<PAGE>
FILE PURSUANT TO RULE 424
REGISTRATION NO. 333-86643
1,000,000 SHARES OF COMMON STOCK
PRECIS SMART CARD SYSTEMS, INC.
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
<S> <C> <C>
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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.
[LOGO] [LOGO]
THE DATE OF THIS PROSPECTUS IS FEBRUARY 8, 2000
<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.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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 .......................... 32
Lack of Employment Arrangements
and Keyman Insurance ........................................ 32
Certain Transactions .................................................... 32
Security Ownership of Certain Beneficial
Owners and Management ............................................... 33
Description of Securities ............................................... 34
Common Stock .................................................... 34
Preferred Stock ................................................. 34
Transfer Agent and Registrar .................................... 35
Underwriters' Warrants ........................................ 35
Outstanding Stock Options ....................................... 35
Shareholder Action .............................................. 35
Anti-Takeover Provisions ........................................ 36
Shares Eligible for Future Sale ......................................... 37
Lock-Up Agreements .............................................. 38
State Imposed Lock-In Arrangement ............................... 38
Underwriting ............................................................ 39
Legal Matters ........................................................... 41
Experts ................................................................. 41
Where You Can Find Additional Information ............................... 41
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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<TABLE>
THE OFFERING
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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;
$129,650 (4.5% of net proceeds) for repayment of
shareholder loans;
$277,550 (5.5% of net proceeds) for payment of
long-term debt; and
$708,000 (14% 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.
Common stock trading symbols:
Nasdaq SmallCap................................ PCIS
Boston Stock Exchange.......................... PCI
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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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1999 1998
---------- ----------- ---------- ----------
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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)
---------- ----------- ---------- ----------
57,060 27,608 53,287 17,017
---------- ----------- ---------- ----------
Net loss -- Deficit accumulated
during development state...................... $ (671,330) $(1,150,160) $ (665,598) $ (480,664)
========== =========== ========== ==========
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)
========== =========== ========== ==========
DECEMBER 31, SEPTEMBER 30, 1999
--------------------------- ---------------------------
1998 1997 ACTUAL AS ADJUSTED(1)
---------- ----------- ----------- --------------
BALANCE SHEET DATA:
Current assets.................................... $10,035 $45,864 $ 174,515 $4,291,515
Working capital (deficit)......................... (757,441) (551,188) (1,011,899) 4,138,101
Total assets...................................... 74,253 206,139 263,642 4,380,642
Total current liabilities......................... 767,476 597,052 1,186,414 253,414
Long-term debt, net of current portion............ 41,570 273,669 -- --
Stockholders' equity (deficit).................... (734,793) (664,582) (922,772) 4,127,228
</TABLE>
(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 SECURITIES 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
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<PAGE>
statements for 1998 and 1997 notes that we have suffered losses from
operations in 1998 and 1997 and had an accumulated deficit at December 31,
1998. The report indicated that these factors raised substantial doubt
regarding our ability to continue as a going concern. Unless our marketing
efforts successfully result in profitability, our losses will 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, our
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 the change in 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 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 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
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<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 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 necessary research and
development investments, we will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of
new products,
- - our 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 depend on our ability to
- - enter into marketing and licensing or other arrangements on a timely basis
and on favorable terms;
- - establish satisfactory arrangements with sales representatives and
marketing consultants;
- - hire and retain skilled management as well as financial, technical,
marketing and other personnel;
- - manage successfully our growth (including monitoring operations,
controlling costs and maintaining effective quality, inventory and service
controls); and
- - obtain adequate financing when and as needed.
There is limited information available concerning the performance of our
technologies or market acceptance of our products. We provide no assurance that
- - we will be successful in implementing our business plan or
- - that unanticipated expenses or problems or
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<PAGE>
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 of 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 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,
- - the results of our operations, and
- - the status of competing products.
Also, further development of our smart card products to meet the requirements
and specifications of a particular customer may require significant
investment in research and development. This investment may be much in
advance of the actual installation and commencement of revenues from the
installation.
We cannot accurately predict our timing or amount of capital
requirements. If and when needed, we may not be able to obtain additional
capital resources or if available the additional capital will be on terms
satisfactory or advantageous to our shareholders. If needed, our inability to
obtain additional financing could require significant reduction or suspend of
our operations, including our research and development activities, or require
us to seek a merger partner both of which could result in significant losses
to our shareholders. Alternatively, we may sell additional shares of our
stock on terms that are dilutive to our shareholders and superior to the
rights of our shareholders.
