1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2000.
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
------- -------
Commission File No: 000-30045
CATUITY INC.
(Exact Name of Registrant as specified in its charter)
Delaware 38-3518829
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2711 E. Jefferson Avenue
Detroit, MI 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(313) 567-4348
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( X ) No ( )
Indicate the number of shares outstanding of the each issuer's classes of stock
as of the latest practical date:
Common stock outstanding - 7,150,508 shares as of July 31, 2000
1
2
INDEX
CATUITY, INC. AND SUBSIDIARIES
PAGE
Part 1. Financial Information NO.
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - June 30, 2000 and December 31, 1999 3
Consolidated statements of operations - Three months ended June 30,
2000 and 1999; Six months ended June 30, 2000 and
1999 5
Consolidated statements of cash flows - Six months ended
June 30,2000 and 1999 5
Notes to consolidated financial statements - June 30, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
Part II. Other Information 15
Item 1. Legal Proceedings 15
Item 2 Changes In Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
2
3
Part I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CATUITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
2000 1999
------------------------ -----------------------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 3,946,068 $ 5,269,757
Accounts receivable, less allowance of $144,000 at
June 30, 2000, $158,000 at December 31, 1999
303,868 429,159
Inventories 59,750 65,781
Prepaid expenses 65,687 67,016
Restricted cash 204,083 178,054
Other receivables 320,985 -
Other 29,456 2,519
------------------------ -----------------------
Total current assets 4,929,897 6,012,286
Property, plant and equipment, net 247,244 242,038
------------------------ -----------------------
Total assets $ 5,177,141 $ 6,254,324
======================== =======================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable $ 230,409 $ 560,906
Accrued expenses 165,166 301,630
Accrued compensation 128,544 118,054
Trust liability 185,131 157,685
------------------------ -----------------------
Total current liabilities 709,250 1,138,275
Borrowings from shareholders 777,530 854,230
Accrued compensation 51,609 20,588
Stockholders' equity:
Common stock - no par value
Authorized - 100 million shares
Issued and outstanding - 7,055,840 at June 30,
2000 and 6,729,269 at December 31, 1999 22,335,646 21,519,333
Additional paid-in capital 2,838,651 2,685,195
Shareholder loans - (757,733)
Foreign currency translation 28,389 401,073
Accumulated deficit (21,563,934) (19,606,637)
------------------------ -----------------------
Total stockholders' equity 3,638,752 4,241,231
------------------------ -----------------------
Total liabilities and stockholders' equity $ 5,177,141 $ 6,254,324
======================== =======================
See accompanying notes.
3
4
CATUITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------- --------------------------------
2000 1999 2000 1999
---------------- ---------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
Revenues:
License revenue $ - $ 331,679 $ - $ 387,768
Service revenue 221,572 29,705 251,778 57,687
---------------- ---------------- --------------- ----------------
Total revenues 221,572 361,384 251,778 445,455
Costs and expenses:
Research and development and testing 225,888 196,920 466,472 359,458
Selling and relationship development 476,337 158,033 916,236 275,181
General and administrative 254,454 365,866 513,272 569,473
Stock compensation (623,042) 227,713 153,456 1,170,596
Non recurring charges 55,149 53,881 221,793 135,238
---------------- ---------------- --------------- ----------------
Total costs and expenses 388,786 1,002,413 2,271,229 2,509,946
---------------- ---------------- --------------- ----------------
Operating loss (167,214) (641,029) (2,019,451) (2,064,491)
---------------- ---------------- --------------- ----------------
Other income (expense):
Interest income 50,367 26,649 109,681 31,967
Interest expense - related party (22,935) (51,008) (47,527) (99,961)
---------------- ---------------- --------------- ----------------
Total other income (expense) 27,432 (24,359) 62,154 (67,994)
---------------- ---------------- --------------- ----------------
Loss before taxes (139,782) (665,388) (1,957,297) (2,132,485)
Provision for Income taxes - - - -
---------------- ---------------- --------------- ----------------
Net Loss $ (139,782) $ (665,388) $(1,957,297) $ (2,132,485)
================ ================ =============== ================
Net loss per share - basic and diluted $ (0.02) $ (0.12) $ (0.29) $ (0.39)
================ ================ =============== ================
See accompanying notes.
