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2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-30045
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CATUITY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 38-3518829
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
2711 E. JEFFERSON AVE. DETROIT MICHIGAN 48207
(Address of principal executive offices) (Zip code)
(313-567-4348)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE NASDAQ SMALL CAP MARKET
AUSTRALIAN STOCK EXCHANGE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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At March 15, 2001, the aggregate market value of voting and non-voting stock
held by non-affiliates of the Registrant totaled approximately $26,189,306 based
on the last sale price as reported on the Nasdaq Small Cap Market. As of March
15, 2001 there were 7,869,619 shares of the Registrant's common stock
outstanding, par value $.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates the information required by Items 11, 12, and 13 by
reference to its proxy statement to be furnished to shareholders for its Annual
Meeting of Shareholders to be held in May 2001.
FORWARD LOOKING INFORMATION
This report contains statements (including certain projections and business
trends) accompanied by such phrases as "believes," "estimates," "expect(s),"
"could," "likely," "anticipates," "will," "intends" and other similar
expressions, that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to economic and political changes in international markets where
the Company competes, such as currency exchange rates, inflation rates,
recession, foreign ownership restrictions and other external factors over which
the Company has no control; domestic and foreign government spending, budgetary
and trade policies; demand for and market acceptance of new and existing
products; successful development of advanced technologies; competitive product
and pricing pressures; and the uncertainties of litigation, as well as other
risks and uncertainties, including but not limited to those detailed from time
to time in the Company's Securities and Exchange Commission filings. These
forward-looking statements are made only as of the date hereof, and the Company
undertakes no obligation to update or revise the forward-looking statements,
whether as a result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Catuity provides application software that allows merchants and payment card
issuing banks to establish and administer customer incentive and loyalty
programs, integrated to the payment system. Our software is targeted to a broad
range of sellers of goods and services -- including payment card issuers and
merchants. Our software is especially useful for merchants who sell both through
store locations and over the Internet.
Our software supports the establishment and administration of a variety of
customer incentive and loyalty programs. Using our software, the merchant may
reward its customers with valuable benefits, hoping to attract and retain
customers and to encourage increased purchases. Due to the flexibility of our
software, reward programs may be easily established, targeted and changed. In
addition, the merchant may select from a wide variety of reward options. Our
software directly connects the merchant and its customer so that the customer
recognizes the merchant as the provider of the reward.
Our technology was created and tested in Australia by a company named Chip
Application Technologies Limited, or CAT, which is now our wholly owned
subsidiary. Initial trials of a product that incorporated our technology
commenced in 1995. CAT was listed on the Australian Stock Exchange from July
1997 through November 1999, the date that it became a subsidiary. We were
incorporated in Delaware as Catuity Inc. in June 1999 as part of our strategy to
launch our product in the U.S. market through our U.S. based relationship
partners. Catuity's shares have been listed on the Australian Stock Exchange
since November 1999. Catuity has been listed on the Nasdaq Small Cap Market,
under the trading symbol "CTTY" since December 1, 2000. All references to our
company in this registration statement refer to Catuity Inc., including our
subsidiaries, unless noted otherwise.
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INDUSTRY BACKGROUND
CUSTOMER INCENTIVE AND LOYALTY PROGRAMS
Customer incentive and loyalty programs traditionally are used by merchants and
card issuing banks to attract and retain customers and to encourage purchases.
Examples of typical customer incentive and loyalty programs are:
- - paper coupons;
- - airline frequent flyer programs;
- - supermarket clubs that provide discounts and other special offers at the
checkstand to members;
- - programs of online merchants that reward customers with cash rebates, airline
mileage and other benefits.
Customer incentive and loyalty programs at retail stores frequently are tied to
presenting a coupon, holding a membership card or providing a personal
identification number or customer registration. In the online world, rewards
frequently are tied to an account number or credit card. Loyalty programs
generally use either magnetic stripe cards, smart cards or simple paper or
plastic card identification and data recording systems. Few programs can operate
across a range of different identification and data recording systems.
There are few programs that offer multiple reward options or that work both for
retail stores and for the Internet environment interactively. Many programs are
linked to a particular payment card but few can provide multiple programs, such
as a short term incentive program and a long term loyalty program, based on a
single transaction. Many programs require paper statements and redemption forms,
and few provide instant rewards based on particular patterns of transactions.
Additionally, many existing programs operate on hardware provided by only one
supplier or rewards from only one source. Few loyalty programs are integrated to
the payment system on a real time basis and few provide a combination of payment
and loyalty options using the same card. The consumer user of payment cards
receives many competing offers from card issuers. Few of these offers provide a
benefit value proposition to the consumer, as distinct from a purely price value
proposition.
The card associations, issuing banks and others are seeking ways to reduce
fraud, increase security and offer their customers more. Many merchants and
payment card issuers recognize it is much cheaper to retain an existing customer
than to obtain new customers and that loyalty and other programs, such as
Internet security, offer their customers benefits that can be implemented
through the adoption of smart cards. Smart card costs have recently reduced
significantly which has made the business case for introduction of smart card
more attractive.
THE MARKET OPPORTUNITY
We believe that many merchants and card issuers have found it difficult and cost
inefficient to create and administer customer incentive and loyalty programs. As
a result, we believe that many merchants and card issuers have:
- either avoided or introduced very simple, single-reward customer incentive
and loyalty programs
- developed or had developed for them customized solutions that are
expensive to develop and maintain or
- participated as one of many companies in customer incentive and loyalty
programs created and controlled by the sponsoring company. In these cases,
the rewards may not easily be recognized as having been provided by the
merchant or the card issuer and the programs do not typically offer the
option of using the merchant's own goods and services as rewards.
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We believe that there is significant opportunity for a flexible and easy to use
software tool that permits a merchant or a card issuer to create, target and
easily change customer incentive and loyalty programs. The ideal software tool
is controlled entirely by that merchant or card issuer; can apply to purchases
using any payment system at retail stores, over the Internet or interactively
over both; can use the merchant's own goods and services as rewards; can provide
instant rewards; and accommodates all payment methods. There is also a
significant opportunity in providing merchants the tools to operate customer
incentive and loyalty programs cooperatively with other complementary merchants,
allowing the merchant to provide cross selling programs that share customers.
There is also a significant opportunity for card issuers to use loyalty and
incentive programs to differentiate their payment card from other payment cards
by providing loyalty benefits specifically attributed to use of their card. Card
issuers can offer their customers a value proposition as distinct from simply
offering another price proposition. The introduction of smart cards is now being
supported by the card associations in the U.S. and their member banks are
starting to consider the change from existing magnetic stripe cards to smart
cards.
THE MARKET, OUR RELATIONSHIPS AND CUSTOMERS
We believe that loyalty programs will be seamlessly integrated into the payment
system. Loyalty is intrinsically linked to a sale and use of one of the range of
payment methods. Card issuers, who earn fees from use of their cards, want the
consumer to select their card for the payment and the merchant wants as many
sales as possible. Customer loyalty and incentive programs aim to increase sales
for the merchant and increase use of a particular card. These two groups, the
card issuers and merchants, are our target market.
In order for these customers to utilize loyalty/payment software, it is
necessary for Catuity to create relationships with the payment system
infrastructure providers. It is the payment system infrastructure that will
operate the loyalty programs for the card issuers and the merchants. These
providers are:
|X| Card associations and their member banks who determine the technical
standards for payments (and any other applications including loyalty,
that are integrated with payments);
|X| Suppliers of cards, terminals, software and system integration that
links all systems to the hardware components;
|X| Transaction processing and sales organizations that process the
transactions and service the merchant payment systems for the banks.
We believe the U.S. market will lead the world in integrating loyalty with
payment systems, because the payment system infrastructure providers are
predominantly based and managed in the United States. Functionally, a payment
card needs to work the same in New York as it does in London, Sydney or Shanghai
and loyalty programs operating with these payments cards must do the same. As
organizations in the U.S. set the standards and dominate the payment system,
they will set the standards and manage the integration of loyalty systems.
It has been our objective in 2000 to gain the widest possible support and market
alliance coverage from these organizations since they will determine the
standards and manage the loyalty environment. Many of these organizations have
become alliance partners and resellers of our product.
CARD ASSOCIATIONS AND MEMBER BANKS
According to CardData, there are over 275 million credit and debit / ATM cards
issued by the top 10 U.S. bank issuers, accounting for over 75 percent of all
such cards issued. Other research points to even greater numbers of cards
issued. Industry figures indicate that over 500 million payment cards have been
issued in the United States alone, with more than 1.5 billion payment cards
worldwide.
TOP PAYMENT CARD ISSUERS IN U.S.
Bank One Corp/First USA Bank Citibank
Discover MBNA
American Express Corp Capital One Financial Corp
Bank of America Chase Manhattan Corp
Providian Financial Corp FleetBoston Financial Corp
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Visa and Mastercard are the two dominant card associations and 8 of the above
payment card issuers issue cards under either the Visa or Mastercard name. We
have created a strong relationship with Visa USA, the dominant region within the
Visa worldwide organization. We are providing long-term planning and strategic
thinking to Visa in the loyalty area as they move to capture the U.S. market for
smart cards. It is our belief that using an integrated loyalty software
application with payment will be the key differentiator of these smart cards
accelerating growth and offering banks and merchants a true competitive
advantage in gaining more loyal customers. During 2000, Catuity participated
with seven other organizations in the development of the guidelines for the
integration of smart Visa payment systems with loyalty and in May 2000, these
guidelines were published. In June 2000, we signed a significant agreement with
Visa USA to provide loyalty programs for the smart Visa card product released by
Visa USA in September 2000. To date, Catuity is the only certified supplier of
loyalty programs for this Visa initiative.
As part of the smart Visa initiative, we recently signed a contract with Fleet
Credit Card Services, a division of FleetBoston Financial Corp., for the use of
our system on their new "Fusion" credit card. Fleet began issuing cards in
October 2000. Fleet is the first Visa member bank to begin issuing the smart
Visa product and is just one of the many bankcard issuers introduced to Catuity
by Visa. We are in discussions with several other Visa member banks. These banks
represent the major merchant transaction acquirers and card issuers in the
United States and we are confident the Visa member banks will be moving forward
with the smart Visa program including the Catuity loyalty platform.
Visa has given smart cards a high priority in the U.S., backed by growing
investment to heighten smart card awareness and develop smart chip products for
use by their member banks. As the smart card market grows in the U.S., it is
critical to place cards in consumers' hands, with Visa and its card-issuing
banks leading the way. Catuity is working to help create the standards that will
allow all payment cards to be as easily accepted as combined loyalty / payment
cards. This breakthrough achievement is expected to solve one of the key
merchant issues in considering new point of sale systems relating to smart card
acceptance, and Catuity is positioned to capitalize on this opportunity.
In addition to the Visa USA agreement we have agreements with Visa
International.
CARD AND TERMINAL SUPPLIERS
Suppliers to U.S. merchants have become very optimistic about the growth in the
U.S. smart card market. The leading industry associations of suppliers suggest
that the total U.S. market for multi-application smart cards could reach ten
million cards in 2001, 35 million cards in 2002 and 100 million cards in 2003.
There are over 500 million magnetic stripe payment cards in circulation in the
U.S. today.
During the year we signed a marketing agreement for the United States market
with GemPlus, the world's largest supplier of smart cards, and commenced working
with Oberthur, the world's largest supplier of magnetic stripe cards and another
major smart card supplier. We also have working agreements with Schlumberger and
Geisecke and Devrient for smart cards. These companies represent the leading
suppliers of magnetic stripe and smart cards in the world. It is now possible
for card issuers to select a range of cards from a range of suppliers.
The U.S. terminal market is also changing as merchants demand increased
functionality in point-of-sale (POS) transaction devices and as transaction
volume increases in stores, on the Internet and through personal wireless
transaction devices.
TOP POINT-OF-SALE TERMINAL PROVIDERS
VeriFone Ingenico
Hypercom IVI Checkmate
@POS.com Lipman
Schlumberger Linkpoint
In September 2000, we entered into a technology cooperation agreement with
VeriFone, the world's largest supplier of secure payment devices and a
subsidiary of Hewlett Packard. This agreement has now been extended to a
marketing agreement allowing VeriFone to market the Catuity loyalty platform
with their new range of Omni multi-application terminals. We also work with
Ingenico, Hypercom and Schlumberger, and, have or are currently integrating our
software to devices supplied by these manufacturers. We will, therefore,
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have our software integrated with payment devices from the three largest
terminal suppliers in the world. Again, this gives merchants a choice of
terminal device and supplier.