BECAUSE THE PERIOD FROM INITIATION TO COMPLETION OF A SALE AND INSTALLATION
IS LENGTHY, WE MAY HAVE FLUCTUATIONS IN REVENUE, WHILE MOST OF OUR OVERHEAD
COST ARE FIXED, WHICH MAY RESULT SIGNIFICANT FLUCTUATIONS IN OF OUR RESULTS
OF OPERATIONS FROM PERIOD TO PERIOD.
The purchase of a smart card system generally involves a significant
commitment of capital with attendant delays frequently associated with large
capital expenditures and implementation procedures within an organization.
Accordingly, our product sales cycle varies by customer and industry, and may
extend for periods of 12 months or more. Also, our sales cycles are subject to
- - customers' or clients' budgetary constraints,
-8-
<PAGE>
- - 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 experience price reductions,
reduced gross margins and
-9-
<PAGE>
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 BOSTON STOCK EXCHANGE AND WILL BECOME TRADABLE ON THE
OVER-THE-COUNTER MARKET, WHICH WILL ADVERSELY AFFECT THE SALE PRICE OF OUR
COMMON STOCK.
In order to continued inclusion of our common stock on Nasdaq and the
Boston Stock Exchange minimum listing requires must be met. In the event these
minimum requirements for inclusion are not met, our common stock
-10-
<PAGE>
- - will be delisted and no longer included on the Nasdaq SmallCap Market and
Boston Stock Exchange,
- - will then be traded in the over-the-counter market, and
- - may become subject to the "penny stock" trading rules.
The over-the-counter market is volatile and characterized as follows:
- - the over-the-counter securities are subject to substantial and sudden price
increases and decreases,
- - at times the price (bid and ask) information for the securities may not be
available,
- - if there is only one or two market makers, there is a risk that the dealers
or group of dealers may control the market in our common stock and set
prices that are not based on competitive forces, and
- - the 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 and Boston Stock
Exchange.
IF OUR COMMON STOCK BECOMES 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 the
Boston Stock Exchange and does not trade on another national securities
exchange, our common stock may become subject to the "penny stock" rules. A
"penny stock" is generally a stock that
- - is only listed in "pink sheets" or on the NASD OTC Bulletin Board,
- - has a price per share of less than $5.00 and
- - is issued by a company with net tangible assets less than $2 million.
The penny stock trading rules will impose additional duties and responsibilities
upon broker-dealers and salespersons recommending the purchase 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 SHAREHOLDER 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.
-11-
<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 $229,650 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 ...................................... 129,750 2.5
Repayment of currently due long-term debt, bearing interest at 10% per year .... 277,550 5.5
Working capital ................................................................ 708,000 14.0
---------- -----
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. We cannot predict
with any degree of certainty the occurrence of these conditions. 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.
-12-
<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 other 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.
-13-
<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................... 336,098 158,576
----------- -----------
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) $ 4,285,804
=========== ===========
</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
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<PAGE>
implementation of the PrecisCache-TM- system for the 1998 PGA Championship
and the Kiel Center Arena, home of the National Hockey League's St. Louis
Blues, during the 1998 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 $18,381 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
-15-
<PAGE>
attributable to the decrease of $152,617 decrease, a 28.1% decrease, in
product deployment and research and development to $389,586 from $542,203
during 1997 and the $72,564 decrease (a 15.4% decrease) in general and
administrative expense to $399,756 from $472,320 during 1997. The decrease in
product deployment and research and development was attributable to the
decrease in expenses associated with maintenance and implementation of the
Chicago 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 not experienced any event or occurrences attributable to the
failure to be year 2000 compliant.
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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 available sources of capital. 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 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
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depreciation of $64,059 and increased by changes in accounts payable and accrued
liabilities of $209,551. In 1998, our operating activities used net cash of
$420,674 as the result of the net loss of $671,330, offset by depreciation of
$103,594, a decrease in inventory of $34,123, and an increase in accounts
payable and accrued liabilities of $112,939. During the 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
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over which we have no control and which we are not accurately able to predict.
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.SCARDWP.HTM.) We believe that with
the integration of this technology with future versions of Windows and Windows
NT operating systems, smart card development and utilization for security and
electronic commerce on the Internet will become prevalent.