4
5
CATUITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
----------------------------------
2000 1999
---------------- -----------------
(UNAUDITED)
Cash flows from operating activities:
Net loss $(1,957,297) $(2,132,485)
Adjustments used to reconcile net loss to net cash used in
operating activities:
Stock based compensation 153,456 1,170,596
Depreciation and amortization 62,548 35,161
Changes in assets and liabilities:
Accounts receivable (168,286) (140,211)
Inventories - 22,726
Accounts payable (330,497) 14,222
Accrued expenses and other liabilities (144,207) (18,844)
Other assets, net 64,890 13,873
---------------- -----------------
Net cash used in operating activities (2,319,393) (1,034,962)
---------------- -----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (46,001) (42,219)
---------------- -----------------
Net cash used in investing activities (46,001) (42,219)
---------------- -----------------
Cash flows from financing activities:
Issuance of common stock, net of expenses 1,574,047 6,057,373
---------------- -----------------
Net cash provided by financing activities 1,574,047 6,057,373
---------------- -----------------
Foreign exchange effect on cash (532,342) 190,286
---------------- -----------------
Net increase/(decrease) in cash and cash equivalents (1,323,689) 5,170,478
Cash and cash equivalents, beginning of period 5,269,757 148,789
---------------- -----------------
Cash and cash equivalents, end of period $ 3,946,068 $ 5,319,267
================ =================
5
6
CATUITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Catuity Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months period ended June
30, 2000 are not necessarily indicative of the result that may be expected for
the year ended December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10 for the
year ended December 31, 1999.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No.
101 provides guidance on applying accounting principles generally accepted in
the United States to the recognition, presentation, and disclosure of revenue in
the financial statements. The Company is currently evaluating SAB 101 and has
not completed its assessment of the impact of adoption. Any change in the
Company's revenue recognition policy resulting from SAB 101 will be reported as
a change in accounting principle in the quarter ending December 31, 2000.
6
7
CATUITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share for the three and six months ended June 30, 2000 and 1999:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2000 1999 2000 1999
--------------------------------------- ------------------------------------------
Numerator:
Net loss $ (139,782) $ (665,388) $ (1,957,297) $ (2,132,485)
======================================= ==========================================
Denominator:
Denominator for
basic earnings per
share - weighted
average shares
outstanding
6,748,869 5,675,036 6,742,300 5,440,340
======================================= ==========================================
Basic and diluted
loss per share $ (0.02) $ (0.12) $ (0.29) $ (0.39)
======================================= ==========================================
During the second quarter of 2000, a total of 310,268 options were exercised at
prices ranging from $2.87 to $5.98 resulting in the Company receiving cash
proceeds of $1,183,680.
7
8
CATUITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPREHENSIVE LOSS
Total comprehensive loss is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2000 1999 2000 1999
--------------------------------------- ------------------------------------------
Net loss $ (139,782) $ (665,388) $ (1,957,297) $ (2,132,485)
Foreign currency
translation (66,853) (6,706) (372,685) (39,103)
--------------------------------------- ------------------------------------------
Total
comprehensive
loss $ (206,635) $ (672,094) $ (2,329,982) $ (2,093,382)
======================================= ==========================================
5. NON RECURRING CHARGES
Non-recurring charges of $55,149 and $221,793 for the three and six months ended
June 30, 2000 and $53,881 and $135,238 for the three and six months ended June
30, 1999 relate to legal, accounting, audit and financial consultants fees
associated with the Company's efforts to change its domicile to the US.
8
9
CATUITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS
SALE OF OPTION AND EARLY EXTINGUISHMENT OF DEBT
On June 30, 2000 Chip Application Technologies Limited (CAT), a wholly owned
subsidiary of the Company, entered into an Option Assignment Agreement with BNP
Paribas Equities (Australia) Limited (BNP) whereby CAT transferred all its
rights, title and interests under the Loan Repayment and Option Agreement as
amended (the "Agreement") it had entered into with Heath Group Australia Limited
(HGA) and Industrial Superannuation Administration Services Limited (ISAS) dated
May 4, 1999 for the right to acquire 309,150 and 23,437 shares held respectively
by HGA and ISAS in the Company. The Agreement provided the Company the right to
purchase its shares owned by HGA and ISAS at $4.92 per share prior to July 19,
2000. Also on June 30, 2000 CAT signed a Mandate Letter with BNP for disposal of
the shares at $8.11 per share.
The transactions were completed on July 14, 2000. In accordance with the
Agreements and Mandate Letter, BNP paid CAT $1,059,672 after deducting $134,867
of fees resulting in $924,805 of net proceeds from the transaction. As a
condition of the option being exercised, CAT repaid the outstanding loans due
HGA of $777,530 plus a $127,446 early repayment premium.
STOCK OPTION EXERCISE
During July 2000, a total of 94,668 options to acquire shares in the Company
were exercised which resulted in the Company receiving $342,274 of additional
capital.