In the area of smart card operating systems we primarily use the Java operating
platform, although our software can also work with Multos, Windows for Cards and
some other proprietary systems. To date, only the Java application has been
required by our customers.
We have cooperative relationships with hardware and software suppliers under
which we receive technical information and development systems in support of our
development efforts to deploy our software on their hardware and software
platforms. Such relationships exist with Sun Microsystems, Gemplus, Oracle,
Verifone, Oberthur, Ingenico, Schlumberger, Maosco and Geisecke and Devrient.
TRANSACTION PROCESSING AND SALES ORGANIZATIONS
Transactions conducted at merchants are acquired by transaction processing
organizations and the arrangements with the merchants are established by sales
organizations active on behalf of the banks. Sometimes these functions are
performed by the same organization. It is necessary to install our software in
the transaction processing centers and to enter into marketing agreements with
the independent sales organizations (ISOs), who become an important marketing
channel between the processors the merchants. The following companies process in
excess of 20 billion transactions annually.
BANK CARD PROCESSORS MERCHANT ACQUIRERS ISOS
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First Data Corporation Chase Merchant Services Cardservice International
National Processing Corp National Processing Corp ACS Merchant Services
Nova Information Services Paymentech Superior BancCard
Global Payments Nova Information Services P.O.S. Card Systems
Bank of America B of A Merchant Services Netcom Data Southern Corp
Midwest Payment Systems Midwest Payment Systems creditCards.com
U.S. Bancorp Concord/EFS Electronic Merchant Systems
First of Omaha Unified Merchants First American Payment
EFS National Wells Fargo Automated Merchant Systems
Lynk Systems U.S. Bancorp Electronic Exchange Systems
We are focused on this market and have installed our system at First Data
Corporation (FDC). FDC is the largest transaction processor in North America
with 2 million merchants. Negotiations related to marketing and other matters
with FDC are continuing.
In March 2001, we concluded a non-exclusive joint product development and
marketing agreement with Lynk Systems, Inc. for the use of the Catuity Magnetic
Stripe Loyalty System. Lynk services over 75,000 merchants and 12,000 ATM
locations nationwide and processes 30 million transactions per month, which
includes credit, debit, check, ATM, and e-commerce. Lynk Systems has been named
one of the fastest growing companies in the U.S. by both Deloitte & Touche and
Inc. Magazine.
We have signed a license agreement for our smart card product with Global
Consumer Technologies, (www.lifestylecanada.com) a Canadian-based integrator of
smart card solutions enhancing merchant sales and consumer convenience both
online and in-store. The company has launched North America's first commercial
combination of smart credit/debit and loyalty card technology for small and
medium sized merchants and consumer markets. Lifestyle Canada is a subsidiary of
Global Consumer Technologies, Inc. The agreement provides for Catuity to receive
installation fees, transaction fees and maintenance fees.
We are looking at opportunities in the U.K. and in Asia/Australia/New Zealand
that currently meet our criterion. We have entered into exclusive arrangements
with Rewards4U.net in the Australian and New Zealand markets for five years,
conditional upon them obtaining a contract with a card issuer or merchant that
would provide more than one million consumer users in three years. Rewards4U
would then become a joint venture company owned equally by Catuity and APN News
and Media, one of Australia's largest media groups.
We have also signed agreements with CardPlus and DataPro, two smaller processors
to license our software.
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INTERNATIONAL MARKETS
We are primarily focusing on the North America market because of the market
size, the growth opportunity for smart cards and the important role U.S.
companies play in the development of payment systems. We are, however,
evaluating and responding to inquiries from other world markets. With the
exception of Canada, which can be supported from our U.S. offices, our
evaluation requirements are that the opportunity must provide critical mass,
have the short term prospect of becoming a profitable self-funding business,
must involve market-leading companies and the resources required from Catuity
must be limited.
STRATEGY
Our strategy is to focus on helping the merchants and card issuers create
customer incentive and loyalty programs that they can control, easily customize
and use on different platforms. We support the merchant's desire to acquire new
customers and to retain existing customers. Our objective is to provide a
solution that:
- provides an easy entry, low cost, powerful marketing solution for the
merchants and card issuers;
- supports customer incentive and loyalty programs whether the customer
purchases at a retail store location or over the Internet; and whether
existing magnetic stripe card Technology or the future smart card
technology is used
- provides the merchant with timely data collection, analysis and
customer information, and provides the cardholder easily accessible and
timely program information and reports.
- fulfills the Any 6 TM objective of any program on any card in any
terminal using any payment method anytime anywhere.
We aim to sell our product through value added resellers (VARs) such as card and
terminal providers, integrators, ISO's and transaction processors, and directly
through our own sales force. Some VARs integrate or bundle our product with
their products, such as an e-commerce product or a payment product. Certain VARs
install our product in their facilities and offer merchants services that
include the functionality provided by our product. By selling through VARs, we
seek to obtain wide and deep market coverage of our business customers and
obtain access to existing VAR customers.
We also sell our product directly through our own sales force. In certain cases,
we use the services offered by the VARs to support the sale. We also use our own
sales force to support and train the VAR sales teams. This multi-channel
distribution strategy provides us with the greatest potential for industry-wide
product acceptance.
COMPETITION
Our product faces competition at two levels. First, we compete with companies
that provide software for customer incentive and loyalty programs for retail
store locations and/or Internet merchants. Second, our resellers who provide
services to merchants, compete with providers of incentive and loyalty programs
to merchants. We believe that the principal factors upon which we and our
resellers compete in the marketplace include:
- product functionality;
- product compatibility;
- price;
- service and training;
- reputation and financial strength; and
- ability to provide other products and services.
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Certain suppliers to retail stores of point of purchase terminals and card and
host systems offer software that is useful for incentive and loyalty programs.
Software providers for e-commerce, are also potential competitors.
Competitors to the services provided by our resellers to retail stores include
the operators of the airline frequent flyer programs as well as marketing and ad
agencies operating traditional incentive and loyalty programs. Competitors to
the services provided by our resellers to on-line merchants are those that
provide frequent flyer points, targeted on-line incentive programs, sweepstakes,
cash back for credit card transactions, personalized coupons, and customer
profiled targeted marketing programs.
We expect competition to increase as companies expand their offerings of
customer incentive and loyalty programs and provide software for retail stores
and the Internet. Our ability to compete depends upon many factors, including:
- our ability to successfully market our product's features;
- the sales and marketing efforts by us and our competitors;
- the effectiveness of our solution relative to the product offerings of
our competitors;
- our ability to continually expand the credibility of our product in the
marketplace;
- our ability to sell to target merchants and card issuers;
- our ability to continue to attract and retain VARs who will sell our
product; and
- the timeliness of our product enhancements from our product development
efforts.
Catuity believes that it's product design and functionality has allowed us to
compete very effectively in the marketplace. We are not aware of any alternative
supplier having won any major loyalty/payment contract with any payment system
infrastructure provider, card issuer or merchant in the United States.
Our application software has a number of strong competitive advantages that
provide market leadership:
|X| Diversity, flexibility and functionality of programs
|X| Operating with existing magnetic stripe or smart cards offering
seamless technology transition
|X| Operates in-store and on the Internet interactively
|X| Integration with the payment system and a wide range of cards and
terminals from the world's largest suppliers
|X| Scalability and control, tracking and reporting systems
|X| Ease of use.
A significant competitive advantage is the strength and breadth of our
relationships with the payment infrastructure providers. We have aligned with
organizations like Visa USA, VeriFone, GemPlus and others, who are the largest
providers in their respective fields.
We have positioned our business as a provider of application software, which
means we do not necessarily compete with loyalty program operators, such as
Netcentives, Frequency Marketing and others. We also do not provide the
traditional Customer Relationship Management (CRM) type of service. We regard
loyalty program operators and the CRM companies as potential partners and
customers for our product. Catuity's focus is on real time redemption.
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OUR PRODUCT
We provide software tools to establish and administer customer loyalty and
incentive programs, whether the customer's purchases occur at a retail store
location or over the Internet. Our product may be used by a wide variety of
businesses, including retail stores, Internet merchants, banks and financial
institutions, credit card issuers, sporting and entertainment venues, public
transport providers and membership organizations. Our software provides a single
solution for the creation and administration of customer incentive and loyalty
programs that span retail store and Internet sales for those merchants who
operate in both arenas. This single solution also helps the merchant establish
programs that encourage loyalty of customers who shop both at retail stores and
over the Internet.
The combination of incentives and loyalty programs incorporated into our
solution offers a powerful customer acquisition and customer retention solution
for merchants. Incentives are used as short-term, tactical marketing programs to
win new customers and loyalty programs are used as long-term, strategic
marketing programs to retain customers. These programs and rewards, operating
simultaneously, can provide merchants (and others such as payment card issuers
and product suppliers) an important marketing tool.
Customer incentive and loyalty programs created with our software are entirely
controlled by the merchant. Our product provides a software solution that is
easy to use and is flexible. The merchant can reward its customers in ways that
permit the customer to easily recognize the merchant as the provider of the
reward. Merchants can either operate the programs or use one of our value added
resellers on an out-sourced basis, but still retain control of the programs
themselves. In addition, merchants can establish programs with other
complementary merchants that create incentives for one merchant's customers to
purchase goods from the other merchant. Rewards may be provided in the
merchant's own goods and services, or through rewards provided by third parties.
The merchant can select from a variety of program and reward options.
Our solution is not dependent upon one type of customer identification or method
of verification. Customers can use existing cards or a membership number with a
personal identification number, or PIN, and programs can operate with various
payment methods. Customers and merchants can receive on-line reporting and
information services via the Internet.
Our product is a fully developed and tested software tool that provides a
merchant and card issuer the infrastructure to establish and administer customer
incentive and loyalty programs, integrated with the payment system. Our
product's features include:
- multiple customized reward options to meet the needs of a wide range of
merchants and issuers;
- the ability to provide programs that offer instant or delayed rewards;
- the ability of the merchant to provide its own goods and services as
rewards or use third party goods and services as rewards;
- the ability of multiple merchants or issuers to determine eligibility
for rewards based on purchases from one or multiple merchants or using
particular cards and the ability to pool points;
- an easy to operate, complete, off-the-shelf solution;
- applicability for sales through retail stores and for purchases online;
- capacity to operate on existing magnetic stripe cards or the future
smart cards with a clear transition path between these technologies
- on-demand data collection, analysis, customer profiling and behavioral
reporting;
- capacity to change or add incentive and loyalty programs overnight;
- support of a broad range of payment methods;
- scalability to support and upgrade to larger systems;
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- the choice of online or offline processing operations;
- a completely paperless operation;
- security and monitoring systems; and
- support of multi-lingual operations.
Our product permits the merchant or issuer to offer a broad range of reward
eligibility, including rewards that are:
- triggered by reaching preset spending levels or conducting specified
activities based on the value or the frequency of the activities;
- based upon short or long term activity;
- triggered by conducting specified activities at one or a range of
merchants or on a particular card;
- tiered based upon one or a range of activities or activity levels;
- increased based on achieving certain activity levels;
The types of rewards that the merchant or issuer may choose to offer the
customer include:
- fixed or percentage discounts on the immediate transaction or on the
next transaction;
- rewards comprising goods and services provided by the merchant or by a
complementary merchant or the issuer or over the Internet; and
- multiple rewards such as:
- simultaneously offering an immediate incentive for the next purchase
and a long term loyalty program incentive for repeat purchases;
- simultaneously offering participation in a local retail store incentive
program, a national chain loyalty program and a complementary
merchant's Internet program; or
- simultaneously offering participation in different programs offered by
a merchant, a payment card issuer and a product supplier based on the
same activity.
In addition to our target market of customer incentive and loyalty programs, our
product also is designed to support other complimentary applications. For
example, our product supports ticketing , entertainment and sporting venues;
issuing and tracking memberships in an organization; and controlling access to
facilities.
PRODUCT DEVELOPMENT
During 2000, Catuity continued to enhance the functionality of our product on
many fronts.
Early in the year we completed the changes necessary to support online magnetic
stripe card based transactions as an alternative to chip or smart cards. The
Point-of-Sale (POS) component of our software was enhanced to allow POS
terminals to accept either chip-based cards for offline loyalty processing or
magnetic stripe cards for online loyalty transaction processing. This
enhancement allows card issuers and merchants to choose either a magnetic stripe
based solution or a smart card or a combination of both.
This development allows our product to be installed without the need to wait for
existing terminal infrastructure to be upgraded to smart card capability and it
provides merchants and card issuers a solution for the transition from magnetic
stripe to smart card technology.
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For the last two years we have worked closely with Visa's technical teams. We
were part of the Visa working group that established the guidelines for the
seamless integration of Visa payment systems with loyalty, which resulted in the
release by Visa in May 2000 of "Smart Loyalty - A Loyalty-Payment Integration
Guide."
Our relationship with Visa USA resulted with our technical team assisting Visa
in the development and promotion of the "smart Visa" initiative. This initiative
incorporates four standard applications on a single smart card. The applications
are: smart Visa debit/credit, smart Visa access, and smart Visa loyalty. Catuity
provided the smart loyalty component of the initiative.
The smart loyalty product offering combines traditional credit card,
issuer-based loyalty point programs with features only available with smart
cards. With smart Visa, loyalty points can be awarded to cardholders using their
Visa credit card (magnetic stripe or smart based) for payment. This account
number is also stored in the issuer's Catuity system database. Cardholders can
log into the issuer's web site and view their current point balances. Points can
be "downloaded" onto their smart card and "spent" as value at the issuer's web
site or a participating merchant web site or directly at the retail store. In
addition to the issuer based points program, smart loyalty offers merchants the
ability to run their own specific loyalty and incentive programs at the time of
purchase, regardless of the payment method.
The smart Visa project involved customizing our "Open Platform" smart card
applet to suit Visa's requirements and developing the necessary interfaces to
card initialization service bureaus, the Visa payment system and the development
of the web and POS based points download and spend modules.
This project was completed successfully in July, culminating in a number of
training sessions in the U.S. given to Visa USA staff members and other third
parties on the functionality and operation of the Catuity system. As a result of
Visa's marketing of the smart Visa initiative, we immediately began work on
specific customizations required for the first participating card issuers. These
customizations involved minor changes to the system interfaces and to the
"look-and-feel" of the web-based applications. These customizations have been
completed and the first issuer has been issuing cards to its target market since
last October with the smart loyalty application developed by Catuity.
During the year, we increased the diversity of terminals supported by our
product by porting our software to the VeriFone Omni 3000 line of POS terminals.
This is the latest range of terminals from VeriFone, the world leader in supply
of secure POS payment devices. The Omni 3000 range is being specifically
targeted as the preferred platform for smart loyalty support in the in-store
retail market. The VeriFone Omni 3000 range now compliments our existing
supported terminal range from Intellect and Schlumberger.
Toward the end of the year we began work on our most comprehensive release of
the system to date. Known as Release 8, the release included a number of notable
enhancements. Namely:
|X| full support for Microsoft Windows 2000
|X| full support for PC/SC readers including USB readers under Windows
98 and Windows 2000
|X| Seamless support for all Open Platform cards from various vendors
including GemPlus and Oberthur
|X| A fully integrated demonstration kit
|X| Integrated support for magnetic stripe and chip based smart Visa
loyalty
During the second quarter of 2001 we expect to release an enhanced "gift
card/voucher" solution, which will allow merchants to replace existing
paper-based gift vouchers with magnetic stripe cards and allow those cards to be
used as an alternate payment method in the store and on their web site while
offering all the features of Catuity's powerful merchant-based loyalty programs.
The technology used in our software was developed by our technical development
team in Sydney, Australia. We continually work to enhance the product by adding
new product capabilities and applications. Our Australian development team is
experienced and provides a low cost development capability. Our expenditures for
research, development and testing were $1,433,744, $825,968, and $899,028,
respectively, for 2000, 1999, and 1998.
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BUSINESS MODEL
Merchants and card issuers use our product to provide benefits for the purchase
of goods and services to their customers. Our business model is to receive
transaction fees paid either by the merchant and or by the card issuer. This
model is designed to create a recurring revenue stream, protected by a minimum
annual fee, and offers a low initial cost purchase decision for our customers.
In certain markets, we may license commercialization of our product and
technology exclusively to a third party. In certain situations, we may offer
incentive and loyalty program services, based on our product, to merchants.
Our business model delivers three types of revenues:
Software development revenue is generated from integration, customization and
installation fees that normally occur within several months of the contract
date. These fees are largely a recovery of costs on a time and materials basis.
Recurring software license revenue is generally based on a per transaction basis
or a fee is charged for each card issued. These fees, which will make up the
majority of our revenues, are for the limited license to use Catuity software
and will follow contract signing by a number of months until merchant
transactions start occurring or payment cards are issued and activated.
Service revenue is generated from training services and annual maintenance fees
for software upgrades.
While the first and third revenue types are relatively easy to project when a
contract and the scale of programs are awarded. The second revenue type is more
difficult to project as the rate of rollout and the scale of programs are
controlled by the customer. However, we believe the license fees represent
recurring revenues and will be significant over time as our software becomes
integrated to the payment system and merchants begin to capture the increased
revenue and the decreased costs afforded by the Catuity system.
REVENUE AND ASSETS BY GEOGRAPHIC LOCATION
In the year 2000, the significant majority of our revenues were derived in the
United States. Prior to 2000, all of the Company's revenues related to its
Australian operations.
The Company's assets are located at its headquarters in Detroit, Michigan, at
its product development facility in Sydney, Australia, and at its service and
demonstration office in Arlington, Virginia.
STANDARDS, PATENT AND OTHER INTELLECTUAL PROPERTY ISSUES
We have filed certain patent applications in a number of countries including the
United States. These patent applications relate to the use of customer profiles
and systems for the operation of multiple reward programs in retail shops and on
the Internet in a single solution. We also rely on the protections afforded our
intellectual property under copyright, trademark and trade secret laws.
Catuity believes that it is neither technically nor commercially feasible to
have a multitude of different loyalty application software packages integrated
with payment systems. The certification and management procedures, the limited
capacity of cards and terminals and cost preclude card issuers from providing
duplicated capacity for loyalty programs. Therefore, integration standards need
to be developed that will guide the market and ensure that interoperability of
cards is achieved. The major card issuers and merchants want interoperability,
which is delivered as a part of our Any 6 TM vision for the market. Catuity is
developing the features and functionality to offer the interoperability required
by the market. The major standard-setting organizations are beginning to
recognize our contributions to this effort. We expect some industry progress and
some resolution to occur during 2001.
Irrespective of any interoperability standard announcements, we believe, the
most open platform product with the largest market appeal will drive the
standards. The main protection for software companies, however, lies in
copyright of source code and market share, not in standards, patents or other
intellectual property rights.
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EMPLOYEES
As of March 15, 2001, we had 40 full time employees, comprised of 10 in sales
and marketing, 8 in finance and administration and 22 in technology,
implementation support, and product development. None of our employees is
represented by a collective bargaining agreement. We consider our relations with
our employees to be very good.
FACILITIES
Our corporate headquarters is located in Detroit, Michigan. Our implementation
and service team is located in Arlington, Virginia. Our technology and product
development facilities are in Sydney, Australia. We have no other material
foreign operations. Also see Item 2, Properties, below.
OPERATIONS
Catuity U.S. operations can expand as opportunities unfold. Our marketing, sales
and finance group now numbers 13 people in Detroit, with 4 remaining in Sydney.
Our integration and installation team has three full time people residing at
Smart Dynamics in Arlington, Virginia. Under agreement with Smart Dynamics, we
have access to abundant trained technical integration specialists as we need
them.
Our 20 member product development team in Sydney is completely integrated with
our sales and installation efforts, providing seamless continuity to our
customers. We have installed test/demo systems for six customers in North
America and currently have five full system installations scheduled for
customers. The implementation time and procedures are becoming more streamlined
as we gain experience.
ITEM 2. PROPERTIES
Our corporate headquarters and principal executive offices in North America are
located in leased facilities in Detroit, Michigan consisting of approximately
1,950 square feet of office space. Our lease expires on February 1, 2002 but is
renewable at our option. Our current facilities in the United States should meet
our needs for the next 12-24 months, but may not be sufficient to meet our
anticipated growth beyond then.
Our office and development center is located in leased facilities in Sydney,
Australia, consisting of approximately 2,060 square feet. Our lease agreement
expires on December 14, 2003. We believe that our Australia facilities are
sufficient to meet our foreseeable operating needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in litigation concerning claims arising in
the ordinary course of our business. We are not presently a party to any legal
proceedings, except for the lawsuit described below.
On July 20, 2000 Welcome Real-Time S.A. made an application to the Federal Court
in Australia to obtain an injunction and damages from Catuity Inc. for
infringement of an Australian patent by the Catuity owned Transcard product.
This is an action we are vigorously defending and we subsequently filed a claim
for revocation of their patent. As of March 15, 2001 the Welcome Real Time (WRT)
action in the Federal Court of Australia against Catuity for alleged
infringement of their Australian patent and Catuity's action for revocation of
the WRT patent is continuing. The case is currently adjourned and will reconvene
on April 2, 2001. It is expected to be completed by April 15, 2001. The timing
of a decision by the Judge is uncertain but is not expected before late April,
at the earliest.
Based on our legal counsel's opinion, we expect to prevail in the court action
and we expect no material effect on the Company's financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Catuity ("CTTY") was listed on the Nasdaq Small Cap Market beginning December 1,
2000. The following table sets forth high and low sale prices per share of our
common stock during December 2000 as reported on the Nasdaq Small Cap Market.
Price Range of
Common Stock
----------------
High Low
---- ---
Fourth Quarter 2000 (from December 1) $10.00 $5.38
Chip Application Technologies was listed on the Australian Stock Exchange (ASX)
under the trading symbol "CAT" from July 11, 1997 to November 22, 1999. On
November 23, 1999, upon Catuity's acquisition of CAT, we replaced CAT as the
listed entity on the ASX under the same trading symbol. We continue to be traded
on the ASX.
Our high and low sales prices on the ASX for each quarter within the last two
fiscal years are shown below, both in Australian dollars and in United States
dollars.
High Low High Low
Period (Australian $) (Australian $) (United States $) (United States $)
- ------ -------------- ------------- ----------------- -----------------
2000
First Quarter $23.90 $15.50 $14.50 $9.40
Second Quarter $21.00 $10.00 $12.65 $6.03
Third Quarter $18.45 $14.16 $10.06 $7.72
Fourth Quarter $19.80 $10.40 $11.09 $5.82
1999
First Quarter $ 9.90 $ 2.40 $ 6.28 $1.52
Second Quarter $15.10 $ 7.60 $ 9.98 $5.03
Third Quarter $12.50 $ 8.00 $ 8.16 $5.22
Fourth Quarter $24.40 $11.70 $16.03 $7.69
All currency conversions are based on the prevailing A$ to US$ rate applicable
on the last day of each respective quarter.
As of March 15, 2001 there were approximately 4,007 stockholders of record of
our common stock as reported to us by Computershare Investor Services, our
transfer agent.
To date, we have not paid any dividends on our common stock and do not expect to
do so in the foreseeable future. We expect to retain all earnings to finance the
growth and development of our business.
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ITEM 6. SELECTED FINANCIAL DATA
FOR YEARS ENDED DECEMBER 31
(IN THOUSANDS EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
INCOME STATEMENT DATA:
Total Revenues $ 744 $ 638 $ 292 $ 761 $ 441
Total Costs and Expenses (1) 4,627 6,808 2,499 4,063 3,740
------- ------- ------- ------- -------
Operating Loss (3,883) (6,170) (2,207) (3,302) (3,299)
Total Other Income/(Expense) 199 (41) (177) (215) (363)
Extraordinary loss on Early
extinguishment of debt (127) -- -- -- --
------- ------- ------- ------- -------
Net Loss ($3,811) ($6,211) ($2,384) ($3,517) ($3,662)
======= ======= ======= ======= =======
Loss per share before extraordinary item-
basic & diluted ($ 0.52) ($ 1.05) ($ 0.53) ($ 1.15) ($ 2.81)
Loss per share on extraordinary
item-basic & diluted (0.02) -- -- -- --
------- ------- ------- ------- -------
Net Loss per share-basic & diluted ($ 0.54) ($ 1.05) ($ 0.53) ($ 1.15) ($ 2.81)
======= ======= ======= ======= =======
AS OF DECEMBER 31
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Total Assets $ 9,500(2) $ 6,189(3) $ 639 $ 1,336 $ 495
Long-Term Debt -- 854 1,594 1,692 2,028
(1) Includes variable stock compensation expense (benefit) of ($716,192) in
2000, $2,475,175 in 1999, ($8,627) in 1998, $218,646 in 1997 and $9,396 in
1996.