We believe that widespread acceptance and use of smart card technology will
occur, but only following the transition from magnetic stripe only
infrastructure to one that includes both magnetic stripe and smart cards. Major
credit card companies and large banking institutions have shown an interest in
smart card technology because the technology makes small-value monetary
transactions feasible, faster and more economically processed. Use of smart
cards reduces the need for signature, verification of credit availability,
receipts and paperwork. The 1996 Olympic smart card pilot in Atlanta, Georgia by
several banks in association with Visa demonstrated the need for considerable
consumer education before widespread acceptance and utilization will occur.
We believe that closed-area smart card systems will serve as a transitional
or interim phase to widespread smart card utilization and acceptance. A
closed-area system is a limited venue, including a sports arena, a university or
college campus, or a limited access entertainment event. There are several
reasons for this.
- - First, open systems require huge investments in both infrastructure and
marketing. As with most technology implementation, especially point-of-sale
and other transaction technology, there is reluctance to invest in the
requisite infrastructure. Also, there is reluctance on the part of
consumers to purchase and use the cards if widespread utilization does not
exist. In a closed-area, the consumer may be required to use a smart card
for
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- - 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.
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
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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
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program throughout the bank's primary markets.
We were selected by VeriFone (a Hewlett-Packard company), one of the
leading providers of transaction automation systems for the payment processing
for 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.
-24-
<PAGE>
- - Retailers have been made acutely aware of the value of their contact
with the consumer. The key to repeat business is to accurately identify,
and then satisfy, customer needs. Smart cards would enable retailers to
track customer behavior and base marketing decisions gleaned from this
valuable information. This technology can also reduce the risk of fraud,
improve inventory management and offer the customer convenience and
better service.
- - AFFINITY PROGRAMS -- The trend in retail, fund raising and other repeat
customer businesses is the move toward customer rewards. This application
represents a tremendous opportunity and an explosive growth area, which is
virtually untapped. By incorporating a smart card into a traditional
point-of-sale application, the retailer will realize complete tracking of
all aspects of the sales process including the ability to reward repeat
customers with premiums or discounts through the use of a smart card
without the traditional computerized infrastructure. Retailers could use
the data accumulated to target market areas not being penetrated and focus
marketing and advertising costs on those areas.
WHAT ARE THE CURRENT AND FUTURE MARKETS FOR PRECIS' PRODUCTS?
We believe our early success in several important market niches has
positioned us for growth. Our near-term marketing focus is to solidify our
market position and use that foundation as a basis for expanding into additional
markets. To date our marketing efforts and 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.
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<PAGE>
ADVERTISING MEDIUM AND CORPORATE SPONSORSHIP. As an adjunct to our efforts
to capture both the arenas-stadiums market and the festivals-fairs market, we
are developing a strategy for securing or assisting in the securing of card
sponsors-advertisers. In addition to its technological aspects, the uniqueness
of the product, the size and personal nature of the card, and the fact that it
is carried in an individual's wallet or purse and seen often, make smart cards a
very suitable advertising medium. Furthermore, beyond simply the card, sponsor
mentions in promotional materials, signage, advertising for the cards and press
reports surrounding an event can greatly enhance the value of the card as a
sponsorship medium. In many cases, revenues from the sponsorship of the card may
simply be used to offset the expenses incurred in implementing the system. This
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
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<PAGE>
providing healthcare services and emergency medical response services.
Following the offering, we expect to have the financial resources to broaden
our marketing efforts within the healthcare market.
WHAT IS THE NATURE AND EXTENT OF PRECIS' COMPETITION?
The environment within which we operate is intensely competitive and
subject to rapid change in general. To maintain or increase our market share
position in the smart card industry, we will continually need to enhance our
current product offerings, introduce new product features and enhancements, and
expand our professional service capabilities. We currently compete principally
on the basis of the specialized nature of our products and ability to
expeditiously install and implement a smart card system. Our product features
and functions facilitate integration with a wide range of 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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<PAGE>
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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<PAGE>
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 related to corporate
acquisitions and mergers.
DONALD (DAN) A. CUNNINGHAM became one of our Directors in 1996 and
became President and Chief Operating Officer in August 1999. During 1998 and
1997 Mr. Cunningham served as President and Chief Executive Officer of the
Smart Card Industry Association. Before that position, he served as Senior
Vice President of Business Development of Phoenix Planning & Evaluation, Ltd.