LITIGATION
On July 21, 2000 Welcome Real-Time SA filed an Application and Statement of
Claim in the Federal Court of Australia claiming breach of an Australian Patent
issued to Welcome Real-Time SA on July 31, 1997 and seeking a permanent
injunction restraining Catuity Inc. and its subsidiaries Chip Application
Technologies Limited and CiT Cards (Australia) Limited during the term of the
Patent from infringing the stated Patent.
The application seeks damages, or at the Applicants option, an account of
profits in respect of all infringements of the Patent and payment of the sum
found due plus interest.
9
10
CATUITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS (CONTINUED)
LITIGATION (CONTINUED)
The Company does not believe the Claim is valid and will vigorously defend its
position. The Company had previously obtained legal advice on its patent
position and will provide the Court with evidence that fully supports its view
that the claim does not have merit.
PRO FORMA BALANCE SHEET
The following condensed, consolidated, unaudited, pro forma balance sheet as of
June 30, 2000 considers the effect of the Early Extinguishment of Debt and July
stock option exercise previously described as if they occurred as of June 30,
2000. The pro forma balance sheet has been prepared for comparative purposes
only and is not necessarily indicative of the financial condition that may occur
in the future.
JUNE 30 JUNE 30
2000 2000
------------------- -------------------
(ACTUAL) (AS ADJUSTED)
Cash $ 3,946,068 $ 4,328,564
Other current assets 983,829 796,829
Non current assets 247,244 247,244
------------------- -------------------
Total assets $ 5,177,141 $ 5,372,637
=================== ===================
Current liabilities $ 709,250 $ 709,250
Borrowings from shareholders 777,530 -
Other non current liabilities 51,609 51,609
Stockholders' equity 3,638,752 4,611,778
------------------- -------------------
Total liabilities and stockholders' equity $ 5,177,141 $ 5,372,637
=================== ===================
10
11
CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Catuity develops, licenses and supports customer loyalty software that enables
retailers to establish and administer customer incentive and loyalty programs
that are completely customizable to meet their unique needs. The Catuity system
functions in both the internet (e-commerce) and in-store environments.
Catuity's U.S. based operations began in earnest in January 2000 with the hiring
of its President and CEO. In the ensuing months the Company established its
headquarters, hired a CFO and Vice President of Sales, and built a sales staff.
During this period the focus of sales efforts centered on establishing
relationships with key industry providers of point of sale terminals, credit
card issuing banks, smart card manufacturers, credit card companies, and
independent service providers who will act as resellers of the Company's
software.
Catuity has developed excellent relationships with several of the largest
companies participating in the smart card and credit card industry. These
companies are providing a solid basis for sales efforts and are establishing
Catuity as having significant presence and credibility in the United States
market.
REVENUE
Service revenue includes revenue associated with the Company's Transcard system
operating in Sydney, Australia and software modification revenue for a customer
under contract in the United States. Of the $221,572 of service revenue in the
second quarter $34,572 relates to the Transcard system and $187,000 from the
software modification work done for a Customer in the United States. The
Company's software modification activity, and the revenue it generates, is
expected to increase in the second half of 2000 due to additional sales
successes currently being experienced. Service revenue increases are projected
to precede the onset of license revenue as the Company completes software
modification work for customers and they subsequently implement and begin
utilizing the software in their operations.
License revenues of $331,679 and $387,768 in the three and six months ending
June 30, 1999 respectively were principally due to a one time license fee
agreement with a customer in 1999 and a small licensing agreement with another
customer during that period. The company has had no licensing revenue to date in
2000. Based on the timetable for implementation established by the Company's
larger United States customers, significant license revenue is not expected to
begin until 2001.
RESEARCH AND DEVELOPMENT AND TESTING
Research and development and testing expense consists of the costs associated
with our software development team in Sydney, Australia and our implementation
services staff in the U.S. For the six months ending June 30, 2000 costs
increased by 26% due primarily to an increase in staff. For the three months
ended June 30, 2000 these costs increased by 13% over the corresponding three
month period of 1999. Costs associated with customer modification activities
will generally be chargeable to the customer.
11
12
CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
SELLING AND RELATIONSHIP DEVELOPMENT
These costs are related to the significant increase in sales activity in the
U.S. market in 2000. For the three months ended June 30, 2000 sales related
costs increased by 301% to $402,277 compared to the same period in 1999. For the
six months ended June 30, 2000 the increase was 333%. While sales related costs
are expected to remain at these higher levels due to ongoing activities in the
U.S. market, the percentage increase over 1999, should be reduced in future
quarters. Expenses associated with the development of sales and promotional
materials and public relations activities are included in these costs as well.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of payroll and related expenses for
executive, accounting and administrative personnel, professional fees and other
general corporate expenses. Expenses for the three months ended June 30, 2000
were 30% below the same period in 1999 due primarily to unusually high expense
levels in the second quarter of 1999 related to legal, accounting and consulting
fees associated with the company's on-going efforts to become established as a
United States Corporation. For the six month period ended June 30, 2000 expenses
were 10% below the same period in 1999. Expenses were level between the first
and second quarter of 2000 whereas they were increasing during 1999.