(2) Includes a private placement of 710,000 shares of common stock which raised
$6,245,000 in net cash proceeds.
(3) Includes the issuance of shares of common stock which raised $9,521,278 in
net cash proceeds.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a summary of the consolidated operating results of Catuity,
Inc. and contains forward looking statements based upon current expectations
that involve risks and uncertainties. The Company's actual results and the
timing of certain events could differ materially from those anticipated in these
forward looking statements.
RESULTS OF OPERATIONS
OVERVIEW
The year 2000 was the first full year of Catuity's operations in the United
States. In January our President and CEO joined the Company and began to build
the sales, finance, operations and administrative staff. From January to
September the United States staff grew from one to thirteen. We will continue to
hire additional staff in 2001 in order to meet the growing demand for our
software. Our product development team remains in Sydney Australia enhancing and
modifying our software to meet customer needs in the United States. In addition,
we have made arrangements with a technical consulting company who has become
fully versed in our software to provide us with added technical support for
flexibility in meeting our customer needs. As a result, we have been able to
keep our costs controlled but still provide the service and implementation
support that our customers need.
A number of milestones were accomplished during 2000. In addition to building
our U.S. staff and infrastructure, we won our first major strategic and revenue
earning contracts in America and completed all of the work necessary to achieve
SEC and Nasdaq clearance to become listed on the Nasdaq Small Cap Market.
In May 2000, when we were concluding the Visa USA agreements, we projected that
Visa USA and its member banks would issue 5 million smart cards that include our
product by the end of 2001 and 20 million smart cards by the end of 2002. Based
on this analysis, we projected the revenue from the Visa USA agreement and
related member bank agreements would exceed $9 million over 30 months (up to
December 31, 2002).
Today, the leading industry associations' suppliers suggest that the total U.S.
market for multi-application smart cards issued by banks and merchants could
reach 10 million cards in 2001, 35 million smart cards in 2002 and 100 million
smart cards in 2003. There are a number of factors impacting the market. The
positive factors have been the reduction in price of smart cards which has
positively impacted the business case for card issuers and the strong commitment
by Visa to the introduction of smart cards. The negative factors are the lack of
a standard agreed to by the key participants for the integration of loyalty with
the payment system, the slowness of terminal suppliers to deliver
multi-application terminals and the slowness of merchants and card issuers to
complete system integration. These factors have caused greater interest in the
smart card opportunity among issuers but a longer lead time in implementation
and the decision making process.
While the prospect still exists that Visa member banks will achieve the original
projection, (with FleetBoston Financial Corp. already issuing cards and a
second bank preparing to issue cards in the near future), the rate of adoption
and issue by Visa member banks is accelerating but has been slower than
projected.
Although the smart card market and the Visa smart card program are important to
us, we are pursuing and winning contracts with customers that do not involve
either smart cards or Visa member banks. For example, the Lynx Systems agreement
for our magnetic stripe card solution and the Global Consumer Transactions
agreement for loyalty and other payment cards. We are also pursuing
opportunities that involve very large merchants and card issuers both within and
outside the U.S.. Therefore, we believe on a world-wide basis the prospect of
having at least 5 million cards issued with our software by the end of 2001 and
20 million cards with our software by the end of 2002 is achievable.
Our license fee revenues depend on the rate at which card issuers issue cards,
cardholders conduct transactions and other factors beyond our control. As
previously stated, the Visa USA contract includes per annum card fees that were
proposed to the Visa member banks. In negotiations with these banks, we are
finding that some want a per transaction fee based on loyalty transactions on
the cards. As a result, we now offer pricing on the basis of either a per card
fee and or a per transaction fee. The impact of a per transaction fee is that
the revenue to Catuity is less certain and the revenue is delayed in the short
term. The benefit is that there is a higher potential
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for revenue in the longer term. The per card issued pricing has the benefit of
achieving revenues sooner, but could generate less revenue in the long term. We
will continue to offer the merchants and the card issuers the pricing approach
that they believe best suits their needs. In projecting our license revenue, we
have evaluated all our existing qualified prospects with the result that we
believe that a sustainable assumption for recurring license fee revenue during
the market development phase over the next 12 months, is a range of 5 to 10
cents per month per card issued, irrespective of whether the fee basis is per
card or per transaction. Contracts will vary as to the timing of the beginning
of license revenue being recognized. Some contracts will have payments begin
once cards have been issued, while others will have payments begin following the
occurrence of the first loyalty transactions.
A second source of recurring revenues is maintenance fees which relate to the
number of licenses granted. Other fees, such as integration, installation,
customization and consulting service fees, are generally on a time and materials
basis and are non recurring. By end of 2001 we project these fees will be in
excess of $100,000 per month.
We do not expect significant revenues in the first half of 2001, and revenues
that are recognized in this period will primarily be for service and
maintenance.
For 2001, our total operating expenses are currently projected to be $6.6
million exclusive of non-cash related general and administrative variable stock
compensation expense which fluctuates with our stock price. Included in these
projections is the expectation for increased sales and marketing expenses
related to the U.S. market, lower general and administrative expenses due to the
completion of the transformation to a U.S. company and the completion of the
Nasdaq listing and SEC filing requirements for listing, and marginally higher
product development expenses due to a reduction in research and development
grants from the Australian Government.
Based on our assessments of our customers plans, our expectations of a high
gross margin and our projected expenses, we project we will achieve our first
month of profitability in the fourth quarter of 2001. The speed with which our
customers progress with their plans and the success they achieve in their
product launches will determine the actual timing of our first profitable month
from operations.
During 2000, we improved our cash and equity position and generated sufficient
cash for the early retirement of all long-term debt and to fund our anticipated
growth in 2001. As of December 31, 2000, we have cash reserves of $8,559,000
and no long-term debt. These cash reserves represent approximately 16 months
of projected operating expenses. Based on the revenue projections referred to
above, our cash reserves are adequate for our future requirements.
FISCAL YEAR ENDED 2000 COMPARED TO 1999
Revenues in 2000 exceeded 1999's revenues by approximately $100,000 or 16.5%. Of
the $744,000 in 2000 revenue, 83% was derived from sales activities in the
United States and 17% from sales in Australia. This is the first time that U.S.
revenues have been such a significant majority of the Company's revenue and
reflects the transformation to becoming a U.S. Company and building the U.S.
operations during the year.
Of the $744,000 of revenues in 2000, $527,000 was related to software
development, $92,000 was related to training activities and $125,000 related to
on-going customer activities in Sydney Australia. Given the nature of our sales
cycle and the work that must be done for a customer to fully begin to utilize
our software, service revenue is normally expected to precede maintenance
revenue and license revenue on any given customer to which the Company licenses
it's loyalty software.
Product development expenses are primarily related to our technical staff
located in Sydney Australia that continues to increase the features and
functionality of our loyalty software based on U.S. customer needs. Expenses
related to our U.S. based service and implementation team are also included in
product development costs. In 2000, product development expenses increased
$608,000 or 74% over 1999. The increase was primarily due to the higher costs
associated with the establishment of our U.S. based implementation and service
team in 2000. In addition, product development grant monies are recognized that
offset product development expenses. Grant amounts recognized by the Company
decreased in 2000 to $299,000 from $573,000 in 1999. The Company may seek
additional research and development grants from the Commonwealth and/or other
sources in the future. We have achieved all milestone associated with the grant
and know of no obligation to repay any amounts. In addition, we have met the
conditions of all previous grants.
Sales and marketing expenses increased $949,000 or 99% from $957,000 in 1999 to
$1,906,000 in 2000. The Company used contractors in 1999 to begin introducing
software products in the U.S. As planned, the Company significantly increased
its efforts and investment in the U.S. market in 2000. This investment included
the hiring of a sales force and increasing the travel of these sales personnel
to increase product awareness. We expect sales and marketing expenses to
increase again in 2001 as we continue to invest in the selling and marketing of
our software products.
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General and Administrative (G&A) costs relate to finance, administrative, office
overhead, and outside professional fees. G&A costs decreased $546,000 or 21% in
2000 compared to 1999. In 1999 our professional services costs were very high as
the company extensively used outside legal, accounting and consulting services
to transform itself from an Australian company to become incorporated in the
United States. These costs, which exceeded $1,200,000, were one time U.S.
establishment costs. The decrease primarily relates to outside professional fees
and other costs related to our transition from Australia to the U.S. in 1999. In
2000, our professional fees remained higher than they are anticipated to be in
the future due to costs associated with achieving SEC and Nasdaq clearance
required to begin trading on Nasdaq. In addition, in 2000, we also incurred
higher than normal legal fees related to the Welcome Real-Time Patent
infringement lawsuit described below. We expect G&A costs to decrease again in
2001.
G&A-variable stock compensation was a credit of $716,000 in 2000 versus and
expense of $2,475,000 in 1999. This non-cash item relates to a variable stock
compensation award to a Company executive coupled with a non-recourse loan. The
expense (credit) is subject to changes in our stock price from period to period.
Other income increased significantly in 2000 to $199,000 compared to a net
expense of $41,000 in 1999. The principle reasons for the increase was the
reduction of interest expense from the early extinguishment of long-term debt
during the year and the interest income earned on higher cash balances
maintained by the Company in 2000.
FISCAL YEAR ENDED 1999 COMPARED TO 1998
In 1999, total revenues were $638,000. These revenues were derived from $541,000
in product licenses and from $97,000 in services relating to transaction
processing fees and consulting activities. Comparatively, 1998 revenues totaled
$292,000, which was entirely derived from product licenses and services.
Operating revenues increased by $347,000, or 119% in 1999. The increase resulted
from an increase of $405,524 in product licenses due to the signing of two new
license agreements.
Product development expenses decreased $73,000, or 8%, to $826,000 for the year
ended December 31, 1999 from $899,000 for the year ended December 31, 1998. This
decrease was due to research and development expenses which were
partially offset by the lower cost and use of resources to support testing of
our product. This decrease is also due to an increase of $162,000 in research
and development grants for the year ended December 31, 1999 from $292,000 for
the year ended December 31, 1998, an increase of 55%.
Sales and marketing expenses increased $42,000, or 5%, from $915,000 for the
year ended December 31, 1998 to $957,000 for the year ended December 31, 1999.
Sales and marketing expenses were primarily attributable to continued U.S.
strategic relationship development and support. As a percentage of net revenue,
these amounts represented 130% for 1998 as compared to 79% for 1999, which
reflects increased sales rather than increased selling and relationship
development expenditures. Sales and marketing expenditures in the U.S.
significantly increased as U.S. sales and marketing activities increased, while
expenditures in other markets was minimal.
General and administrative expenses increased $1,856,000, or 267%, from $694,000
for the year ended December 31, 1998 to $2,550,000 for the year ended December
31, 1999. The expense increase primarily relates to the increased resources
required to implement the transformation of CAT into Catuity and increased
compliance costs related to the increase in our issued capital stock and in our
number of shareholders to 4,380 at December 31, 1999, compared to 955 at
December 31, 1998. During the year ended December 31, 1999, an additional
provision of $105,000 was recorded against assets related to testing of our
product, compared to a provision of $31,000 in the year ended December 31, 1998.
Depreciation and amortization expense increased $24,000 from $78,000 for the
year ended December 31, 1998 to $102,000 for the year ended December 31, 1999.
General and administrative variable stock compensation expense was charged in
relation to a non recourse loan to an Executive in the amount of $2,475,000 for
the year ended December 31, 1999, compared to a credit of $9,000 for the year
ended December 31, 1998. The significant increase in expense is attributable to
the significant improvement in our stock price during 1999.
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Other expense decreased by $136,000, or 77%, to $41,000 for the year ended
December 31, 1999 from $177,000 for the year ended December 31, 1998. This
decrease was attributable to a reduction in borrowings during 1999 and an
increase of $95,000 in interest income on higher cash reserves.
Principally as a result of the factors described above, we incurred a net loss
of $6,210,000 for the year ended December 31, 1999 compared to a net loss of
$2,384,000 for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, $8.2 million of cash was raised through the exercise of nearly
427,000 option shares and the private placement of 710,000 shares to several
accredited institutional investors. In addition, all of the Company's $854,000
of previously outstanding borrowings was repaid with the proceeds from the sale
of an option right. The Company incurred an extraordinary loss of $127,000 for
the early extinguishment of debt related to this transaction.
Operating activities utilized $3,939,000 of cash in 2000 compared to $3,525,000
in 1999. Among the reasons for the increase of $414,000 in cash utilization was
a reduction in accounts receivable, timing of payments of accounts payable and
accrued expenses and an increase in other assets acquired during the year.
Cash used in investing activities in 2000 totaled $112,000 and was primarily
related to the purchase of equipment for the Company's headquarters and
personnel in the U.S. This was comparable to the investment of $136,000 in
equipment during 1999.
Cash obtained from financing activities was $8,137,000 in 2000 compared to
$8,681,000 in 1999. The largest source of cash came from the private placement
of 710,000 shares to several accredited institutional investors that raised
$6,245,000. In addition, $1,892,000 in proceeds from the exercise of options was
realized during the year.
We improved our cash and equity position during 2000. We have $8,559,000 in cash
and cash equivalents at December 31, 2000 and no outstanding debt. We believe
that we have sufficient cash and equivalents on hand to fund our anticipated
growth in 2001.
As of December 31, 2000, the Company had operating loss carry-forwards with a
full valuation allowance of $2,617,000 expiring in 2020 in the United States and
$15,582,000 in Australia. Utilization of the net operating loss carry-forwards
in Australia is subject to an annual limitation due to the ownership change
limitations in accordance with Division 165 and Division 166 of the Australian
Income Tax Assessment Act 1997. The limitation may result in the expiration of
net operating losses before utilization.
LEGAL PROCEEDINGS
On July 20, 2000 Welcome Real-Time S.A. made an application to the Federal Court
in Australia to obtain an injunction and damages from Catuity Inc. for
infringement of an Australian patent by the Catuity owned Transcard product.
This is an action we are vigorously defending and we subsequently filed a claim
for revocation of their patent. As of March 15, 2001 the Welcome Real Time (WRT)
action in the Federal Court of Australia against Catuity for alleged
infringement of their Australian patent and Catuity's action for revocation of
the WRT patent is continuing. The case is currently adjourned and will reconvene
on April 2, 2001. It is expected to be completed by April 15, 2001. The timing
of a decision by the Judge is uncertain but is not expected before late April,
at the earliest.
Based on our legal counsel's opinion, we expect to prevail in the court action
and we expect no material effect on the Company's financial position or results
of operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to foreign currency exchange rate risk inherent in our sales,
expenses, assets and liabilities denominated in the Australian dollar. To date,
we have not utilized any foreign currency hedging or other derivative
instruments to reduce exchange rate risk. We do not expect to employ these or
other strategies to hedge the risk in the foreseeable future.
As of December 31, 2000, and 1999 the Company's net current assets (defined as
current assets less current liabilities) subject to foreign currency risk are
$95,000 and $4,870,000. The potential decrease in net assets from a hypothetical
10% adverse change in quoted foreign currency exchange rates would be
approximately $9,500 and $487,000.
We are also exposed to interest rate risk on our investment portfolio which is
affected by changes in the general level of interest rates in the United States
and Australia. Since we generally invest in very short-term interest bearing
deposits, we do not believe we are subject to any material market risk exposure.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Report of Independent Auditors ..................................... 22
Consolidated Balance Sheet ......................................... 23
Consolidated Statement of Operations ............................... 24
Consolidated Statement of Cash Flows ............................... 25
Consolidated Statement of Shareholders' Equity ..................... 26
Notes to Consolidated Financial Statements ......................... 27
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REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CATUITY INC.
We have audited the accompanying consolidated balance sheets of Catuity Inc. as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of Catuity Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Detroit, Michigan /s/ Ernst & Young LLP
March 21, 2001
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CATUITY INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,558,843 $ 5,269,757
Accounts receivable-trade, less allowance of
$44,000 in 2000, and $158,000 in 1999 111,698 429,159
Restricted cash 222,265 178,054
Prepaid expenses and other 370,357 69,535
------------ ------------
Total current assets 9,263,163 5,946,505
Property and equipment, net 236,832 242,038
------------ ------------
Total Assets $ 9,499,995 $ 6,188,543
============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable $ 378,983 $ 560,906
Deferred revenue 67,000 --
Accrued compensation 122,134 118,054
Other Accrued expenses 483,406 235,849
Trust liability 204,243 157,685
------------ ------------
Total current liabilities 1,255,766 1,072,494
Borrowings from shareholders -- 854,230
Accrued compensation 50,231 20,588
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock - $.001 par value Authorized - 100
million shares:
issued and outstanding - 7,869,619 in 2000
and 6,729,269 in 1999 7,870 6,729
Additional paid-in capital 32,626,916 24,197,799
Shareholder loans (757,733) (757,733)
Foreign currency translation adjustment (265,067) 401,073
Accumulated deficit (23,417,988) (19,606,637)
------------ ------------
Total shareholders' equity 8,193,998 4,241,231
------------ ------------
Total Liabilities and Shareholders' Equity $ 9,499,995 $ 6,188,543
============ ============
See accompanying notes
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CATUITY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Software development revenue $ 526,993 $ -- $ --
Service revenue 216,913 97,623 156,298
License revenue -- 540,759 135,235
----------- ----------- -----------
Total revenues 743,906 638,382 291,533
Operating Costs and expenses:
Product development 1,433,744 825,968 899,028
Sales and marketing 1,905,906 956,911 914,622
General and administrative 2,003,408 2,549,732 693,979
General and administrative-variable
stock compensation (716,192) 2,475,175 (8,627)
----------- ----------- -----------
Total operating costs and expenses 4,626,866 6,807,786 2,499,002
----------- ----------- -----------
Operating loss (3,882,960) (6,169,404) (2,207,469)
Other income/(expense):
Interest income 246,200 115,631 20,186
Interest expense - related party (47,145) (156,311) (196,865)
----------- ----------- -----------
Total other income/(expense) 199,055 (40,680) (176,679)
----------- ----------- -----------
Loss before taxes and extraordinary item (3,683,905) (6,210,084) (2,384,148)
Provision for income taxes -- -- --
----------- ----------- -----------
Loss before extraordinary item (3,683,905) (6,210,084) (2,384,148)
Extraordinary loss on early extinguishment
of debt (127,446) -- --
----------- ----------- -----------
Net Loss $(3,811,351) $(6,210,084) $(2,384,148)
=========== =========== ===========
Loss per share before extraordinary
item - basic & diluted $ (0.52) $ (1.05) $ (0.53)
Loss per share on extraordinary
item-basic & diluted (0.02) -- --
----------- ----------- -----------
Net Loss per share -basic & diluted $ (0.54) $ (1.05) $ (0.53)
=========== =========== ===========
Weighted average shares outstanding-basic 7,020,534 5,913,613 4,473,257
& diluted =========== =========== ===========
See accompanying notes
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CATUITY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
===================================================
2000 1999 1998
=========== =========== ===========
Cash flows from operating activities:
Net Loss $(3,811,351) $(6,210,084) $(2,384,148)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Stock based compensation (716,192) 2,475,175 (8,627)
Depreciation and amortization 117,525 101,809 78,425
Amortization of prepaid license fees -- -- 72,319
Extraordinary loss on early extinguishment
of debt 127,446 -- --
Provision for doubtful accounts 44,421 157,704 --
Provision for obsolete inventory -- 104,929 30,669
Changes in assets and liabilities:
Accounts receivable 430,854 (576,072) 193,015
Inventories -- (19,523) 104,940
Accounts payable (181,923) 250,840 164,585
Accrued expenses and other liabilities 348,280 195,278 12,881
Other assets, net (298,475) (4,860) (13,554)
----------- ----------- -----------
Net cash used in operating activities (3,939,415) (3,524,804) (1,749,495)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (112,319) (135,622) (175,951)
Net advances to shareholders -- -- (120)
----------- ----------- -----------
Net cash used in investing activities (112,319) (135,622) (176,071)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock, net of expenses 8,193,904 9,521,278 1,504,570
Net proceeds from sale of option 924,805 -- --
Payments on borrowings from related parties (854,230) (839,981) --
Fees paid for early extinguishment of debt (127,446) -- --
----------- ----------- -----------
Net cash provided by financing activities 8,137,033 8,681,297 1,505,570
----------- ----------- -----------
Foreign exchange effect on cash (796,213) 100,097 (23,411)
----------- ----------- -----------
Net increase/(decrease) in cash and cash
equivalents 3,289,086 5,120,968 (444,407)
Cash and cash equivalents, beginning of
period 5,269,757 148,789 593,156
----------- ----------- -----------
Cash and cash equivalents, end of period $ 8,558,843 $ 5,269,757 $ 148,789
=========== =========== ===========
Supplemental disclosure of cash flow
information
Taxes paid $ -- $ -- $ --
=========== =========== ===========
Interest paid $ 47,145 156,311 $ 178,241
=========== =========== ===========
Common stock issued for purchase of
Transcard assets $ -- $ -- $ 471,750
=========== =========== ===========
See accompanying notes
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CATUITY INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Issued Capital Foreign Total
Additional Paid Shareholder Accumulated Currency Shareholders'
Shares Amount in Capital Loans Deficit Translation Equity
---------- ------- ------------ ------------- ------------ ------------ ------------
Balances at January 1, 1998 3,904,978 $ 3,905 $ 10,207,428 $(806,146) $(11,012,405) $ 327,679 $ (1,279,539)
Issuance of common stock 826,368 826 1,500,913 1,501,739
Exercise of options 1,500 2 2,829 2,831
Issuance of shares in consideration
for acquisition of Transcard assets 187,494 187 471,563 471,750
Stock based compensation (8,627) (8,627)
Net loss (2,384,148) (2,384,148)
Foreign currency translation 85,037 85,037
------------
Comprehensive loss (2,299,111)
---------- ------- ------------ --------- ------------ ---------- ------------
Balances at December 31, 1998 4,920,340 $ 4,920 $ 12,174,106 $(806,146) $(13,396,553) $ 412,716 $ (1,610,957)
Issuance of common stock 796,782 797 4,818,084 4,818,881
Exercise of options 1,012,147 1,012 4,730,434 4,731,446
Stock based compensation 2,475,175 2,475,175
Shareholder loans 48,413 48,413
Net loss (6,210,084) (6,210,084)
Foreign currency translation (11,643) (11,643)
------------
Comprehensive loss (6,221,727)
---------- ------- ------------ --------- ------------ ---------- ------------
Balances at December 31, 1999 6,729,269 $ 6,729 $ 24,197,799 $(757,733) $(19,606,637) $ 401,073 $ 4,241,231
Issuance of common stock 713,636 714 6,289,812 6,290,526
Exercise of options 426,714 427 1,902,952 1,903,379
Sale of option right 952,545 952,545
Stock based compensation (716,192) (716,192)
Net loss (3,811,351) (3,811,351)
Foreign currency translation (666,140) (666,140)
------------
Comprehensive loss (4,477,491)
---------- ------- ------------ --------- ------------ ---------- ------------
Balances at December 31, 2000 7,869,619 $ 7,870 $ 32,626,916 $(757,733) $(23,417,988) $ (265,067) $ 8,193,998
========== ======= ============ ========= ============ ========== ============
See accompanying notes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Catuity Inc. (the "Company") designs, develops, operates and markets
multi-program systems that provide loyalty and incentive marketing
solutions for retailers and card issuing banks for purchases in stores
as well as over the Internet. These solutions are intended to increase
customer retention, increase the customer base and reduce costs for
merchants. Catuity provides full program services and network system
software that directly connects the seller and the buyer across all
purchasing channels, irrespective of payment method. Until the end of
1999, the Company's operations had been predominantly located in
Australia. As of 2000, the Company's headquarters, management team,
sales, marketing, finance and administrative activities were
established in the United States.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidation of
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated.
REVENUE RECOGNITION
The Company generates several types of revenue including the following:
Software Development Revenues: Revenue from fixed price contracts is
generally recognized over the contract term using the percentage of
completion method, based upon costs incurred as a percentage of
estimated total costs of the respective contract. The cumulative impact
of any revisions in estimated total revenues and direct contract costs
are recognized in the period in which they become known. Revenue in
excess of billings is recognized as unbilled receivables and is
included in receivable-trade accounts. Billings in excess of revenue
are recorded as deferred revenue until revenue recognition criteria are
met.
Service Revenue: Product service revenue consists of revenue from
transaction processing services and post customer support (PCS).
Revenue from transaction processing services is recognized at the time
the service is utilized by the customer and the fee becomes determined
and payable. Revenue from PCS includes maintenance revenue, which is
recognized ratably over the maintenance period, and training revenue.
The Company provides training services to its customers.
Revenue from such services is recognized in the period in which the
service is performed and includes all costs billed or billable to the
customer.
PCS may be recognized as part of the original license fee on delivery
of the software when it is provided for one year or less, the estimated
cost of providing the PCS is insignificant and the upgrades provided
are minimal.
License Revenue: The Company licenses software under non-cancelable
license agreements. License revenues are generally recognized when a
non-cancelable license agreement has been signed, the software product
has been shipped, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and collection is
considered probable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results may differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all cash and highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
The credit risk associated with trade receivables is limited due to
performing on going credit evaluations. The Company generally does not
require collateral for its trade receivables.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization expense are recorded using the straight-line method over
the estimated useful lives of the respective assets (which range from
three to ten years).
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's subsidiaries are translated in accordance
with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation". All balance sheet accounts are translated at the
exchange rates in effect at the balance sheet date. Revenues and
expenses for the Australian subsidiaries are translated at the average
exchange rate during the year. All cumulative translation gains and
losses are included as a separate component of shareholders' equity in
the consolidated balance sheets. Currency transaction gains and losses
are included in the consolidated statement of operations. The net
transaction gain for 2000 was $137,000. There were no transaction gains
or losses in 1999 or 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments such as cash and
cash equivalents, accounts receivable-trade, and accounts payable
approximate their fair values.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"), which requires the use of the liability method in
accounting for income taxes. Under SFAS No. 109, deferred tax assets
and liabilities are measured based on differences between the financial
reporting and tax bases of assets and liabilities using enacted tax
rates and laws that are expected to be in effect when the differences
are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees under the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and has adopted the disclosure-only alternative of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123").
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29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For all fixed awards, the Company records an expense based on the
intrinsic value and amortizes it over the vesting period. For variable
awards, the Company records an expense, or benefit, based on the
intrinsic value of the options at each balance sheet date
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 provides guidance on applying accounting
principles generally accepted in the United States to the recognition,
presentation and disclosure of revenue in financial statements. The
Company adopted SAB 101 in 2000. There was no material effect of the
adoption on the Company's financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 31
----------------------
2000 1999
--------- ---------
Computer equipment $ 383,383 $ 346,666
Leasehold Improvements 54,126 63,485
Office furniture and equipment 105,238 60,566
--------- ---------
$ 542,747 $ 470,717
Less accumulated depreciation (305,915) (228,679)
--------- ---------
$ 236,832 $ 242,038
========= =========
NOTE 4. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has commitments under a non-cancellable
office lease expiring December 14, 2003. Minimum future annual lease
payments under this lease as of December 31, 2000 are as follows:
2001 $ 85,347
2002 89,412
2003 93,883
--------
$268,642
========
Total rent expense on all office leases was $ 91,222, $121,701, and
$126,605 for the years ended December 31, 2000, 1999 and 1998
respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONTINGENCIES
The company received research and development grants and export market
development grants in 2000 and 1999. The grants are recognized using
contract accounting when the underlying performance objective has been
attained or services have been provided. The revenue is offset against
the expenses to which it relates.
Under the terms of a Grant Agreement with the Commonwealth of
Australia, the Company must meet certain obligations with regard to the
development and commercialization of the Multi Card Acceptance Device.
In the event that these obligations are not met the Company may be
required to repay all or part of the grant monies received. The Company
does not believe that any liability will materialize. The maximum
potential liability at December 31, 2000 was $456,962.
On July 20, 2000 Welcome Real-Time S.A. made an application to the
Federal Court in Australia to obtain an injunction and damages from
Catuity Inc. for infringement of an Australian patent by the Catuity
owned Transcard product. This is an action the Company is vigorously
defending and the Company subsequently filed a claim for revocation of
their patent. As of March 15, 2001 the Welcome Real Time (WRT) action
in the Federal Court of Australia against Catuity for alleged
infringement of their Australian patent and Catuity's action for
revocation of the WRT patent is continuing. The case is currently
adjourned and will reconvene on April 5, 2001. It is expected to be
completed by April 15, 2001. The timing of a decision by the Judge is
uncertain but is not expected before late April, at the earliest.
Based on our legal counsel's opinion, the Company expects to prevail in
the court action and expects no material effect on its financial
position or results of operations.
NOTE 5. STOCKHOLDERS' EQUITY
LIMITED RECOURSE LOANS
The Company issued limited recourse loans to a director and six
employees for the purpose of purchasing shares in the Company. The
loans have been offset against shareholders' equity. The Company's
recourse for repayment of the loans is limited to after-tax dividends
and proceeds from the sale of the shares. As a result, the
recoverability of the loan is dependent upon the value of the shares.
The loans do not have a specified repayment date and were provided
interest-free. Consequently, the awards have been treated as a variable
award and variable accounting has been adopted. The Company has
recorded an expense/(credit) related to these awards based on the
movement in the share price of common stock from the date of the award
to the respective balance sheet date. The expense/(credit) was
($746,192), $2,459,523 and ($26,847) for the years ended December 31,
2000, 1999 and 1998, respectively.
EMPLOYEE STOCK OPTION PLAN
The Board of Directors approved the establishment of an Employee Stock
Option Plan on December 6, 1999. The Plan was approved at a special
meeting of the shareholders on March 16, 2000. Under the plan the
Company grants stock options at an exercise price that may be
determined by the Board of Directors at the time of issuance, but is
generally at the closing price of the stock on the date of the grant.
Option vesting schedules are determined by the Board of Directors at
the time of issuance. Stock options issued prior to December 31, 1998
generally vested immediately on the date of grant. Options issued
subsequent to December 31, 1998 vested at the end of a specified period
of time, which is linked to the employees' continuing employment,
generally being from one to five years. Employees must exercise the
options within three to six months of terminating their employment with
the Company or the options lapse. In the event an option exercise price
is different than the closing price on the date of grant, the Company
records an expense based upon the difference between the exercise price
and the closing price of the Company's shares on the date of the option
grant. The
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31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company has recorded an expense relating to these grants of $15,653,
and $16,543, for the years ended December 31, 1999 and 1998,
respectively. There was no expense for the year ended December 31,
2000.
DIRECTOR STOCK OPTION PLAN
On October 24, 2000 the members of the Board of Directors, who are
employees of the Company, approved the establishment of a Director
Stock Option Plan effective October 1, 2000 for outside Directors. The
Plan is subject to shareholder approval. The Plan is designed to
provide a portion of the outside Director's compensation through stock
options. Under the Plan, outside Directors receive 10,000 non-qualified
option shares on the date they join the Board or on the date the plan
became effective, in the case of existing outside Directors. In
addition, each outside Director shall receive 5,000 non-qualified
option shares on October 1 of each succeeding year for as long as the
Director remains on the Board. The option issue price will be the
closing price on the grant date, or the closing price on the last
trading day preceding the grant date in the event the grant date falls
on a weekend or holiday. The options vest on the date of grant and
expire after eight years, or six months after the Director ceases to be
a member of the Board, whichever shall occur first. The Plan is limited
so that no more than 100,000 option shares may be outstanding at any
one time.
Had compensation costs for these plans been determined consistent with
SFAS No. 123, "Accounting for Stock Based Compensation," the Company's
net loss and net loss per share would have been reported as follows:
YEAR ENDED DECEMBER 31
--------------------------------------------
2000 1999 1998
------------ ------------- -----------
Net Loss as Reported $ (3,811,351) $ (6,210,084) $(2,384,148)
============ ============= ===========
Pro Forma Net Loss $ (5,460,084) $ (6,865,434) $(2,436,292)
============ ============= ===========
Pro Forma basic & diluted
Loss per share $ (0.78) $ (1.16) $ (0.54)
============ ============= ===========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For disclosure purposes, the fair value of stock based compensation was
computed using the Black-Scholes option pricing model with the
following weighted average assumptions used for 2000, 1999, and 1998
grants:
DECEMBER 31
--------------------------------
2000 1999 1998
-------- -------- --------
Risk Free Interest Rate 6.00% 5.96% 4.65%
Expected Dividend Yield -- -- --
Expected Lives (years) 4.95 3.04 3.38
Expected Volatility 0.917 0.796 0.749
OPTIONS ISSUED TO THIRD PARTIES
The Company granted options to purchase shares of common stock to third
parties during the period January 1, 1998 to December 31, 2000. The
Company valued these options using the Black-Scholes option pricing
model. Expense relating to these options amounted to $30,000, $0, and
$1,677 for the three years ended December 31, 2000, 1999, and 1998
respectively. The expense was charged to the operations in the year
they were granted as they vested immediately.
The following is a summary of stock option activity:
WEIGHTED
NUMBER OF AVERAGE
OPTION EXERCISE
SHARES PER SHARE
---------- ----------
Outstanding at January 1, 1998 1,396,498 $ 5.57
Granted 125,500 3.59
Cancelled/lapsed (33,000) 1.89
Exercised (1,500) 1.89
---------- --------
Outstanding at December 31, 1998 1,487,498 $ 5.49
Granted 352,254 $ 7.00
Cancelled/lapsed (5,982) 4.76
Exercised (1,012,147) 5.64
---------- --------
Outstanding at December 31, 1999 821,623 $ 5.96
Granted 696,000 $ 8.21
Cancelled/lapsed (56,750) 8.66
Exercised (426,714) 4.46
---------- --------
Outstanding at December 31, 2000 1,034,159 $ 7.76
========== ========
The weighted average fair value of options granted during the three
years ended December 31, 2000, 1999 and 1998 are $4.78, $3.19, and
$1.07, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is additional information relating to options outstanding
as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
EXERCISE PRICE NUMBER OF EXERCISE LIFE NUMBER OF EXERCISE
RANGE SHARES PRICE (YEARS) SHARES PRICE
----- --------- ---------- ----------- --------- ----------
$1.92 34,000 $ 1.92 1.79 34,000 $ 1.92
$4.80 - $6.40 305,659 $ 6.02 3.94 163,159 $ 5.84
$7.36 - $9.50 636,000 $ 8.66 7.03 233,000 $ 8.57
$10.24 - $11.66 58,500 $ 10.45 4.73 52,000 $ 10.29
The dilutive effect of stock options has not been included in the loss
per share calculation, as the effect would be anti-dilutive.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 10 million shares
of preferred stock, with a par value of $0.001 per share, none of which
is issued or outstanding. The Board of Directors has the authority to
issue the preferred stock in one or more series and to fix rights,
preferences, privileges and restrictions, including dividends, and the
number of shares constituting any series or the designation of such
series, without any further vote or action by the shareholders.
PRIVATE PLACEMENT
On November 16, 2000 the Company completed the private placement of
710,000 shares of common stock to six accredited institutional
investors at a price of $9.47 per share. The settlement date of the
transaction was November 21, 2000. Net proceeds from the placement were
$6,245,000. The price of the issue was based on the average closing
price for Catuity shares on the Australian Stock Exchange for the
thirty-day period prior to the placement.
SALE OF OPTION RIGHT 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 Health 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 $127,446 for
early repayment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SCHEMES OF ARRANGEMENT
In September 1999, Chip Application Technologies limited (CAT) sought
approval from The Supreme Court of New South Wales to hold a
shareholder and optionholder meeting to consider and approve Schemes of
Arrangement to restructure the Company. Under the Schemes, shareholders
and optionholders would exchange their securities and entitlements in a
newly formed Delaware registered Company (NovaTec Inc.) which would
seek listing on the ASX. As part of the Scheme the Company completed a
one-for-ten reverse share and option split. The Schemes were approved
at Court ordered meetings of shareholders and optionholders held on
November 3, 1999 and implemented on November 22, 1999 when trading in
CAT shares ceased and trading in Catuity Inc. (formerly NovaTec Inc.)
shares began on November 23, 1999. Implementation of the Schemes
resulted in Catuity becoming the parent company of the group acquiring
all of CAT's outstanding shares and issuing an equivalent number of
shares in Catuity. Options were treated in the same way and
optionholders received an equivalent number of options with the same
terms and conditions, in Catuity.
STOCK SPLIT
At November 22, 1999, the Company completed a one-for-ten reverse stock
split of the outstanding shares of issued capital. All share
information and per share amounts in the accompanying consolidated
financial statements has been retroactively adjusted to reflect the
effect of this stock split.
NOTE 6. INCOME TAXES
The components of loss before income taxes and extraordinary items
consisted of the following:
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Foreign ($1,066,336) ($5,385,420) ($2,384,148)
Domestic (2,617,569) (824,664) --
---------- ------------ -----------
Loss before taxes and ($3,683,905) ($6,210,084) ($2,384,148)
extraordinary item ========== ========== ==========
There has been no provision for income taxes for any period as the
Company has incurred operating losses. The provision for income tax
losses at statutory rates is reconciled to the reported provision for
income tax as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Net loss at statutory tax rate $(1,295,859) $(2,235,630) $ (858,293)
Stock compensation (243,505) 891,063 (3,106)
Scheme of Arrangement -- 466,069 --
R&D grant 25% deduction (97,405) (84,678) (56,805)
Grant revenue (101,660) (206,108) (147,872)
Over provision of losses -- -- 313,813
Effect of change in corporate tax
rate on losses and FITB not
recognized -- 336,699 --
Non deductible branch costs -- -- 101,907
Other 409 44
Valuation Allowance 1,738,429 832,176 650,312
----------- ----------- -----------
Provision for Income Tax $ -- $ -- $ --
=========== =========== ===========
34
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The statutory tax rate was 36% for the years ended December 31, 1998
and 1999 and was 34% for the year ended December 31, 2000, due to the
move from an Australian company to a United States company. Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
DECEMBER 31
--------------------------------------
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carry-forwards $ 6,551,164 $ 5,235,117
Provisions 130,997 143,478
----------- -----------
Total deferred tax assets 6,682,161 5,378,595
Valuation allowance (6,682,161) (5,378,595)
----------- -----------
Total net deferred tax assets $ -- $ --
=========== ===========
Realization of deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation
allowance.
As of December 31, 2000, the Company had operating loss carry-forwards
of $2,617,000 expiring in 2020 in the United States and $15,582,000 in
Australia. Utilization of the net operating loss carry-forward is
subject to an annual limitation due to the ownership change limitations
in accordance with Division 165 and Division 166 of the Australian
Income Tax Assessment Act 1997. The limitation may result in the
expiration of net operating losses before utilization.
NOTE 7. DEFINED CONTRIBUTION PLAN
On behalf of its Australian employees, the Company contributes to a
defined contribution plan on the basis of varying percentages of
employees' salaries. The Company is only obligated to make
contributions while the participants remain employees of the Company.
The Company contributed $78,019, $85,421 and $92,235 for the three
years ended December 31, 2000, 1999 and 1998 respectively.
NOTE 8. RESTRICTED CASH
The Company is the trustee of a bank account related to the use of its
Transcard multi-program software product. When consumers using the
system transfer funds to their cards, the funds are deposited into this
trust account. The funds are debited from the account electronically
and paid to merchants when transaction information relating to
cardholder usage is downloaded from merchants through a central host
processing system. The Company is not entitled to the funds other than
in specified circumstances such as when cards are inactive or expired.
Consequently, an amount corresponding to the trust account balance is
recorded as a current liability. The trust account had an ending
balance of $204,243, and $157,685 December 31, 2000 and 1999
respectively.
35
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Company had restricted cash of $18,022, and $20,369 as
of December 31, 2000 and 1999, respectively, related to an amount held
as security for an operating lease.
NOTE 9. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company provides loyalty software technology for retailers and card
issuing banks in North America and Australia. As of December 31, 2000,
Catuity is organized and operates in one business segment, providing
loyalty software for retailers and card issuing banks. This was
determined primarily on how the chief operating decision maker views
and evaluates Catuity's business. Two U.S. customers represented 72%
and 10% of total revenue for the year ended December 31, 2000. Three
Australian customers represented 49%, 30% and 10% of total revenue for
the year ended December 31, 1999. Three Australian customers
represented 45%, 18% and 15% of total revenue for the year ended
December 31, 1998.
The following table shows total revenue and long-lived assets by
geographic area.
2000 1999 1998
---- ---- -----
Long-Lived Total Long-Lived Total Long-Lived Total
Assets Revenues Assets Revenues Assets Revenues
-------- -------- -------- -------- -------- --------
Australia $145,949 $125,056 $242,038 $638,382 $170,890 $291,533
U.S $ 90,883 $618,850 $ -- $ -- $ -- $ --
-------- -------- -------- -------- -------- --------
Total $236,832 $743,906 $242,038 $638,382 $170,890 $291,533
======== ======== ======== ======== ======== ========
36
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
2000 2000 2000 2000
----------------------------------------------------------------------
Total revenues $ 32,028 $ 221,572 $ 346,061 $ 144,245
Total costs and expenses (1) 2,262,157 (357,486) 1,277,847 1,444,348
----------- ----------- ----------- -----------
Operating Income/(Loss) (2,230,129) 579,058 (931,786) (1,300,103)
Total Other Income/(Expense) 34,722 27,432 48,774 88,127
----------- ----------- ----------- -----------
Income (Loss) Before
Extraordinary Item ($2,195,407) $ 606,490 ($ 883,012) ($1,211,976)
Extraordinary loss on Early
Extinguishment of Debt -- -- (127,446) --
----------- ----------- ----------- -----------
Net Income/(loss) ($2,195,407) $ 606,490 ($1,010,458) ($1,211,976)
=========== =========== =========== ===========
Net Income (loss) per
share-basic & diluted ($ 0.33) $ 0.09 ($ 0.14) ($ 0.15)
=========== =========== =========== ===========
Three Months Ended
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
1999 1999 1999 1999
----------------------------------------------------------------------
Total revenues $ 84,071 $ 361,384 $ 187,509 $ 5,418
Total costs and expenses (2) 1,507,540 1,002,413 1,681,791 2,616,042
-----------------------------------------------------------------------
Operating loss (1,423,469) (641,029) (1,494,282) (2,610,624)
Total Other Income/(Expense) (43,635) (24,359) 14,701 12,613
-----------------------------------------------------------------------
Net Loss ($1,467,104) ($ 665,388) ($1,479,581) ($2,598,011)
=========== =========== =========== ===========
Net Loss per share-basic &
diluted ($ 0.28) ($ 0.12) ($ 0.23) ($ 0.39)
=========== =========== =========== ===========
- ----------------
(1) Includes variable stock compensation expense (benefit) of $1,154,391
($1,369,314), ($6,033), and ($495,236) in the three month periods ended
March 31, June 30, September 30, and December 31, 2000 respectively. The
Company recorded a correcting entry of $746,272 to reduce its variable
stock compensation expense for the three month period ended June 30, 2000
and an increase of $377,893 in its expense for the three months ended March
31, 2000. The amounts in each quarter in the table above reflect the
correcting entry in the proper periods.
(2) Includes variable stock compensation expense of $942,883, $227,713,
$323,160 and $981,419 in three month periods ended March 31, June 30,
September 30, and December 31, 1999 respectively.
37
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth our executive officers and directors,
and their ages as of March 15, 2001.
Name Age Position(s)
----- --- -----------
David L. Mac.Smith 50 Director and Chairman (2)
Michael V. Howe 52 Director, President and Chief Executive Officer (2)
Alexander S. Dawson 57 Director(1),(2)
Duncan P.F. Mount 53 Director(1)
Alan L. Gilman 57 Director(1),(2)
Robert C. Robins 59 Director
John H. Lowry III 53 Vice President, Chief Financial Officer, Treasurer and
Secretary
Jonathan R.E. Adams 34 Vice President -- Product Development
Benjamin A. Garton 38 Vice President -- Implementation and Technical Support
Robert Kosnik 48 Vice President -- Sales and Marketing
(1) Member, Audit Committee
(2) Member, Compensation Committee
David L. Mac. Smith is our founder and currently our Chairman of
the Board. He has been the Chief Executive Officer and Managing
Director of CAT, our wholly owned subsidiary, since November 1992. In
December 1999, he became our President and CEO pending the appointment
of a new President and CEO. In January 2000, he resigned as our
President and CEO and became our Chairman. Prior to November 1992, he
was the founder and, from 1982 to 1991, CEO of Technology Investment
Management Limited, a funds management company with specific focus on
technology related businesses. He has a Bachelor of Law degree from the
Australian National University.
Michael V. Howe has served as our President and Chief Executive
Officer since January 2000. From December 1995 through December 1999,
he was the Director of Marketing Communications for United Airlines,
responsible for the United Mileage Plus loyalty rewards program and the
United partnership program. Prior to joining United Airlines, he served
as the Chief Executive Officer of Young and Rubicam Advertising in
Detroit, Michigan from October 1990 to November 1995. He has a Bachelor
of Business Administration from John Carroll University and a Master of
Business Administration from Michigan State University.
Alexander S. Dawson is currently one of our non-employee
Directors. He served as the Chairman of CAT, our wholly owned
subsidiary, from November 1992 to December 1999. From April 1987 to
January 1991, he was Chief Executive Officer of Arnotts Ltd.,
Australia's largest biscuit and snack food manufacturing company. From
January 1988 to December 1990, he was a member of the Business Council
of Australia. He served as Chairman of United Distillers (Australasia)
Limited from August 1994 to March 1996. He has a Bachelor of Commerce
degree from the University of New South Wales and a Master of Business
Administration from Columbia University.
Duncan P.F. Mount is currently one of our non-employee Directors.
He served as a non-employee Director of CAT, our wholly owned
subsidiary, from March 1999 to December 1999. From October 1996 to
September 1999, he was the Asian adviser to CEF.TAL Investment
Management Limited, a Hong Kong based joint venture between the
Canadian Imperial Bank of Commerce, Cheung Kong Holdings Limited and
TAL Investment Counsel.
38
39
He spent 17 years in Hong Kong as the Managing Director of Gartmore
Investment Management Limited, from May 1980 to October 1988, and as
managing director of CEF Investment Management Limited from May 1988 to
October 1996, entities which are fund management and investment
companies. From October 1996 to December 1998, he was Managing Director
of CEF.TAL Australia Limited. He holds a Bachelor and Master of Arts
degree in Economics and Law (Hons) from Cambridge University.
Alan L. Gilman joined the Board of Directors on July 1, 2000
following his retirement from Arthur Andersen LLP. For 22 years prior
to retirement, Mr. Gilman was a partner with Arthur Andersen LLP and
specialized in the retail industry. Most recently he managed the Arthur
Andersen Competency Center, specializing in retail consulting. From
September 1992 to August 1999 he served as the managing partner of
Senn-Delaney, a unit of Arthur Andersen specializing in the retail
industry. In addition to his role with Senn-Delaney, he held worldwide
leadership responsibility for Arthur Andersen's retail industry and
consumer products activities. Prior to September 1992, he was an Audit
Partner at Arthur Andersen focusing primarily on retail distribution
and advertising. Mr. Gilman is also serving as the chairman of the
Audit Committee of the Board.
Robert C. Robins joined the Board of Directors on October 9, 2000
following his retirement from Visa USA. He is currently an Executive
Vice President of Business Development with National Processing
Corporation. Mr. Robins was Executive Vice President of Visa USA in
charge of the bank card association's division that markets Visa
products and services to merchants across the United States. Prior to
that he spent seven years in various sales and marketing management
positions with American Cyanamid Company. He also was with Alba Inc.
and the Nestle Corporation in both field sales and corporate management
positions.