Phoenix is one of the premier consulting firms in the United States providing
strategic planning and technical assistance to the banking industry,
government agencies, and healthcare and transportation industries. Mr.
Cunningham served as President and Chief Executive Officer of Gemplus Card
International Corp., the United States subsidiary of French-owned Gemplus SA,
from 1993 to 1996. Before joining Gemplus, Mr. Cunningham held positions at
Micro Card Technologies, Inc., Recognition Equipment, Inc. and the NCR
Corporation.
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<PAGE>
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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION(1) COMMON STOCK
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS
- --------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
James Lout(4).................................................... 1999 $46,108 $ -- --
President and Chief Executive Officer 1998 $64,000 $ -- 17,241
1997 $74,000 $ -- --
Larry E. Howell.................................................. 1999 $15,000 $ -- --
Chief Executive Officer 1998 $ -- $ -- --
1997 $ -- $ -- --
</TABLE>
(1) The named executive officer received additional non-cash compensation,
perquisites and other personal benefits; however, the aggregate amount and
value thereof did not exceed 10% of the total annual salary and bonus paid
to and accrued for the named executive officer during the year.
(2) Dollar value of base salary (both cash and non-cash) earned during the
year.
(3) Dollar value of bonus (both cash and non-cash) earned during the year.
(4) Mr. Lout served as our President and Chief Executive Officer beginning in
June 1996 until mid-August 1999. As a result of Mr. Lout's employment
termination, 26,819 unexercisable stock options granted to Mr.
Lout expired or terminated without exercise.
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<PAGE>
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number of options
exercised in the year ended December 31, 1999, and the value realized by each
executive officer named in the Summary Compensation Table, as well as,
information related to the number and value of options held by them at
December 31, 1999. During the year ended December 31, 1999, no outstanding
options were exercised.
<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1999
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS(1) IN-THE-MONEY OPTIONS(2)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Larry E. Howell..................... -- -- $ -- $ --
James Lout.......................... 36,399 -- 28,391 --
</TABLE>
- ------------------------
(1) As a result of his employment termination in August 1999, Mr. Lout's right
to receive the unexercisable options immediately terminated.
(2) A market for our common stock does not exit. The value of unexercised
in-the-money options is based upon the fair market value of the shares of
common stock underlying the options, which was determined be $6.00 per
share as of December 31, 1999 (after giving effect to and adjustment for
the reverse stock split), minus the $5.22 exercise price multiplied by the
number of shares of common stock underlying the options.
STOCK OPTION PLAN
For the benefit of our employees, directors and consultants, we have
adopted the Precis Smart Card Systems, Inc. 1999 Stock Option Plan (the
"stock option plan" or the "plan"). The plan provides for the issuance of
options intended to qualify as incentive stock options for federal income tax
purposes to our employees and non-employees, including employees who also
serve as our directors. Qualification of the grant of options under the plan
as incentive stock options for federal income tax purposes is not a condition
of the grant and failure to so qualify does not affect the exercisability of
the stock options. The number of shares of common stock authorized and
reserved for issuance under the Plan is 145,000. As of the date of this
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
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<PAGE>
(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.
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, 1999 and 2000 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
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("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. and the Boston Stock Exchange, 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
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.................................................... 72,019 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
John Simonelli....................................................... 100,000 8.3 4.5
2500 McGee Street, Suite 147
Norman, Oklahoma 73072
Executive Officer and Directors as a group (six persons)(3).......... 172,716 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%.
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DESCRIPTION OF SECURITIES
Under our Certificate of Incorporation, we are authorized to issue up to
10,000,000 shares of capital stock, consisting of 8,000,000 shares of common
stock, $.01 par value per share, and 2,000,000 shares of preferred stock,
$.01 par value per share. As of the date of this prospectus, our issued and
outstanding capital stock consists of 1,200,000 shares of common stock. We
are offering 1,000,000 shares of our common stock under the offering.
The following description of our common stock and preferred stock is a
summary and is qualified in its entirety by the provisions of our Certificate
of Incorporation and bylaws. Our Certificate of Incorporation and bylaws have
been filed as exhibits to the registration statement of which this prospectus
is a part. See "Where You Can Find Additional Information."
