER'S WARRANT AGREEMENT (the "Underwriter's Warrant Agreement"
or "Agreement"), dated as of __________, 2000, between Precis Smart Card
Systems, Inc. (the "Company") and Barron Chase Securities, Inc. (the "Managing
Underwriter").
W I T N E S S E T H:
WHEREAS, the Managing Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof between the Company and the Managing Underwriter, to act as the Managing
Underwriter in connection with the Company's proposed public offering of
1,000,000 shares of the Company's Common Stock at $6.00 per share (the "Public
Offering"); and
WHEREAS, the Company proposes to issue to the Managing Underwriter
and/or persons related to the Managing Underwriter as those persons are defined
in Rule 2710 of the NASD Conduct Rules (the "Holder"), 100,000 warrants ("Common
Stock Underwriter Warrants") to purchase 100,000 shares of the Company's Common
Stock (the "Shares"). The "Common Stock Underwriter Warrants" are also referred
to as the "Warrants". The "Shares" are also referred to as the "Warrant
Securities"; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Holders in consideration for, and as part of
the compensation in connection with, the Managing Underwriter acting as Managing
Underwriter pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment to the
Company of TEN DOLLARS AND NO CENTS ($10.00), the agreements herein set forth
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. GRANT AND PERIOD.
The above recitals are true and correct. The Public Offering has been
registered under a Registration Statement on Form SB-2 (File No. 333-86643) and
declared effective by the Securities and Exchange Commission (the "SEC" or
"Commission") on __________, 2000 (the "Effective Date"). This Agreement,
relating to the purchase of the Warrants, is entered into pursuant to the
Underwriting Agreement between the Company and the Managing Underwriter in
connection with the Public Offering.
Pursuant to the Warrants, the Holders are hereby granted the right to
purchase from the Company, at any time during the period commencing on the
Effective Date and expiring five (5) years thereafter (the "Expiration Time"),
up to 100,000 Shares at an initial exercise price (subject to adjustment as
provided in Article 8 hereof) of $9.00 per share (150% of the public offering
price) (the "Exercise Price" or "Purchase Price"), subject to the terms and
conditions of this Agreement.
Except as specifically otherwise provided herein, the Shares
constituting the Warrant Securities shall bear the same terms and conditions as
such securities described under the caption "Description of Securities" in the
Registration Statement, and as designated in the Company's Articles of
Incorporation and any amendments thereto, and the Holders shall have
registration rights under the Securities Act of 1933, as amended (the "Act"),
for the Warrants and the Shares, as more fully described in paragraph seven (7)
of this Underwriter's Warrant Agreement.
2. WARRANT CERTIFICATES.
The warrant certificates (the "Warrant Certificate") delivered and to
be delivered pursuant to this Agreement shall be in the form set forth in the
form of Warrant Certificate, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
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3. EXERCISE OF WARRANT.
3.1 FULL EXERCISE.
(i) The Holder may effect a cash exercise of the Common Stock
Underwriter Warrants by surrendering to the Company the Warrant
Certificate, together with a Subscription in the form of Exhibit "A"
attached thereto, duly executed by such Holder, at any time prior to
the Expiration Time, at the Company's principal office, accompanied by
payment in cash or by certified or official bank check payable to the
order of the Company in the amount of the aggregate purchase price (the
"Aggregate Price"), subject to any adjustments provided for in this
Agreement. The aggregate price hereunder for each Holder shall be equal
to the exercise price as set forth in Section six (6) hereof multiplied
by the number of Shares that are the subject of each Holder's Warrant
(as adjusted as hereinafter provided).
(ii) The Holder hereof may effect a cashless exercise of the
Common Stock Underwriter Warrants by delivering the Warrant Certificate
to the Company together with a Subscription in the form of Exhibit "B"
attached thereto, duly executed by such Holder, in which case no
payment of cash will be required. Upon such cashless exercise, the
number of Shares to be purchased by each Holder hereof shall be
determined by dividing: (i) the number obtained by multiplying the
number of Shares that are the subject of each Holder's Warrant
Certificate by the amount, if any, by which the then Market Value (as
hereinafter defined) exceeds the Purchase Price; by (ii) the then per
share Market Value or Purchase Price, whichever is greater. In no event
shall the Company be obligated to issue any fractional securities and,
at the time it causes a certificate or certificates to be issued, it
shall pay the Holder in lieu of any fractional securities or shares to
which such Holder would otherwise be entitled, by the Company check, in
an amount equal to such fraction multiplied by the Market Value. The
Market Value shall be determined on a per Share basis as of the close
of the business day preceding the exercise, which determination shall
be made as follows: (a) if the Common Stock is listed for trading on a
national or regional stock exchange or is included on the NASDAQ
National Market or Small-Cap Market, the average closing sale price
quoted on such exchange or the NASDAQ National Market or Small-Cap
Market which is published in THE WALL STREET JOURNAL for the ten (10)
trading days immediately preceding the date of exercise, or if no trade
of the Common Stock shall have been reported during such period, the
last sale price so quoted for the next day prior thereto on which a
trade in the Common Stock was so reported; or (b) if the Common Stock
is not so listed, admitted to trading or included, the average of the
closing highest reported bid and lowest reported ask price as quoted on
the National Association of Securities Dealer's OTC Bulletin Board or
in the "pink sheets" published by the National Daily Quotation Bureau
for the first day immediately preceding the date of exercise on which
the Common Stock is traded.
3.2 PARTIAL EXERCISE. The securities referred to in paragraph 3.1 above
also may be exercised from time to time in part by surrendering the Warrant
Certificate in the manner specified in Section 3.1 hereof, except that with
respect to a cash exercise, the Purchase Price payable shall be equal to the
number of securities being purchased hereunder multiplied by the per security
Purchase Price, subject to any adjustments provided for in this Agreement. Upon
any such partial exercise, the Company, at its expense, will forthwith issue to
the Holder hereof a new Warrant Certificate or Warrants of like tenor calling in
the aggregate for the number of securities (as constituted as of the date
hereof) for which the Warrant Certificate shall not have been exercised, issued
in the name of the Holder hereof or as such Holder (upon payment by such Holder
of any applicable transfer taxes) may direct.
4. ISSUANCE OF CERTIFICATES.
Upon the exercise of the Warrants, the issuance of certificates for the
shares of Common Stock and/or other securities shall be made forthwith (and in
any event within three (3) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as
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may be directed by, the Holder thereof; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Common Stock and/or other securities shall be executed on behalf of the
Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company, attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary of the Company. Warrant Certificates shall be
dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS.
The Holder of a Warrant Certificate, by acceptance thereof, covenants
and agrees that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one
(1) year from the Effective Date of the Public Offering, except (a) to officers
of the Managing Underwriter or to officers and partners of the other
Underwriters or Selected Dealers participating in the Public Offering; (b) by
will; or (c) by operation of law.