John H. Lowry III has served as our Vice President and Chief
Financial Officer since May 2000 and since July, has also served as
Secretary and Treasurer. From August 1992 to January 2000, he was Vice
President Finance for Kelly Services, a Michigan based publicly held
staffing services company, responsible for all financial activities for
operations of over 500 staffing offices in 190 cities with annual sales
exceeding $800 million. From August 1982 to July 1992 he was Corporate
Controller and Senior Financial Officer for Crain Communications, a
magazine publishing company in Michigan. Prior to this he was a Senior
Manager at Arthur Anderson. He holds a Masters degree in Business
Administration and a Bachelor of Engineering degree from the University
of Michigan.
Jonathan R.E. Adams is our Vice President--North American
Implementation and Technical Services. From May 1996 to July 1998 he
was the Director, Financial Markets, for Schlumberger Smart Cards and
Systems based in New Jersey. From June 1994 to May 1996 he worked with
MBNA America Corporation in strategic planning, involved with card
system implementation and electronic commerce. He holds a Bachelor of
Arts degree from Washington College and Master of Business
Administration from Georgetown University.
Benjamin A. Garton is currently Vice President--Product Management
& Development. He served in the same role with CAT, our wholly owned
subsidiary, from March 1999 to December 1999. From November 1996 to
February 1999 he was Manager of Development for CAT and from September
1994 to October 1996 he was a Senior Systems Analyst for CAT. From
October 1992 to August 1994, he was Development Manager at Citibank
Australia with responsibilities for electronic funds transfer switching
systems.
Robert Kosnik has served as our Vice President of Sales and
Marketing since June 2000. Rob has twenty-five years of experience in
sales and marketing in the computer industry. For the five years prior
to joining Catuity he was the founder and President of Bronto Vision, a
systems integrator and provider of high end 3-D computer animation
systems. He also spent two and one half years as the Director of
Marketing for Macro Computer Products, a provider of high end,
redundant computer systems. Prior to that he spent six years in various
sales and marketing positions at Digital Equipment Corporation. He
holds a bachelors degree from Albion College.
Each of our directors holds office until the next annual meeting
of stockholders or until his successor has been duly elected or
qualified or until his earlier death, resignation or removal. Executive
Officers are appointed by, and serve at the discretion of, our board of
directors.
39
40
Our board of directors has an audit committee. The audit
committee, among other things, makes recommendations to the board of
directors concerning the engagement of independent auditors and
monitors the results of our operating and internal controls as reported
by management and the independent auditors.
Effective February 26, 2001, the board of directors established a
compensation committee. The compensation committee is responsible for
establishing the compensation levels for our executive officers.
Members of the committee who are also executive officers do not
participate in discussions or decisions about their own compensation
level or changes in it. In recommending and determining compensation,
the committee considers independent studies of comparable remuneration
packages. Incentives in the form of stock options are generally
offered.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled "Director
Compensation" and the section entitled "Summary Compensation Table" of
the registrant's 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section entitled "Ownership of
Securities" of the registrant's 2000 proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section entitled "Certain
Relationships and Related Transactions" of the registrant's 2000 Proxy
Statement.
40
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. All Financial Statements:
The following financial statements are filed as part of this
report under Item 8 - "Financial Statements and Supplementary
Data."
Report of Independent Auditors ................... 22
Consolidated Balance Sheet ....................... 23
Consolidated Statement of Operations ............. 24
Consolidated Statement of Cash Flows ............. 25
Consolidated Statement of Shareholders' Equity ... 26
Notes to Consolidated Financial Statements ....... 27
2. Financial Statement Schedules:
All other schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated
Financial statements and notes thereto in Item 8 above.
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
CATUITY, INC.
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE OF PERIOD
Year Ended December 31, 2000
Valuation allowance for trade receivable $ 157,704 $ 44,421 ($157,704)(1) $ 44,421
Valuation allowance for deferred tax assets 5,378,595 1,303,566 6,682,161
Year Ended December 31, 1999
Valuation allowance for trade receivable -- 157,704 -- 157,704
Valuation allowance for deferred tax assets 4,546,419 832,176 5,378,595
Year Ended December 31, 1998
Valuation allowance for trade receivable -- -- -- --
Valuation allowance for deferred tax assets 3,896,107 650,312 4,546,419
- --------------------------------------------------------------------------------
(1) uncollectible accounts written off
41
42
3. EXHIBITS
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the SEC. Catuity shall
furnish copies of exhibits for a reasonable fee (covering the expense
of furnishing copies) upon request.
Exhibit
Number Description
------- --------------------------------------------------------------
1 Not applicable
2 Not applicable
3(a) Registrant's Certificate of Incorporation, which appears as
Exhibit 3.3 to Registrant's Form 10-12G filed March 21, 2000,
which is incorporated herein by reference.
3(b) Registrant's Certificate of Amendment to the Certificate of
Incorporation, which appears as Exhibit 3.4 to Registrant's
Form 10-12G filed March 21, 2000, which is incorporated herein
by reference.
3(c) Registrant's By-Laws, which appears as Exhibit 3.5 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
3(d) Certificate of Registration of Card Technologies Australia
Limited, which appears as Exhibit 3.1 to Registrant's Form
10-12G filed March 21, 2000, which is incorporated herein by
reference.
3(e) Certificate of Registration on change of name from Card
Technologies Australia Limited to Chip Application
Technologies Limited, which appears as Exhibit 3.2 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
4 Not applicable
5-8 Not applicable
9 None
10(a) Registrant's stock option Plan, which appears as Exhibit 10.25
to Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference. 10(b) Registrant's 2000
Director Stock Option Plan, which appears as Exhibit 4.2 to
Registrant's Form S-8 filed December 20, 2000, which is
incorporated herein by reference.
10(c) Employment agreement of Michael V. Howe, which appears as
Exhibit 10.3 to Registrant's Form 10-12G filed March 21, 2000,
which is incorporated herein by reference.
10(d) Executive services agreement of David L. Machettie Smith,
which appears as Exhibit 10.4 to Registrant's Form 10-12G
filed March 21, 2000, which is incorporated herein by
reference.
10(e) Deed of employment of Benjamin Garton, which appears as
Exhibit 10.5 to Registrant's Form 10-12G filed March 21, 2000,
which is incorporated herein by reference.
10(f) Deed of employment of John Weihen, which appears as Exhibit
10.7 to Registrant's Form 10-12G filed March 21, 2000, which
is incorporated herein by reference.
10(g) Services agreement of Jonathan Adams, which appears as Exhibit
10.8 to Registrant's Form 10-12G filed March 21, 2000, which
is incorporated herein by reference.
10(h) Services agreement of Carl H. Fisher, which appears as Exhibit
10.9 to Registrant's Form 10-12G filed March 21, 2000, which
is incorporated herein by reference.
10(i) Employment agreement of John H. Lowry III, which appears as
Exhibit 10.10 to Registrant's Form 10-12G filed March 21,
2000, which is incorporated herein by reference.
10(j) Employment agreement of Robert Kosnik, which appears as
Exhibit 10.26 to Registrant's Form 10-12G filed August 11,
2000, which is incorporated herein by reference.
10(k) Put and Call Option Deed of A.S. Dawson in Respect of Shares
of Chip Application Technologies Limited, which appears as
Exhibit 10.1 to Registrant's Form 10-12G filed March 21, 2000,
which is incorporated herein by reference.
10(l) Share Option Deed of A.S. Dawson in Respect of Shares of
NovaTec Inc.,which appears as Exhibit 10.2 to Registrant's
Form 10-12G filed March 21, 2000, which is incorporated herein
by reference.
10(m) Lease for premises located at 68-72 Wentworth Avenue Surry
Hills, New South Wales, Australia, which appears as Exhibit
10.11 to Registrant's Form 10-12G filed March 21, 2000, which
is incorporated herein by reference.
42
43
10(n) Lease for premises located at 2711 East Jefferson Avenue,
Detroit, Michigan, which appears as Exhibit 10.12 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
10(o) Research and Development Start Grant for Chip Application
Technologies Limited, which appears as Exhibit 10.13 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
10(p) Smart Loyalty Technical Work Group Agreement between Visa
U.S.A. and Chip Application Technologies limited, which
appears as Exhibit 10.14 to Registrant's Form 10-12G filed
March 21, 2000, which is incorporated herein by reference.
10(q) Partner Program Loyalty Services Agreement between Visa
International Service Association and Chip Application,
Technologies Limited, which appears as Exhibit 10.15 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
10(r) Software Remarketing Agreement between IBM and Chip
Application Technologies Limited, which appears as Exhibit
10.16 to Registrant's Form 10-12G filed March 21, 2000, which
is incorporated herein by reference.
10(s) Marketing Support Plan between IBM and Chip Application
Technologies Limited, which appears as Exhibit 10.17 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
10(t) Operation Reseller Agreement between Catuity Inc. and Data Pro
Accounting Software, Inc., which appears as Exhibit 10.18 to
Registrant's Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.
10(u) Sun Microsystems Computer Company and Chip Application
Technologies Limited Joint Marketing Agreement, which appears
as Exhibit 10.19 to Registrant's Form 10-12G filed March 21,
2000, which is incorporated herein by reference.
10(v) Cooperative Agreement between Chip Application Technologies
Limited and Global Transaction Company, which appears as
Exhibit 10.20 to Registrant's Form 10-12G filed March 21,
2000, which is incorporated herein by reference.
10(w) Technology Partnership Agreement between Chip Application
Technologies Limited and Gemplus Technologies Asia Pte Ltd.,
which appears as Exhibit 10.21 to Registrant's Form 10-12G
filed March 21, 2000, which is incorporated herein by
reference.
10(x) Memorandum of Understanding between De La Rue Cartes et
Systemes and Chip Application Technologies Limited, which
appears as Exhibit 10.22 to Registrant's Form 10-12G filed
March 21, 2000, which is incorporated herein by reference.
10(y) Loan Repayment and Option Agreement among Chip Application
Technologies Limited, Health Group Australia Pty Limited and
Industrial Superannuation Administration Services Limited,
which appears as Exhibit 10.23 to Registrant's Form 10-12G
filed March 21, 2000, which is incorporated herein by
reference.
10(z) Form of Indemnification Agreement, which appears as Exhibit
10.24 to Registrant's Form 10-12G filed March 21, 2000, which
is incorporated herein by reference.
10(aa) Form of Stock option Plan and Form of Stock Option Agreement
under Plan, which appears as Exhibit 10.25 to Registrant's
Form 10-12G filed March 21, 2000, which is incorporated herein
by reference.
11 Not applicable
12 Not applicable
13-17 Not applicable
18 None
19-20 Not applicable
21 Subsidiaries of Registrant as of March 15, 2001
22 None
23.1 Consent of Independent Auditors
24 Powers of Attorney Contained on Page 47 of this Annual Report
on Form 10-K and incorporated herein by reference.
25-27 Not applicable
99.1 Audit Committee Charter, which appears as Exhibit Registrants
99.1 to Registrant's Form 10-Q filed November 14, 2000, which
is incorporated herein by reference.
b) Reports on Form 8-K
None
43
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 2001 CATUITY INC.
By: /s/John H. Lowry
--------------------------------------
John H. Lowry
Vice President, CFO and Secretary
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature
appears below constitutes and appoints John H. Lowry his or her
attorneys-in-fact, for such person in any and all capacities, to sign any
amendments to this report and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that either of said
attorney-in-fact, or substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
--------- -------- ----
/s//David L. Mac. Smith Chairman and Director March 27, 2001
- ------------------------------------
David L. Mac. Smith
/s/Michael V. Howe President, CEO and Director March 27, 2001
- ------------------------------------
Michael V. Howe
/s/Alexander S. Dawson Director March 27, 2001
- ------------------------------------
Alexander S. Dawson
/s/Duncan P F. Mount Director March 27, 2001
- ------------------------------------
Duncan P. F. Mount
/s/Alan L. Gilman Director March 27, 2001
- ------------------------------------
Alan L. Gilman
/s/Robert C. Robins Director March 27, 2001
- ------------------------------------
Robert C. Robins
/s/John H. Lowry Vice President, CFO and
- ------------------------------------ Secretary March 27, 2001
John H. Lowry
44
45
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
21 Subsidiaries of Catuity, Inc.
23.1 Consent of Independent Auditors