STOCK COMPENSATION
We account for employee stock based compensation under the intrinsic value
method in accordance with Accounting Principals Board Opinion No. 25 and have
adopted the disclosure-only alternative of Statement of Financial Standards No.
123. Stock compensation charges result from a limited recourse loan to an
executive and the, as yet, undetermined exercise price of stock options granted
to two executives hired in 2000. The credit of $623,042 in the three months
ended June 30, 2000 resulted from a decline in our stock price that occurred in
conjunction with the significant declines in technical stocks on the Nasdaq
market and Australian Stock Exchange in May and June of this year. In the
comparable periods of 1999, technology stock prices in general, and our stock
price in particular, were increasing, resulting in much higher stock
compensation expense being recognized.
12
13
CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
NONRECURRING CHARGES
Nonrecurring charges relate to the costs associated with legal, accounting,
audit and consulting fees to complete the company's change in its' domicile from
Australia to the U.S. and the related one time SEC filings. In the three months
ended June 30, 2000 these costs were 2% over the cost in the second quarter of
1999 when the use of professional services was increasing. For the six months
ended June 30, 2000 the cost increased by 64% over the first half of 1999 due to
the high level of professional services that continued into the first quarter of
2000. Professional services costs are expected to be at higher than normal
levels for the remainder of 2000, but comparable to the second half of 1999.
OTHER INCOME (EXPENSE)
Interest income increased by 89% and 343% in the three and six months ending
June 30, 2000 respectively. The increase in interest income is primarily
attributable to earnings on the capital raised from the placement of 340,000
shares in December 1999 and the repayment of debt in July 1999. Interest expense
decreased by 55% and 52% in the three and six month periods ending June 30,
2000. The decrease was principally due to the debt repayment that occurred in
July 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the company had $3,946,068 in cash and cash equivalents, a
decrease of $1,323,689 from December 31, 1999.
Net cash used in operating activities was $2,319,393 for the six month period
ended June 30, 2000 compared with $1,034,962 for the six month period ended June
30, 1999. This increase was expected and was primarily due to expenses
associated with the growth in staffing in the United States in the first six
months of 2000. In addition, accounts payable and accrued expenses and other
liabilities were reduced by $330,497 and $144,207 respectively in 2000.
Net cash provided by financing activities was $1,574,047 for the first six
months of 2000. Of this amount, $1,183,680 was due to the exercise of 310,268
options in the second quarter. The remainder resulted from the issue of 3,636
shares and the exercise of 12,667 option shares in the first quarter of 2000.
13
14
CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
We believe that our existing capital resources are adequate to meet our cash
requirements for the next twelve months. During July 2000, 94,668 options
were exercised resulting in $342,274 of additional working capital. In addition,
we expect to see an increase in revenues from our U.S. sales activities related
to software modification efforts requested by our customers.
FORWARD LOOKING INFORMATION
The Management Discussion and Analysis of Financial Condition and Results of
Operations includes "forward-looking" statements within the meaning of the
Private Securities Litigation Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the expected
results. All statements other than statements of historical fact made in this
Form 10-Q are forward looking. In some cases, they can be identified by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should consider various factors that may cause our actual
results to differ materially from any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievement. Moreover, neither we nor any other person
assumes liability for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this filing to conform such statements to actual results or to
changes in our expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There have been no material changes from the information reported in the
Company's Form 10 for the year ended December 31, 1999.
14
15
CATUITY INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See notes to financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See notes to financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 2000 Catuity Inc. held its Annual Meeting at which time the
Stockholders elected Messrs. D.L. MacSmith, A.S. Dawson, D.P.F. Mount, M.V. Howe
and A.L. Gilman (effective July 1, 2000) as directors of the Company for the
next twelve months. .
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibit Description
None
(b) There were no Form 8-Ks filed during the quarter ended June 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: /s/ Michael V. Howe
-----------------------------------------------
Michael V. Howe
President and Chief Executive Officer
August 21, 2000
By: /s/ John H. Lowry
-----------------------------------------------
John H. Lowry
Chief Financial Officer
15
16
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule