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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2001.
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File No: 000-30045
CATUITY INC.
(Exact Name of Registrant as specified in its charter)
Delaware 38-3518829
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2711 E. Jefferson Avenue
Detroit, MI 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(313) 567-4348
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( X ) No ( )
Indicate the number of shares outstanding of the each issuer's classes of stock
as of the latest practical date:
Common stock outstanding - 7,897,619 shares as of April 15, 2001
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INDEX
CATUITY INC.
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NO.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- March 31, 2001 and December 31, 2000 3
Consolidated statements of operations -- Three months ended 4
March 31, 2001 and 2000
Consolidated statements of cash flows -- Three months ended 5
March 31, 2001 and 2000
Notes to consolidated financial statements -- March 31, 2001 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
Part II. Other Information 14
Item 1. Legal Proceedings 14
Item 2. Changes In Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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Part I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CATUITY INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31
2001 2000
---------------------------------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 6,975,381 $ 8,558,843
Accounts receivable, less allowance of $39,000 at 174,785 111,698
March 31, 2001, $44,000 at December 31, 2000
Restricted cash 329,656 222,265
Prepaid expenses and other 173,865 370,357
------------ ------------
Total current assets 7,653,687 9,263,163
Property and equipment, net 228,683 236,832
------------ ------------
Total assets $ 7,882,370 $ 9,499,995
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable $ 208,912 $ 378,983
Deferred revenue 18,544 67,000
Accrued compensation 241,674 122,134
Other accrued expenses 313,966 483,406
Trust liability 314,019 204,243
------------ ------------
Total current liabilities 1,097,115 1,255,766
Accrued compensation 43,613 50,231
Stockholders' equity:
Common stock - $.001 par value 7,898 7,870
Authorized - 100 million shares Issued
and outstanding - 7,897,619 at March
31, 2001 and 7,869,619 at December 31, 2000
Additional paid-in capital 31,831,661 32,626,916
Shareholder loans (757,733) (757,733)
Foreign currency translation (421,417) (265,067)
Accumulated deficit (23,918,767) (23,417,988)
------------ ------------
Total stockholders' equity 6,741,642 8,193,998
------------ ------------
Total liabilities and stockholders' equity $ 7,882,370 $ 9,499,995
============ ============
See accompanying notes.
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CATUITY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31
-------------------------------
2001 2000
-------------------------------
(UNAUDITED) (AS RESTATED)
Revenues:
Software modification revenue $ 64,922 $ --
Service revenue 80,303 32,028
License revenue -- --
----------- -----------
Total revenues 145,225 32,028
Operating costs and expenses:
Product development 507,325 339,125
Sales and marketing 519,152 397,389
General and administrative 500,971 371,252
General and administrative - variable stock
compensation (836,272) 1,154,391
----------- -----------
Total operating costs and expenses 751,176 2,262,157
----------- -----------
Operating loss (605,951) (2,230,129)
----------- -----------
Other income/(expense):
Interest income 105,172 59,314
Interest expense - related party -- (24,592)
----------- -----------
Total other income/(expense) 105,172 34,722
----------- -----------
Loss before taxes (500,779) (2,195,407)
Provision for income taxes -- --
----------- -----------
Net Loss $ (500,779) $(2,195,407)
=========== ===========
Net loss per share - basic and diluted $ (0.06) $ (0.33)
Weighted average shares outstanding-basic & diluted 7,869,716 6,737,497
See accompanying notes.
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CATUITY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31
-------------------------------
2001 2000
-------------------------------
(UNAUDITED) (AS RESTATED)
Cash flows from operating activities:
Net loss $ (500,779) $(2,195,409)
Adjustments used to reconcile net loss to net cash
used in operating activities:
Stock based compensation (836,272) 1,154,391
Depreciation and amortization 28,113 30,943
Changes in assets and liabilities:
Accounts receivable (63,087) 180,919
Other assets, net 89,101 51,808
Accounts payable (170,071) (228,694)
Accrued expenses and other liabilities 4,802 (108,566)
----------- -----------
Net cash used in operating activities (1,448,193) (1,114,608)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (19,964) (15,475)
----------- -----------
Net cash used in investing activities (19,964) (15,475)
----------- -----------
Cash flows from financing activities:
Issuance of common stock, net of expenses 41,045 83,308
----------- -----------
Net cash provided by financing activities 41,045 83,308
----------- -----------
Foreign exchange effect on cash (156,350) (375,830)
----------- -----------
Net increase/(decrease) in cash and cash equivalents (1,583,462) (1,422,605)
Cash and cash equivalents, beginning of period 8,558,843 5,269,757
----------- -----------
Cash and cash equivalents, end of period $ 6,975,381 $ 3,847,152
=========== ===========
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CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Catuity Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
General and administrative - variable stock compensation expense for the three
month period ended March 31, 2000 has been restated to properly reflect an
expense of $1,154,391 versus the $776,498 that was incorrectly reported in the
Company's Amendment Number 2 to Form 10 filed May 15, 2000. The incorrect
expense was determined and disclosed in the Company's Form 10-Q for the three
and nine month periods ended September 30, 2000 and in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2000.
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CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share for the three months ended March 31, 2001 and 2000.
THREE MONTHS ENDED
MARCH 31
2001 2000
----------------------------
Numerator:
Net loss $(500,779) $(2,195,407)
========= ===========
Denominator:
Denominator for basic
and diluted earnings
per share - weighted
average shares
outstanding 7,869,716 6,737,497
========= ===========
Basic and diluted loss
per share $ (0.06) $ (0.33)
========= ===========
For the three month period ended March 31, 2001, a total of 28,000 options were
exercised at prices ranging from $1.48 to $1.53 resulting in the Company
receiving cash proceeds of $41,045.
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CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMPREHENSIVE LOSS
Total comprehensive loss is summarized as follows:
THREE MONTHS ENDED
MARCH 31
2001 2000
Net loss $(500,779) $(2,195,407)
Foreign currency
translation (156,350) 305,831
--------- -----------
Total comprehensive loss $(657,129) $(2,501,238)
========= ===========
4. LEGAL PROCEEDINGS
On July 21, 2000 Welcome Real-Time SA filed an Application and Statement of
Claim in the Federal Court of Australia claiming breach of an Australian Patent
issued to Welcome Real-Time SA on July 31, 1997 and seeking a permanent
injunction restraining Catuity Inc. and its subsidiaries Chip Application
Technologies Limited and CiT Cards (Australia) Limited during the term of the
Patent from infringing the stated Patent. The application seeks damages, or at
the Applicants option, an accounting of profits with respect to all
infringements of the Patent and payment of the sum found due plus interest.
The Company does not believe the Claim is valid and has vigorously defended its
position. On May 14, 2001, the trial, wherein Catuity defended its position, has
been completed and the parties are waiting for the judge's ruling. The Company
continues to believe that this action will not have a material effect on the
Company's financial position or results of operations. All costs and expenses of
this action have been expensed.
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CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Catuity develops, licenses and supports customer loyalty software that enables
retailers and credit card issuing banks to establish and administer customer
incentive and loyalty programs that are completely customizable to meet their
unique needs. The Catuity system functions in both the internet (e-commerce) and
in-store environments.
In the first three months of 2001, the Company's U.S. operations were fully
established and actively supporting its international activities. In comparison,
during the first three months of 2000, the Company's U.S. operations were in the
early stages of becoming established. As a result, costs in the three month
period ended March 31, 2001 rose significantly over those of 2000. This was
anticipated and planned for by the Company.
During the three month period ended March 31, 2001, the Company signed three
agreements with customers that are expected to further its progress in
penetrating its market. License agreements were signed with FleetBoston
Financial Corporation ("Fleet") to provide the Company's loyalty software
application on Fleet's Visa smart card initiative, and with Global Consumer
Technologies Inc. (`GCT') to utilize the Company's loyalty software on GCT's
payment cards and loyalty cards. The Company also signed an agreement in
principle for joint product development and marketing with Lynk Systems Inc.
("Lynk"), a company that provides a transaction processing services to
merchants. The Company expects this agreement to result in the development of a
magnetic stripe version of the Company's loyalty software application that will
provide Lynk with value added services for its customers. Under the agreement,
loyalty related revenues will be shared between Lynk and Catuity and Catuity may
license the software to merchants that do not receive their transaction
processing services from Lynk.
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CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
The Company continues to be in various stages of discussions with other Visa
card issuing banks regarding the use of its loyalty application in their smart
card initiatives. Catuity continues to be the only Visa approved provider of
loyalty on Visa's smart card. In addition, the Company continues in various
stages of discussion with other card associations, card transaction processors,
card issuers, independent sales organizations, and merchants regarding the
licensing of its loyalty software.
For further information regarding the Company's market, product and future
prospects, refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
REVENUE
Revenue in the three month period ended March 31, 2001 increased to $145,000
from $32,000 in the three month period ended March 31, 2000. In 2001,
approximately $65,000 of revenue was related to software modification activities
for U.S. customers, while an additional $65,000 related to service revenues for
installation, training and maintenance efforts on behalf of U.S. customers.
Australian based service revenue, which represented all of the $32,000 reported
revenues in 2000, declined to $15,000 in 2001.
The Company continues to anticipate that revenue in the three month period
ending June 30, 2001 will be modest due to the time required to achieve signed
contracts and the time involved between contract signing and the generation of
transaction based revenue. Revenue for the three month period ending June 30,
2001 is expected to be principally from service and software development
activities.
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CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
PRODUCT DEVELOPMENT
Product development expenses principally consist of the costs associated with
the Company's software development team in Sydney, Australia and implementation
services staff and facilities in the U.S. For the three month period ended March
31, costs increased from $339,000 in 2000 to $507,000 (+50%) in 2001 primarily
due to the costs associated with the service and implementation team and
facility based in the U.S. In 2001, approximately $259,000 of the $507,000
product development expense related to costs from U.S. based implementation
services activities and facilities, while in 2000, U.S. based costs were
approximately $48,000.
SALES AND MARKETING
Sales and marketing expenses rose from $397,000 in the three month period ended
March 31, 2000 to $579,000 in 2001. The increase of $182,000, or 46%, was
principally due to the U.S. based sales and marketing personnel in place in the
three month period ended March 31, 2001 that did not exist in 2000. Sales
related expenses in 2000 were primarily related to the expense of an outside
contractor actively involved in introducing potential customers to the Company
and the costs of Australian based personnel involved in U.S. sales activities.
The Company expects its sales and marketing costs later this year to increase
above the level in the three month period ended March 31, 2001. Personnel are
expected to be hired to fill planned positions that are currently vacant. The
Company intends to increase its sales and marketing resources to meet its market
opportunity.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include costs related to executive,
financial and administrative personnel, outside professional services, patents
and intellectual property defense including court actions, facilities and other
general corporate overhead. Expenses for the three month period ended March 31,
2001 were $501,000 compared to $371,000 in the same period in 2000. The increase
of $130,000 (+35%) relates primarily to the fact that the Company's U.S.
Headquarters was in full operation during the first quarter of 2001, while it
had only begun to be established in the first quarter of 2000. Outside
professional services expense increased in 2001 over 2000 due to approximately
$110,000 of non recurring legal costs associated with the Company's patent
infringement lawsuit.
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CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
STOCK COMPENSATION
Stock compensation is a non-cash expense/(credit) that results from a non
recourse loan awarded to an executive in order to purchase stock and a stock
option award to another executive of the Company. The non recourse loan is
treated as variable and variable accounting has been adopted. The stock option
award to another executive was variable, but became fixed as of December 31,
2000. The expense/(credit) recorded each period is dependent on movements in the
Company's price per share. For the three month period ended March 31, 2001, a
credit of $836,000 was recorded due to downward movement in the Company's stock
price and was related to the non recourse loan award. In the same period in
2000, an expense of $1,154,000 was recorded. Approximately $398,000 of the
$1,154,000 related to expense associated with the variable stock option award
while approximately $756,000 related to the non recourse loan award.
OTHER INCOME (EXPENSE)
Interest income increased by $46,000, from $59,000 for the three month period
ended March 31, 2000 to $105,000 in 2001. The increase in interest income is
primarily attributable to higher cash balances invested in interest bearing
accounts during the three month period ended March 31, 2001.
In the three month period ended March 31, 2001, the Company had no long-term
debt and no interest expense. $25,000 of interest expense was recorded in the
three month period ended March 31, 2000 related to a long-term debt that the
Company repaid in July 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the company had $6,975,000 in cash and cash equivalents, a
decrease of $1,583,000 from December 31, 2000.
Net cash used in operating activities was $1,448,000 for the three month period
ended March 31, 2001 compared with $1,115,000 for the three month period ended
March 31, 2000. The increase in the use of cash was expected, and was primarily
due to the increase in expenses associated with the establishment of the
Company's headquarters and staff in the U.S. that began in the three month
period ended March 31, 2000.
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CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
During the three month period ended March 31, 2001 the Australian dollar
continued to weaken against the U.S. dollar. This resulted in a negative foreign
currency effect on cash of approximately $156,000.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the next twelve months.
FORWARD LOOKING INFORMATION
The Management Discussion and Analysis of Financial Condition and Results of
Operations includes "forward-looking" statements within the meaning of the
Private Securities Litigation Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the expected
results. All statements other than statements of historical fact made in this
Form 10-Q are forward looking. In some cases, they can be identified by
terminology such as "may," "will," "should," "expect," " plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should consider various factors that may cause our actual
results to differ materially from any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievement. Moreover, neither we nor any other person
assumes liability for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this filing to conform such statements to actual results or to
changes in our expectations.
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CATUITY INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to foreign currency exchange rate risk inherent in its
sales, expenses, assets and liabilities that are denominated in the Australian
dollar. To date, the Company has not utilized any foreign currency hedging or
other derivative instruments to reduce exchange rate risk. The Company does not
expect to employ these or other strategies to hedge the risk in the foreseeable
future.
As of March 31, 2001 and 2000 the Company's net current assets (defined as
current assets less current liabilities) subject to foreign currency risk are
$662,000 and $3,556,000. The potential decrease in net assets from a
hypothetical 10% adverse change in quoted foreign currency exchange rates would
be approximately $66,200 and $355,600.
The Company is also exposed to interest rate risk on its investment portfolio,
which is affected by changes in the general level of interest rates in the
United States and Australia. Since the Company generally invests in very
short-term interest bearing deposits, it does not believe it is subject to any
material market risk exposure.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See notes to financial statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See notes to financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibit Description
None
(b) The Company did not file any reports on Form 8-K during the
three month period ended March 31, 2001.
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CATUITY INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: /s/ Michael V. Howe
---------------------------------------
Michael V. Howe
President and Chief Executive Officer
By: /s/ John H. Lowry
---------------------------------------
John H. Lowry
Chief Financial Officer
Date: May 15, 2001
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