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICES.
The initial exercise price of each Common Stock Underwriter Warrant
shall be $9.00 per share (150% of the public offering price). The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 8 hereof.
6.2 EXERCISE PRICE.
The term "Exercise Price" herein shall mean the initial exercise price
or the adjusted exercise price, depending upon the context.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933.
The Warrants and the Warrant Securities (collectively the "Registrable
Securities") have been registered under the Securities Act of 1933, as amended
(the "Act"). Upon exercise, in part or in whole, of the Warrants, certificates
representing the Shares shall bear the following legend in the event there is no
current registration statement effective with the Commission at such time as to
such securities:
The securities represented by this certificate may not be offered or
sold except pursuant to (i) an effective registration statement under
the Act, (ii) to the extent applicable, Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of securities),
or (iii) an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act and applicable state securities laws is
available.
7.2 PIGGYBACK REGISTRATION.
If, at any time commencing after the Effective Date of the offering and
expiring seven (7) years thereafter, the Company prepares and files a
post-effective amendment to the Registration Statement, or a new Registration
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Statement under the Act, or files a Notification on Form 1-A or otherwise
registers securities under the Act, or files a similar disclosure document with
the Commission (collectively the "Registration Documents") as to any of its
securities under the Act (other than under a Registration Statement pursuant to
Form S-8), it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such Registration Document, to the Managing
Underwriter and to all other Holders of the Registrable Securities of its
intention to do so. If the Managing Underwriter and/or other Holders of the
Registrable Securities notify the Company within twenty (20) days after receipt
of any such notice of its or their desire to include any such Registrable
Securities in such proposed Registration Documents, the Company shall afford the
Managing Underwriter and such Holders of such Registrable Securities the
opportunity to have any Registrable Securities registered under such
Registration Documents or any other available Registration Document.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 DEMAND REGISTRATION.
(a) At any time commencing one (1) year after the Effective Date of the
Public Offering, and expiring four (4) years thereafter, the Holders of
Registrable Securities representing more than 50% of such securities at that
time outstanding shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Commission, on one
occasion, a registration statement and/or such other documents, including a
prospectus, and/or any other appropriate disclosure document as may be
reasonably necessary in the opinion of both counsel for the Company and counsel
for the Managing Underwriter and Holders, in order to comply with the provisions
of the Act, so as to permit a public offering and sale of their respective
Registrable Securities for nine (9) consecutive months (or such longer period of
time as permitted by the Act) by such Holders and any other Holders of any of
the Registrable Securities who notify the Company within twenty (20) days after
receipt of notice by registered or certified mail from the Company of such
request. A Demand Registration shall not be counted as a Demand Registration
hereunder until such Demand Registration has been declared effective by the SEC
and maintained continuously effective for a period of at least nine months or
such shorter period when all Registrable Securities included therein have been
sold in accordance with such Demand Registration, provided that a Demand
Registration shall be counted as a Demand Registration hereunder if the Company
ceases its efforts in respect of such Demand Registration at the request of the
majority Holders making the demand for a reason other than a material and
adverse change in the business, assets, prospects or condition (financial or
otherwise) of the Company and its subsidiaries taken as a whole.
(b) The Company covenants and agrees to give written notice by
registered or certified mail of any registration request under this Section 7.3
by the majority of the Holders to all other registered Holders of any of the
Registrable Securities within ten (10) days from the date of the receipt of any
such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing one (1) year after
the Effective Date of the offering, and expiring four (4) years thereafter, the
Holders of a majority of the Registrable Securities shall have the right,
exercisable by written request to the Company, to have the Company prepare and
file, on one occasion, with the Commission a registration statement or any other
appropriate disclosure document so as to permit a public offering and sale for
nine (9) consecutive months (or such longer period of time as permitted by the
Act) by any such Holder of Registrable Securities; provided, however, that the
provisions of Section 7.4(b) hereof shall not apply to any such registration
request and registration and all costs incident thereto shall be at the expense
of the Holder or Holders participating in the offering pro-rata.
(d) Any written request by the Holders made pursuant to this Section
7.3 shall:
(i) specify the number of Registrable Securities which the
Holders intend to offer and sell and the minimum price at which the
Holders intend to offer and sell such securities;
(ii) state the intention of the Holders to offer such
securities for sale;
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(iii) describe the intended method of distribution of such
securities; and
(iv) contain an undertaking on the part of the Holders to
provide all such information and materials concerning the Holders and
take all such action as may be reasonably required to permit the
Company to comply with all applicable requirements of the Commission
and to obtain acceleration of the effective date of the registration
statement.
(e) In the event the Company receives from the Holders of any
Registrable Securities representing more than 50% of such securities at that
time outstanding, a request that the Company effect a registration on Form S-3
with respect to the Registrable Securities and if Form S-3 is available for such
offering, the Company shall, as soon as practicable, effect such registration as
would permit or facilitate the sale and distribution of the Registrable
Securities as are specified in the request. All expenses incurred in connection
with a registration requested pursuant to this Section shall be borne by the
Company. Registrations effected pursuant to this Section 7.3(e) shall not be
counted as registrations pursuant to Section 7.3(a) and 7.3(c) hereof.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION.
In connection with the filing of any Registration Document by the
Company, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand pursuant to
Section 7.3, and shall use its best efforts to have any such registration
statement declared effective at the earliest practicable time. The Company will
promptly notify each seller of such Registrable Securities and confirm such
advice in writing, (i) when such registration statement becomes effective, (ii)
when any post-effective amendment to such registration statement becomes
effective and (iii) of any request by the SEC for any amendment or supplement to
such registration statement or any prospectus relating thereto or for additional
information.
The Company shall furnish to each seller of such Registrable Securities
such number of copies of such registration statement and of each such amendment
and supplement thereto (in each case including each preliminary prospectus and
summary prospectus) in conformity with the requirements of the Act, and such
other documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities by such seller.
(b) The Company shall pay all costs (excluding transfer taxes, if any,
and fees and expenses of Holder(s)' counsel and the Holder's pro-rata portion of
the selling discount or commissions), fees and expenses in connection with all
registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and
expenses in connection with any registration statement filed pursuant to Section
7.3(c). If the Company shall fail to comply with the provisions of Section
7.3(a), the Company shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any or all special and consequential
damages sustained by the Holder(s) requesting registration of their Registrable
Securities.
(c) The Company shall prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be reasonably necessary to keep such registration statement
effective for at least nine months (or such longer period as permitted by the
Act), and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the seller or
sellers of Registrable Securities set forth in such registration statement. If
at any time the SEC should institute or threaten to institute any proceedings
for the purpose of issuing a stop order suspending the effectiveness of any such
registration statement, the Company will promptly notify each seller of such
Registrable Securities and will use all reasonable efforts to prevent the
issuance of any such stop order or to obtain the withdrawal thereof as soon as
possible. The Company will use its good faith reasonable efforts and take all
reasonably necessary action which may be required in qualifying or registering
the Registrable Securities included in a registration statement for offering and
sale under the securities or blue sky laws of such states as reasonably are
required by the Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business
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under the laws of any such jurisdiction. The Company shall use its good faith
reasonable efforts to cause such Registrable Securities covered by such
registration statement to be registered with or approved by such other
governmental agencies or authorities of the United States or any State thereof
as may be reasonably necessary to enable the seller or sellers thereof to
consummate the disposition of such Registrable Securities.
(d) The Company shall indemnify the Holder(s) of the Registrable
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Managing Underwriter as contained in the
Underwriting Agreement.
(e) If requested by the Company prior to the filing of any registration
statement covering the Registrable Securities, each of the Holder(s) of the
Registrable Securities to be sold pursuant to a registration statement, and
their successors and assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from written information furnished by
such Holder, or their successors or assigns, for specific inclusion in such
registration statement to the same extent and with the same effect as the
provisions contained in the Underwriting Agreement pursuant to which the
Managing Underwriter has agreed to indemnify the Company, except that the
maximum amount which may be recovered from each Holder pursuant to this
paragraph or otherwise shall be limited to the amount of net proceeds received
by the Holder from the sale of the Registrable Securities.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the filing of any registration
statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any registration statement
filed pursuant to Section 7.3 hereof without the prior written consent of the
Holders of the Registrable Securities representing a majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall deliver promptly to each Holder participating in
the offering and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
non-privileged memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit each Holder and
underwriter to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration statement
as it deems reasonably necessary to comply with applicable securities laws or
rules of the National Association of Securities Dealers, Inc. ("NASD"). Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such Holder shall reasonably request.
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(j) With respect to a registration statement filed pursuant to Section
7.3, the Company, if requested, shall enter into an underwriting agreement with
the managing underwriter, reasonably satisfactory to the Company, selected for
such underwriting by Holders holding a majority of the Registrable Securities
requested to be included in such underwriting. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders, if required by the
underwriter to be parties to any underwriting agreement relating to an
underwritten sale of their Registrable Securities, may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) Notwithstanding the provisions of paragraph 7.2 or paragraph 7.3 of
this Agreement, the Company shall not be required to effect or cause the
registration of Registrable Securities pursuant to paragraph 7.2 or paragraph
7.3 hereof if, within thirty (30) days after its receipt of a request to
register such Registrable Securities (i) counsel for the Company delivers an
opinion to the Holders requesting registration of such Registrable Securities,
in form and substance satisfactory to counsel to such Holder(s), to the effect
that the entire number of Registrable Securities proposed to be sold by such
Holder(s) may otherwise be sold, in the manner proposed by such Holder(s),
without registration under the Securities Act, or (ii) the SEC shall have issued
a no-action position, in form and substance satisfactory to counsel for the
Holder(s) requesting registration of such Registrable Securities, to the effect
that the entire number of Registrable Securities proposed to be sold by such
Holder(s) may be sold by it, in the manner proposed by such Holder(s), without
registration under the Securities Act.
(l) After completion of the Public Offering, the Company shall not,
directly or indirectly, enter into any merger, business combination or
consolidation in which (a) the Company shall not be the surviving corporation
and (b) the stockholders of the Company are to receive, in whole or in part,
capital stock or other securities of the surviving corporation, unless the
surviving corporation shall, prior to such merger, business combination or
consolidation, agree in writing to assume the obligations of the Company under
this Agreement, and for that purpose references hereunder to "Registrable
Securities" shall be deemed to include the securities which the Holders would be
entitled to receive in exchange for Registrable Securities under any such
merger, business combination or consolidation, provided that to the extent such
securities to be received are convertible into shares of Common Stock of the
issuer thereof, then any such shares of Common Stock as are issued or issuable
upon conversion of said convertible securities shall also be included within the
definition of "Registrable Securities".
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1 ADJUSTMENT FOR DIVIDENDS, SUBDIVISIONS, COMBINATIONS OR
RECLASSIFICATIONS.
In case the Company shall (a) pay a dividend or make a distribution in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (b) subdivide its outstanding shares of Common Stock into a
greater number of shares, (c) combine its outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of its shares
of Common Stock any shares of capital stock of the Company; then, and in each
such case, the per share Exercise Price and the number of Warrant Securities in
effect immediately prior to such action shall be adjusted so that the Holder of
this Warrant thereafter upon the exercise hereof shall be entitled to receive
the number and kind of shares of the Company which such Holder would have owned
immediately following such action had this Warrant been exercised immediately
prior thereto. An adjustment made pursuant to this Section shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this Section, the Holder of this Warrant shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive) shall determine the allocation of the adjusted Exercise Price
between or among shares of such class of capital stock.
Immediately upon any adjustment of the Exercise Price pursuant to this
Section, the Company shall send written notice thereof to the Holder of Warrant
Certificates (by first class mail, postage prepaid), which notice shall
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state the Exercise Price resulting from such adjustment, and any increase or
decrease in the number of Warrant Securities to be acquired upon exercise of the
Warrants, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
8.2 ADJUSTMENT FOR REORGANIZATION, MERGER OR CONSOLIDATION.
In case of any reorganization of the Company or consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental Warrant Agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such reorganization, consolidation, merger,
conveyance, sale or transfer. Such supplemental Warrant Agreement shall provide
for adjustments which shall be identical to the adjustments provided in Section
8 and such registration rights and other rights as provided in this Agreement.
The Company shall not effect any such consolidation, merger, or similar
transaction as contemplated by this paragraph, unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing, receiving, or leasing such assets or other appropriate corporation
or entity shall assume, by written instrument executed and delivered to the
Holders, the obligation to deliver to the Holders, such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase, and to perform the other obligations of the
Company under this Agreement. The above provision of this Subsection shall
similarly apply to successive consolidations or successively whenever any event
listed above shall occur.
8.3 DIVIDENDS AND OTHER DISTRIBUTIONS.
In the event that the Company shall at any time prior to the exercise
of all of the Warrants distribute to its stockholders any assets, property,
rights, evidences of indebtedness, securities (other than a distribution made as
a cash dividend payable out of earnings or out of any earned surplus legally
available for dividends under the laws of the jurisdictions of incorporation of
the Company), whether issued by the Company or by another, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such
distribution as if the Warrants had been exercised immediately prior to such
distribution. At the time of any such distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
subsection or an adjustment to the Exercise Price, which shall be effective as
of the day following the record date for such distribution.
8.4 ADJUSTMENT IN NUMBER OF SECURITIES.
Upon each adjustment of the Exercise Price pursuant to the provisions
of this Section 8, the number of securities issuable upon the exercise of each
Warrant shall be adjusted to the nearest full amount by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of securities issuable upon exercise of the Warrants immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
8.5 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES.
No adjustment of the Exercise Price shall be made if the amount of said
adjustment shall be less than 5 cents ($.05) per Share, provided, however, that
in such case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with the
next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least 5 cents ($.05) per Share.
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8.6 ACCOUNTANT'S CERTIFICATE OF ADJUSTMENT.
In each case of an adjustment or readjustment of the Exercise Price or
the number of any securities issuable upon exercise of the Warrants, the
Company, at its expense, shall cause independent certified public accountants of
recognized standing selected by the Company (who may be the independent
certified public accountants then auditing the books of the Company) to compute
such adjustment or readjustment in accordance herewith and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to any Holder of the Warrants at the Holders'
address as shown on the Company's books. The certificate shall set forth such
adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based including, but not limited to, a statement
of (i) the Exercise Price at the time in effect, and (ii) the number of
additional or fewer securities and the type and amount, if any, of other
property which at the time would be receivable upon exercise of the Warrants.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTEREST.
The Company shall not be required to issue certificates representing
fractions of shares of Common Stock upon the exercise of the Warrants, nor shall
it be required to issue script or pay cash in lieu of fractional interests, it
being the intent of the parties that all fractional interests may be eliminated,
at the Company's option, by rounding any fraction up to the nearest whole number
of shares of Common Stock or other securities, properties or rights, or in lieu
thereof paying cash equal to such fractional interest multiplied by the current
value of a share of Common Stock.
11. RESERVATION, VALIDITY AND LISTING.
The Company covenants and agrees that during the exercise period, the
Company shall at all times reserve and keep available out of its authorized
shares of Common Stock, solely for the purpose of issuance upon the exercise of
the Warrants, such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise under this Warrant
Certificate. The Company covenants and agrees that, upon exercise of the
Warrants, and payment of the Exercise Price therefor, all shares of Common Stock
and other securities issuable upon such exercise shall be duly authorized,
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants to be listed and quoted (subject to official
notice of issuance) on all securities exchanges and systems on which the Common
Stock are then listed and/or quoted, including Nasdaq.
12. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Agreement shall be construed as conferring
upon the Holders of the Warrants the right to vote or to consent or to receive
notice as a stockholder in respect of any meetings of stockholders for the
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election of directors or any other matter, or as having any rights whatsoever as
a stockholder of the Company. If, however, at any time prior to the expiration
of the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date of the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notices shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly given when sent (i) by
facsimile AND (ii) delivered personally or by overnight courier or mailed by
registered or certified mail, return receipt requested:
(a) If to the registered Holder of any of the Registrable
Securities, to the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth below or to
such other address as the Company may designate by notice to the
Holders.
Larry E. Howell
Chief Executive Officer
Precis Smart Card Systems, Inc.
11032 Quail Creek Road, Suite 108
Oklahoma City, OK 73120
With copies to: Michael E. Dunn, Esq.
Dunn Swan & Cunningham
2800 Oklahoma Tower
210 Park Avenue
Oklahoma City, OK 73102-5604
and
David A. Carter, P.A.
10
<PAGE>
2300 Glades Road, Suite 210W
Boca Raton, Florida 33431
15. ENTIRE AGREEMENT: MODIFICATION.
This Agreement (and the Underwriting Agreement to the extent
applicable) contain the entire understanding between the parties hereto with
respect to the subject matter hereof, and the terms and provisions of this
Agreement may not be modified, waived or amended except in a writing executed by
the Company and the Holders of at least a majority of Registrable Securities
(based on underlying numbers of shares of Common Stock). Notice of any
modification, waiver or amendment shall be promptly provided to any Holder not
consenting to such modification, waiver or amendment.
16. SUCCESSORS.
All the covenants and provisions of this Agreement shall be binding
upon and inure to the benefit of the Company, the Holders and their respective
successors and assigns hereunder.
17. TERMINATION.
This Agreement shall terminate at the earlier of (i) the public sale of
all of the Registrable Securities, or (ii) at the close of business on
__________, 2007. Notwithstanding the foregoing, the indemnification provisions
of Section 7 shall survive such termination.
18. GOVERNING LAW; SUBMISSION TO JURISDICTION.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Florida and for all
purposes shall be construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts of laws. The
Company, the Managing Underwriter and the Holders hereby agree that any action,
proceeding or claim arising out of, or relating in any way to, this Agreement
shall be brought and enforced in a federal or state court of competent
jurisdiction with venue only in the Fifteenth Judicial Circuit Court in and for
Palm Beach County, Florida or the United States District Court for the Southern
District of Florida, West Palm Beach Division, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company, the Managing
Underwriter and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. A party to this Agreement named as
a Defendant in any action brought in connection with this Agreement in any court
outside of the above named designated county or district shall have the right to
have the venue of said action changed to the above designated county or district
or, if necessary, have the case dismissed, requiring the other party to refile
such action in an appropriate court in the above designated county or federal
district.
19. SEVERABILITY.
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
20. CAPTIONS.
The caption headings of the Sections of this Agreement are for
convenience of reference only and are not intended, nor should they be construed
as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT.
11
<PAGE>
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Managing Underwriter and any other
registered Holder(s) of the Warrant Certificates or Registrable Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Managing Underwriter and any other Holder(s) of the Warrant Certificates or
Registrable Securities.
22. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
IN WITNESS HEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
PRECIS SMART CARD SYSTEMS, INC.
BY:
-----------------------------------
Larry E. Howell
Chief Executive Officer
Attest:
- ------------------------------
Mark R. Kidd, Secretary
BARRON CHASE SECURITIES, INC.
By:
-----------------------------------
Robert Kirk, President
12
<PAGE>
PRECIS SMART CARD SYSTEMS, INC.
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M, EASTERN TIME ON ___________, 2004
NO. W-____ _____________ Common Stock
Underwriter
Warrants
This Warrant Certificate certifies that _____________, or registered
assigns, is the registered holder of_________ Common Stock Underwriter
Warrants of PRECIS SMART CARD SYSTEMS, INC. (the "Company"). Each Common
Stock Underwriter Warrant permits the Holder hereof to purchase initially, at
any time from __________, 2000 ("Purchase Date") until 5:30 p.m. Eastern Time
on __________, 2004 ("Expiration Date"), one (1) share of the Company's
Common Stock at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $9.00 per share (150% of the public
offering price).
Any exercise of Common Stock Underwriter Warrants shall be effected by
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Underwriter's Warrant Agreement dated as of ________, 2000, between
the Company and Barron Chase Securities, Inc. (the "Underwriter's Warrant
Agreement"). Payment of the Exercise Price shall be made by certified check or
official bank check in New York Clearing House funds payable to the order of the
Company in the event there is no cashless exercise pursuant to Section 3.1(ii)
of the Underwriter's Warrant Agreement. The Common Stock Underwriter Warrants
are also referred to as "Warrants".
No Warrant may be exercised after 5:30 p.m., Eastern Time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Underwriter's Warrant
Agreement, which Underwriter's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation or rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
13
<PAGE>
The Underwriter's Warrant Agreement provides that upon the occurrence
of certain events, the Exercise Price and the type and/or number of the
Company's securities issuable thereupon may, subject to certain conditions, be
adjusted. In such event, the Company will, at the request of the holder, issue a
new Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Underwriter's Warrant Agreement.
Upon due presentment for registration or transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Underwriter's
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Underwriter's Warrant Agreement shall have the meanings assigned to them in the
Underwriter's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed.
Dated as of __________, 2000
PRECIS SMART CARD SYSTEMS, INC.
BY:
------------------------
Larry E. Howell
Chief Executive Officer
Attest:
- ----------------------------
Mark R. Kidd, Secretary
14
<PAGE>
EXHIBIT "A"
FORM OF SUBSCRIPTION (CASH EXERCISE)
(To be signed only upon exercise of Warrant)
TO: Precis Smart Card Systems, Inc.
11032 Quail Creek Road, Suite 108
Oklahoma City, OK 73120
The undersigned, the Holder of Warrant Certificate number
__________(the "Warrant"), representing ____________ Common Stock Underwriter
Warrants of PRECIS SMART CARD SYSTEMS, INC. (the "Company"), which Warrant
Certificate is being delivered herewith, hereby irrevocably elects to
exercise the purchase right provided by the Warrant Certificate for, and to
purchase thereunder, ____________ Shares of the Company, and herewith makes
payment of $_______ therefor, and requests that the certificates for such
securities be issued in the name of, and delivered to, _________________,
whose address is __________________________________________ , all in
accordance with the Underwriter's Warrant Agreement and the Warrant
Certificate.
Dated:_______________
-----------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of the
Warrant Certificate)
-----------------------------------------------
-----------------------------------------------
(Address)
--------------------------
(Social Security Number or
Tax Identification Number)
15
<PAGE>
EXHIBIT "B"
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
TO: Precis Smart Card Systems, Inc.
11032 Quail Creek Road, Suite 108
Oklahoma City, OK 73120
The undersigned, the Holder of Warrant Certificate number_________(the
"Warrant"), representing __________ Common Stock Underwriter Warrants of PRECIS
SMART CARD SYSTEMS, INC. (the "Company"), which Warrant is being delivered
herewith, hereby irrevocably elects the cashless exercise of the purchase right
provided by the Underwriter's Warrant Agreement and the Warrant Certificate for,
and to purchase thereunder, Shares of the Company in accordance with the formula
provided at Section three (3) of the Underwriter's Warrant Agreement. The
undersigned requests that the certificates for such Shares be issued in the name
of, and delivered to, ___________________________________________________ ,
whose address is, _____________________________ , all in accordance with the
Warrant Certificate.
Dated: Signature:
----------------
-----------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of the
Warrant Certificate)
-----------------------------------------------
-----------------------------------------------
(Address)
-----------------------------------------------
(Social Security Number or
Tax Identification Number)
16
<PAGE>
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______________________________________ hereby
sells, assigns and transfers unto
(Print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: Signature:
------------------------------------------------------
(Signature must conform in all respects to name of
holder as specified on the fact of the Warrant
Certificate)
------------------------------------------------------
(Insert Social Security or Other Identifying Number of
Assignee)
17
<PAGE>
EXHIBIT 4.3
PROMOTIONAL SHARES LOCK-IN AGREEMENT
I This Promotional Shares Lock-In Agreement (this "Agreement"), which was
entered into on the day of January, 2000, by and between Precis Smart
Card Systems, Inc. ("Issuer"), whose principal place of business is
located in Oklahoma, and Kent W. Webb, Larry E. Howell, Donald A
Cunningham, and Michael R. Morrisett (each a "Security Holder")
witnesses that:
(1) Issuer has filed an application with the Securities
Administrator of the State of Oklahoma ("Administrator") to
register certain of its Equity Securities for sale to public
investors who are residents of the State of Oklahoma
("Registration");
(2) The Security Holder is the owner of the shares of common stock
or similar securities and/or possesses convertible securities,
warrants, options or rights which may be converted into, or
exercised to purchase shares of common stock or similar
securities of Issuer;
(3) As a condition to Registration, Issuer and Security Holder
("Signatories") agree to be bound by the terms of this
Agreement.
II THEREFORE, the Security Holder agrees not to sell, pledge, hypothecate,
assign, grant any option for the sale of, or otherwise transfer or
dispose of, whether or not for consideration, directly or indirectly,
PROMOTIONAL SHARES as defined in the North American Securities
Administrators Association ("NASAA") Statement of Policy on Corporate
Securities Definitions and all certificates representing stock
dividends, stock splits, recapitalizations, and the like, that are
granted to, or received by, the Security Holder while the PROMOTIONAL
SHARES are subject to this Agreement (the "Restricted Securities").
Beginning two years from the completion date of the public offering,
two and one-half percent (2 1/2%) of the Restricted Securities may be
released each quarter pro rata among the Security Holders. All
remaining Restricted Securities shall be released from escrow on the
anniversary of the fourth year from the completion date of the public
offering.
III THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of Issuer's
assets or securities (including by way of tender offer), or
any other transaction or proceeding with a person who is not a
Promoter, which results in the distribution of Issuer's assets
or securities ("Distribution"), while this Agreement remains
in effect that:
1. All holder of Issuer's EQUITY SECURITIES will
initially share on a pro rata, per share basis in the
Distribution, in proportion to the amount of cash or
other consideration that they paid per share for
their EQUITY SECURITIES (provided that Administrator
has accepted the value of the other consideration),
until the shareholders who purchased Issuer's EQUITY
SECURITIES pursuant to the public offering ("Public
Shareholders") have received, or have had irrevocably
set aside for them, an amount that is equal to one
hundred percent (100%) of the public offering's price
per share times the number of shares of EQUITY
SECURITIES that they purchased pursuant to the public
offering and which they still hold at the time of the
Distribution, adjusted for stock splits, stock
dividends, recapitalizations and the like; and
2. All holder of Issuer's EQUITY SECURITIES shall
thereafter participate on an equal, per share basis
times the number of shares of EQUITY SECURITIES they
hold at the time of the Distribution, adjusted for
stock splits, stock dividends, recapitalization and
the like.
-1-
<PAGE>
3. The Distribution may proceed on lesser terms and
conditions than the terms and conditions stated in
paragraphs 1 and 2 above if a majority of the EQUITY
SECURITIES THAT ARE NOT HELD BY SECURITY HOLDERS,
OFFICERS, DIRECTORS OR Promoters of Issuer, or their
associates or affiliates vote, or consent by consent
procedure, to approve the lesser terms and
conditions.
B. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of Issuer's
assets or securities (including by way of tender offer), or
any other transaction or proceeding with a person who is a
Promoter, which results in a Distribution while this Agreement
remains in effect, the Restricted Securities shall remain
subject to the terms of this Agreement.
C. Restricted Securities may be transferred by will, the laws of
descent and distribution, the operation of law, or by order of
any court of competent jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder may be
hypothecated to pay the expenses of the deceased Security
Holder's estate. The hypothecated Restricted Securities shall
remain subject to the terms of this Agreement. Restricted
Securities may not be pledged to secure any other debt.
E. Restricted Securities may be transferred by gift to the
Security Holder's family members, provided the Restricted
Securities shall remain subject to the terms of this
Agreement.
F. With the exception of paragraph A.3 above, the Restricted
Securities shall have the same voting rights as similar EQUITY
SECURITIES not subject to the Agreement.
G. A notice shall be placed on the face of each stock certificate
of the Restricted Securities covered by the terms of the
Agreement stating that the transfer of the stock evidenced by
the certificate is restricted in accordance with the
conditions set forth on the reverse side of the certificate;
and
H. A typed legend shall be placed on the reverse side of each
stock certificate of the Restricted Securities representing
stock covered by this Agreement which states that the sale or
transfer of the shares evidenced by the certificate is subject
to certain restrictions until January , 2004, pursuant to an
agreement between the Security Holder (whether beneficial or
of record) and the Issuer, which agreement is on file with
Issuer and the stock transfer agent from which a copy is
available upon request and without charge.
I. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrator (the
"Effective date"). The term of this Agreement shall terminate
on the later of (A) the Administrator's receipt of not less
than 10 days' advance written notice of the occurrence or
upcoming occurrence of any one of the occurrences set forth in
(B) immediately below, and (B) the occurrence of any one of
the following:
1. The anniversary of the fourth year from the
completion date of the public offering; or
2. The date the Registration has been terminated if no
securities were sold pursuant thereto; or
3. If the Registration has been terminated, the date
that checks representing all of the gross proceeds
that were derived therefrom and addressed to the
public investors have been placed in the U.S. Postal
Service with first class postage affixed; or
4. The date the securities subject to this Agreement
become "Covered Securities," as defined under the
National Securities Markets Improvement Act of 1996.
-2-
<PAGE>
J. This Agreement to be modified only with the written approval
of the Administrator.
IV THEREFORE, Issuer will cause the following:
A. A manually signed copy of the Agreement signed by the
Signatories to be filed with the Administrator prior to the
Effective Date;
B. Copies of the Agreement and a statement of the per share
initial public offering price to be provided to the Issuer's
stock transfer agent;
C. Appropriate stock transfer orders to be placed with Issuer's
stock transfer agent against the sale or transfer of the
shares covered by this Agreement prior to its expiration,
except as may otherwise be provided in this Agreement;
D. The above stock restriction legends to be placed on the
periodic statement sent to the registered owner if the
securities subject to this Agreement are uncertificated
securities.
Pursuant to the requirements of this Agreement, the Signatories have entered
into this Agreement, which may be written in multiple counterparts and each of
which shall be considered an original. The Signatories have signed this
Agreement in the capacities and on the dates, indicated.
IN WITNESS WHEREOF, the Signatories have executed this Agreement.
"Issuer" PRECIS SMART SYSTEMS, INC.
By:
-----------------------------
Larry E. Howell
Chief Executive Officer
"Security Holder"
--------------------------------
Kent H. Webb
--------------------------------
Larry E. Howell
--------------------------------
Donald A Cunningham
--------------------------------
Michael R. Morrisett
-3-
<PAGE>
EXHIBIT 5.1
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
January 17, 2000
Board of Directors
Precis Smart Card Systems, Inc.
11032 Quail Creek Road
Oklahoma City, Oklahoma 73120
Gentlemen:
Reference is made to your Registration Statement on Form SB-2 filed
with the United States Securities and Exchange Commission (the "Commission"), as
declared effective by the Commission (the "Registration Statement"), with
respect to the proposed initial issuance by the Company of 1,265,000 shares of
common stock, $.001 par value (the "Common Stock") and the Underwriter Warrants
to be issued to Barron Chase Securities, Inc. and its designees exercisable for
the purchase of 115,000 shares of Common Stock (the "Underlying Common Stock")..
Based upon the Registration Statement (including the Prospectus
contained therein and the exhibits thereto), a certificate of the Secretary of
State of the State of Oklahoma, and the financial statements of the Company, we
are of the opinion that:
1. The Company is duly organized and existing under the laws of
the State of Oklahoma;
2. All of the issued and outstanding shares of the Common Stock
of the Company have been legally issued, are fully paid and
are not liable to further call or assessment;
3. The 1,000,000 shares of Common Stock proposed to be sold by
the Company to Barron Chase Securities, Inc. (the
"Underwriters") for sale to the public against payment
therefore in accordance with the Underwriting Agreement, will
be legally issued, fully paid and not liable for further call
or assessment;
4. In the event the Underwriter exercise its option to purchase
up to 150,000 additional shares of Common Stock from the
Company for sale to the public solely to cover over-allotments
with 45 days of the effective date of the Registration
Statement (the "Over-Allotment Option"), such shares of Common
Stock shall also be legally issued, fully paid and not liable
to further call or assessment against payment therefor in
accordance with the Underwriting Agreement; and
5. The Underwriter's Warrant Agreement is a binding obligation of
the Company and the 100,000 shares of Common Stock to be
issued upon exercise of such warrants shall be, upon receipt
of the payment prescribed by the terms of the Underwriter's
Warrants from the holders thereof, shall also be legally
issued, fully paid and not liable for further call or
assessment.
In arriving at the foregoing opinion, we have relied, among other
things, upon the examination of the corporate records of the Company and
certificates of officers of the Company and of public officials. We hereby
consent to the use of this opinion in the Registration Statement and all
amendments thereto, and to the reference to our firm name under the caption
"Legal Matters" of the Prospectus which is included as a part of the
Registration Statement.
1
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Precis Smart Card Systems, Inc.
January 17, 2000
Page 2
Very truly yours,
/S/DUNN SWAN & CUNNINGHAM
2
<PAGE>
EXHIBIT 10.2
FINANCIAL ADVISORY AGREEMENT
This Agreement is made and entered into as of the ____ day of
___________, 2000, between Precis Smart Card Systems, Inc. (the "Company") and
Barron Chase Securities, Inc. (the "Financial Advisor").
W I T N E S S E T H :
WHEREAS, The Company has engaged the Financial Advisor to act as the
Managing Underwriter in connection with the public offering of the Company's
securities; and
WHEREAS, the Financial Advisor has experience in providing financial
and business advice to public and private companies; and
WHEREAS, the Company is seeking and the Financial Advisor is willing to
furnish business and financial related advice and services to the Company on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of, and for the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
1. PURPOSE. The Company hereby engages the Financial Advisor on a
non-exclusive basis for the term specified in this Agreement to render financial
advisory and consulting advice to the Company as an investment banker relating
to financial and similar matters upon the terms and conditions set forth herein.
However, the advisory will only be rendered if specifically requested in writing
by the Chief Executive Officer of the Company.
2. REPRESENTATIONS OF THE FINANCIAL ADVISOR AND THE COMPANY. The
Financial Advisor represents and warrants to the Company that (i) it is a member
in good standing of the National Association of Securities Dealers, Inc.
("NASD") and that it is engaged in the securities brokerage business; (ii) in
addition to its securities brokerage business, the Financial Advisor provides
consulting advisory services; and (iii) it is free to enter into this Agreement
and the services to be provided pursuant to this Agreement are not in conflict
with any other contractual or other obligation to which the Financial Advisor is
bound. The Company acknowledges that the Financial Advisor is in the business of
providing financial services and consulting advice (of the type contemplated by
this Agreement) to others and that nothing herein contained shall be construed
to limit or restrict the Financial Advisor in conducting such business with
respect to others, or rendering such advice to others.
3. DUTIES OF THE FINANCIAL ADVISOR. During the term of this Agreement,
the Financial Advisor will provide the Company with consulting advice as
specified below at the request of the Company, provided that the Financial
Advisor shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service in which the Financial Advisor is
engaged generally. In performance of these duties, the Financial Advisor shall
provide the Company with the benefits of its best judgment and efforts. It is
understood and acknowledged by the parties that the value of the Financial
Advisor's advice is not measurable in any quantitative manner, and that the
amount of time spent rendering such consulting advice shall be determined
according to the Financial Advisor's discretion.
The Financial Advisor's duties may include, but will not necessarily be
limited to:
1) Advice relating to corporate financing activities;
2) Recommendations relating to specific business
operations and investments;
1
<PAGE>
3) Advice relating to financial planning; and
4) Advice regarding future financings involving
securities of the Company or any subsidiary.
4. TERM. The term of this Agreement shall be for twelve (12) months
commencing on the first day of the month following the Company's receipt of the
proceeds from the contemplated public offering (the "Commencement Date");
provided, however, that this Agreement may be renewed or extended upon such
terms and conditions as may be mutually agreed upon by the parties hereto.
5. FEE. The Company shall pay the Financial Advisor a fee of $108,000
for the financial services to be rendered pursuant to this Agreement, all of
which shall be payable at the Closing Date of the Company's proposed public
offering.
6. USE OF ADVICE BY THE COMPANY; PUBLIC MARKET FOR THE COMPANY'S
SECURITIES. The Company acknowledges that all opinions and advice (written or
oral) given by the Financial Advisor to the Company in connec tion with the
engagement of the Financial Advisor are intended solely for the benefit and use
of the Company in considering the transaction to which they relate, and the
Company agrees that no person or entity other than the Company shall be entitled
to make use of or rely upon the advice of the Financial Advisor to be given
hereunder, and no such opinion or advice shall be used for any other purpose or
reproduced, disseminated, quoted or referred to at any time, in any manner or
for any purpose, nor may the Company make any public references to the Financial
Advisor, or use the Financial Advisor's name in any annual reports or any other
reports or releases of the Company without the prior written consent of the
Financial Advisor.
The Company acknowledges that the Financial Advisor makes no commitment
whatsoever as to making a public trading market in the Company's securities or
to recommending or advising its clients to purchase the Company's securities.
Research reports or corporate finance reports that may be prepared by the
Financial Advisor will, when and if prepared, be done solely on the merits or
judgment and analysis of the Financial Advisor or any senior corporate finance
personnel of the Financial Advisor.
7. COMPANY INFORMATION; CONFIDENTIALLY. The Company recognizes and
confirms that, in advising the Company and in fulfilling its engagement
hereunder, the Financial Advisor will use and rely on data, material and other
information furnished to the Financial Advisor by the Company. The Company
acknowledges and agrees that in performing its services under this engagement,
the Financial Advisor may rely upon the data, material and other information
supplied by the Company without independently verifying the accuracy,
completeness or veracity of same. In addition, in the performance of its
services, the Financial Advisor may look to such others for such factual
information, economic advice and/or research upon which to base its advice to
the Company hereunder as the Financial Advisor shall in good faith deem
appropriate.
Except as contemplated by the terms hereof or as required by applicable
law, the Financial Advisor shall keep confidential all non-public information
provided to it by the Company, and shall not disclose such information to any
third party without the Company's prior written consent, other than such of its
employees and advisors as the Financial Advisor determines to have a need to
know.
8. INDEMNIFICATION. The Company shall indemnify and hold harmless the
Financial Advisor against any and all liabilities, claims, lawsuits, including
any and all awards and/or judgments to which it may become subject under the
Securities Act of 1933, (the "Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act") or any other federal or state statute, at common law or
otherwise, insofar as said liabilities, claims and lawsuits (including costs,
expenses, awards and/or judgments) arise out of or are in connection with the
services rendered by the Financial Advisor or any transactions in connection
with this Agreement, except for any liabilities, claims and lawsuits (including
awards and/or judgments), arising out of willful misconduct or willful omissions
of the Financial Advisor. In addition, the Company shall also indemnify and hold
harmless the Financial Advisor against any and all reasonable costs and
expenses, including reasonable counsel fees, incurred relating to the foregoing.
2
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The Financial Advisor shall give the Company prompt notice of any such
liability, claim or lawsuit which the Financial Advisor contends is the subject
matter of the Company's indemnification and the Company thereupon shall be
granted the right to take any and all necessary and proper action, at its sole
cost and expense, with respect to such liability, claim and lawsuit, including
the right to settle, compromise and dispose of such liability, claim or lawsuit,
excepting therefrom any and all proceedings or hearings before any regulatory
bodies and/or authorities.
The Financial Advisor shall indemnify and hold the Company harmless
against any and all liabilities, claims and lawsuits, including any and all
awards and/or judgments to which it may become subject under the Act, the 1934
Act or any other federal or state statute, at common law or otherwise, insofar
as said liabilities, claims and lawsuits (including costs, expenses, awards
and/or judgments) arise out of or are based upon willful misconduct or willful
omissions of the Financial Advisor. In addition, the Financial Advisor shall
also indemnify and hold the Company harmless against any and all reasonable
costs and expenses, including reasonable counsel fees, incurred relating to the
foregoing.
The Company shall give the Financial Advisor prompt notice of any such
liability, claim or lawsuit which the Company contends is the subject matter of
the Financial Advisor's indemnification and the Financial Advisor thereupon
shall be granted the right to take any and all necessary and proper action, at
its sole cost and expense, with respect to such liability, claim and lawsuit,
including the right to settle, compromise or dispose of such liability, claim or
lawsuit, excepting therefrom any and all proceedings or hearings before any
regulatory bodies and/or authorities.
9. THE FINANCIAL ADVISOR AS AN INDEPENDENT CONTRACTOR. The Financial
Advisor shall perform its services hereunder as an independent contractor and
not as an employee of the Company or an affiliate thereof. It is expressly
understood and agreed to by the parties hereto that the Financial Advisor shall
have no authority to act for, represent or bind the Company or any affiliate
thereof in any manner, except as may be agreed to expressly by the Company in
writing from time to time.
10. MISCELLANEOUS.
(a) This Agreement between the Company and the Financial Advisor
constitutes the entire agreement and understanding of the parties hereto, and
supersedes any and all previous agreements and understandings, whether oral or
written, between the parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required hereunder shall
be in writing and shall be deemed sufficiently given if hand-delivered or sent
by facsimile and postage prepaid by certified or registered mail, return receipt
requested, to the respective parties as set forth below, or to such other
address as either party may notify the other in writing:
If to the Company: Larry E. Howell
Chief Executive Officer
Precis Smart Card Systems, Inc.
11032 Quail Creek Road, Suite 108
Oklahoma City, OK 73120
Copy to: Michael E. Dunn, Esq.
Dunn Swan & Cunningham
2800 Oklahoma Tower
210 park Avenue
Oklahoma City, OK 73102-5604
3
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If to the Financial Advisor:
Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Copy to: David A. Carter, P.A.
2300 Glades Road, Suite 210W
Boca Raton, Florida 33431
(c) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors, legal
representatives and assigns.
(d) This Agreement may be executed in any number of counterparts, each
of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.
(f) This Agreement shall be governed by and construed in accordance
with the laws of the State of Florida applicable to contracts made and to be
performed entirely within the State of Florida. The parties agree that any
action brought by any party against another party in connection with any rights
or obligations arising out of this Agreement shall be instituted properly in a
federal or state court of competent jurisdiction with venue only in the
Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida or the
United States District Court for the Southern District of Florida, West Palm
Beach Division. A party to this Agreement named as a Defendant in any action
brought in connection with this Agreement in any court outside of the above
named designated county or district shall have the right to have the venue of
said action changed to the above designated county or district or, if necessary,
have the case dismissed, requiring the other party to refile such action in an
appropriate court in the above designated county or federal district.
(g) This Agreement has been duly authorized, executed and delivered by
and on behalf of the Company and the Financial Advisor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
Very truly yours,
PRECIS SMART CARD SYSTEMS, INC.
BY:
------------------------------
Larry E. Howell
Chief Executive Officer
BARRON CHASE SECURITIES, INC.
BY:
------------------------------
Robert T. Kirk, President
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EXHIBIT 10.3
____________, 2000
Larry E. Howell
Chief Executive Officer
Precis Smart Card Systems, Inc.
11032 Quail Creek Road, Suite 108
Oklahoma City, OK 73120
RE: MERGER AND ACQUISITION AGREEMENT
--------------------------------
Dear Mr. Howell:
You have agreed that Barron Chase Securities, Inc., (the "Finder") may
act as a non-exclusive finder or financial consultant for you in various
transactions in which Precis Smart Card Systems, Inc. (the "Company") may be
involved, including but not limited to, mergers, acquisitions, business
combinations, joint ventures, debt or equity placements or other on-balance or
off-balance sheet corporate transactions. The Company hereby agrees that in the
event that the Finder shall first introduce to the Company another party or
entity, and that as a result of such introduction, a transaction between such
entity and the Company is consummated ("Consummated Transaction"), then the
Company shall pay to the Finder a finder's fee as follows:
a. Five percent (5%) of the first $1,000,000 of the consideration
paid in such transaction;
b. Four percent (4%) of the consideration in excess of $1,000,000
and up to $2,000,000;
c. Three percent (3%) of the consideration in excess of
$2,000,000 and up to $3,000,000;
d. Two percent (2%) of any consideration in excess of $3,000,000
and up to $4,000,000; and
e. One percent (1%) of any consideration in excess of $4,000,000.
The fee due the Finder shall be paid by the Company in cash and/or in
stock at the closing of the Consummated Transaction as mutually agreed between
the Company and the Finder, without regard to whether the Consummated
Transaction involves payments in cash, in stock, or a combination of stock and
cash, or is made on an installment sale basis. By way of example, if the
Consummated Transaction involves securities of the acquiring entity (whether
securities of the Company, if the Company is the acquiring party, or securities
of another entity, if the Company is the selling party) having a value of
$5,000,000, the consideration to be paid by the Company to the Finder at closing
shall be $150,000.
In the event that for any reason the Company shall fail to pay to the
Finder all or any portion of the finder's fee payable hereunder when due,
interest shall accrue and be payable on the unpaid balance due hereunder from
the date when first due through and including that date when actually collected
by the Finder, at a rate equal to two (2) points over the prime rate of
Citibank, N.A. in New York, New York, computed on a daily basis and adjusted as
announced from time to time.
This agreement shall be effective on the date hereof and shall expire
on the fifth anniversary of the date hereof.
Notwithstanding anything herein to the contrary, if the Company shall,
within 180 days immediately following the termination of the five year period
provided above, conclude a Consummated Transaction with any party introduced by
the Finder to the Company prior to the termination of said five year period, the
Company shall also pay the Finder the fee determined above.
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The Company represents and warrants to the Finder that the engagement
of the Finder hereunder has been duly authorized and approved by the Board of
Directors of the Company and this letter agreement has been duly executed and
delivered by the Company and constitutes a legal, valid and binding obligation
of the Company.
This agreement has been executed and delivered in the State of Florida
and shall be governed by the laws of such state, without giving effect to the
conflicts of laws rules thereunder.
This agreement shall be binding upon, and enforceable against, the
successors and assigns of each of the undersigned.
Please sign this letter at the place indicated below, whereupon it will
constitute our mutually binding agreement with respect to the matters contained
herein.
Very truly yours,
BARRON CHASE SECURITIES, INC.
BY:
----------------------------
Robert T. Kirk, President
Agreed to and Accepted:
PRECIS SMART CARD SYSTEMS, INC.
BY:
-------------------------------
Larry E. Howell
Chief Executive Officer
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 3 to the Registration
Statement on Form SB-2 of our report dated July 19, 1999, on our audits of the
financial statements of Precis Smart Card Systems, Inc. We also consent to the
reference to our firm under the caption "Experts."
/S/MURRELL, HALL , McINTOSH & CO., PLLP.
Moore, Oklahoma
January 17, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF DUNN SWAN & CUNNINGHAM
Dunn Swan & Cunningham, A Professional Corporation, hereby consents to
the use of its name under the headings "Management--Executive Officers and
Directors" and "Legal Matters" in the Prospectus constituting a part of this
Amendment No. 3 to the Registration Statement.
/S/DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma,
January 17, 2000