COMMON STOCK
As holders of our outstanding shares of the common stock, your rights,
privileges, disabilities and restrictions in general are as follows:
- - the right to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of assets legally available
therefor, subject to the payment of preferential dividends with respect to
our then outstanding preferred stock;
- - the right to share ratably in all assets available for distribution to the
Common Stock shareholders after payment of our liabilities in the event of
our liquidation, dissolution and winding-up, subject to the prior
distribution rights of the holders of our then outstanding preferred stock;
- - the right to one vote per share on matters submitted to a vote by our
common stock shareholders;
- - no preferential or preemptive right and no subscription, redemption or
conversion privilege with respect to the issuance of additional shares of
our common stock; and
- - no cumulative voting rights, which means that the holders of a majority of
shares voting for the election of directors can elect all members of our
board of directors then subject to election.
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
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- - 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, members 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 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 summary of the principal terms of the underwriters'
warrants does not purport to be complete. Reference is made to the copy of
the underwriters' warrant which is filed as exhibits to the registration
statement of which this prospectus is a part. 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 86,399 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.
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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.
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
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- - 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 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
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<PAGE>
shares of common stock may be sold without regard to volume limitations,
manner of sale restrictions, or public information or notice requirements.
There are approximately 456,000 outstanding shares of our common stock that
may be sold under Rule 144(k).
LOCK-UP AGREEMENTS
During periods of six months to two years 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 agreements cover in the aggregate 1,179,773
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 greater than 5% shareholders have agreed
to not sell or transfer 543,117 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.
- - 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 lock-in agreement
for a four-year period following the date of this prospectus. However, after
two years, 2.5% of the shares of common stock subject to the lock-in
agreement will be released and become available for transfer and resale each
quarter.
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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>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Barron Chase Securities............ 700,000
Emerson Bennett & Associates....... 300,000
---------
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/or persons related to them, 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.
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
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- - 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
- to the managing underwriter, other underwriters, members of the
selling group and/or officers or 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."
-40-
<PAGE>
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).
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>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<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>
<TABLE>
<CAPTION>
PRECIS SMART CARD SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
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
(APRIL 1994)
FOR THE YEAR ENDED FOR THE NINE MONTHS TO
DECEMBER 31, ENDED SEPTEMBER 30, 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>
INCEPTION
FOR THE (APRIL 1994)
FOR THE YEAR ENDED NINE MONTHS ENDED TO
DECEMBER 31, SEPTEMBER 30, 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.
F-8
<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
Pursuant to its Certificate of Incorporation, the Company is
authorized to issue up to 10,000,000 shares of capital stock, consisting of
8,000,000 shares of Common Stock, $.01 par value per share (the "Common
Stock"), and 2,000,000 shares of preferred stock, $1.00 par value per share
(the "Preferred Stock").
COMMON STOCK - The Company was operated historically (from
approximately April 1994 through June 1996) as a limited partnership (the
"LP"). Effective July 1, 1996, the entire business of the LP was merged into
the Company (the "Merger"). The Company issued shares of common stock to the
partners of the LP in consideration of the Merger, thus, the partners of the
LP became the shareholders of the Company. The merger was accounted for as a
"pooling-of-interest." The Company conducted a private placement of common
stock during 1997, during which it issued and subscribed shares of common
stock. Such shares were issued and subscribed at $2.00 per share.
PREFERRED STOCK - During 1998, the Company conducted a private
placement of convertible redeemable, "putable" preferred stock. During this
period, the Company sold 4,967.67 shares of $120.00 face value, no coupon
preferred stock, generating total capital of $596,120. The total capital of
$596,120 was comprised of $406,080 in cash and $196,040 in conversions of
Project Notes. During 1998, and in accordance with their conversion rights,
the preferred shareholders elected to convert their preferred shares into
298,060 shares of common stock ( a conversion ratio of 1 preferred share for
60 shares of common).
RESTRUCTURING PLAN - As a result of the conversion of the
outstanding preferred shares to common shares, the Company had 2,340,910
shares of common stock outstanding on October 29, 1998. On October 30, 1998,
the Company affected a reverse split of the common stock such that
immediately after the reverse split there were 900,000 shares of common stock
outstanding.
COMMON STOCK OPTIONS - Also, as part of the restructuring plan, the
Company obtained releases from its directors and Project Note holders that
cancelled all common stock options held by directors and Project Note
holders. After the reverse split discussed above and as of December 31, 1998,
the Company had the following common stock options outstanding to certain
employees and ongoing service providers:
<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 MARCH 4, 2000, 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
FEBRUARY 8, 2000
===============================================================================
