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, 2002.
( ) 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 each of the issuer's classes of
stock as of the latest practical date:
Common stock outstanding - 8,069,338 shares as of April 15, 2002
INDEX
CATUITY INC.
PAGE
Part I. Financial Information NO.
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - March 31, 2002 and December 31, 2001 3
Consolidated statements of operations - Three months ended 4
March 31, 2002 and 2001
Consolidated statements of cash flows -Three months ended 5
March 31, 2002 and 2001
Notes to consolidated financial statements -March 31, 2002 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 13
Part II. Other Information 13
Item 1. Legal Proceedings 13
Item 2. Changes In Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATUITY INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS (UNAUDITED)
------
Current Assets:
Cash and cash equivalents $ 3,784,675 $ 4,464,863
Accounts receivable, less allowance of $134,000 at 513,502 668,482
March 31, 2002, $114,000 at December 31, 2001
Restricted cash 98,589 94,712
Work in process 363,294 208,823
Prepaid expenses and other 199,264 218,416
------------ ------------
Total current assets 4,959,324 5,655,296
Property and equipment, net 224,873 215,197
------------ ------------
Total assets $ 5,184,197 $ 5,870,493
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 239,906 $ 271,435
Deferred revenue 675,000 834,514
Accrued compensation 136,224 153,415
Other accrued expenses 534,296 620,500
Trust liability 81,339 78,745
------------ ------------
Total current liabilities 1,666,765 1,958,609
Accrued compensation 63,381 54,910
Shareholders' equity:
Common stock - $.001 par value 8,070 8,064
Authorized - 100 million shares
Issued and outstanding - 8,069,338 at March 31,
2002 and 8,063,338 at December 31, 2001
Additional paid-in capital 32,172,288 32,216,113
Shareholder loans (757,733) (757,733)
Foreign currency translation adjustment (319,915) (316,280)
Accumulated deficit (27,648,659) (27,293,190)
------------ ------------
Total shareholders' equity 3,454,051 3,856,974
------------ ------------
Total liabilities and shareholders' equity $ 5,184,197 $ 5,870,493
============ ============
See accompanying notes.
3
CATUITY INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
----------- -----------
Revenues:
Software development revenue $ 720,569 $ 64,922
Service revenue 244,757 80,303
License revenue 10,800 --
----------- -----------
Total revenues 976,126 145,225
Operating costs and expenses:
Product development 287,399 248,683
Customer implementation and support 314,756 258,642
Sales and marketing 489,464 579,152
General and administrative 318,122 500,971
General and administrative -variable stock
compensation (non-cash) (63,019) (836,272)
----------- -----------
Total operating costs and expenses 1,346,722 751,176
----------- -----------
Operating loss (370,596) (605,951)
----------- -----------
Interest income 15,128 105,172
----------- -----------
Loss before income taxes (355,468) (500,779)
Provision for income taxes -- --
----------- -----------
Net Loss $ (355,468) $ (500,779)
=========== ===========
Net loss per share - basic and diluted $ (0.04) $ (0.06)
Weighted average shares outstanding-basic & diluted 8,068,271 7,869,716
See accompanying notes.
4
CATUITY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $ (355,468) $ (500,779)
Adjustments used to reconcile net loss to net cash
used in operating activities:
Stock based compensation (63,019) (836,272)
Depreciation and amortization 42,965 28,113
Non-cash services 19,200 --
Changes in assets and liabilities:
Accounts receivable 154,439 (63,087)
Other assets, net (139,197) 89,101
Deferred revenue (159,514) (48,456)
Accounts payable (31,529) (170,071)
Accrued expenses and other liabilities (92,243) 53,258
----------- -----------
Net cash used in operating activities (624,366) (1,448,193)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (52,641) (19,964)
----------- -----------
Net cash used in investing activities (52,641) (19,964)
----------- -----------
Cash flows from financing activities:
Issuance of common stock, net of expenses -- 41,045
----------- -----------
Net cash provided by financing activities -- 41,045
----------- -----------
Foreign exchange effect on cash (3,181) (156,350)
----------- -----------
Net decrease in cash and cash equivalents (680,188) (1,583,462)
Cash and cash equivalents, beginning of period 4,464,863 8,558,843
----------- -----------
Cash and cash equivalents, end of period $ 3,784,675 $ 6,975,381
=========== ===========
See accompanying notes.
5
CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (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, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
The balance sheet at December 31, 2001 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, 2001.
6
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, 2002 and 2001.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
--------- -------------
Numerator:
Net loss $(355,468) $ (500,779)
========= =============
Denominator:
Denominator for basic and diluted
earnings per share - weighted
average shares outstanding 8,068,271 7,869,716
========= =============
Basic and diluted loss per share $ (0.04) $ (0.06)
========= =============
For the three month period ended March 31, 2002, there were no options
exercised.
3. COMPREHENSIVE LOSS
Comprehensive loss is summarized as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
--------- ---------
Net loss $(355,468) $(500,779)
Foreign currency
translation (3,635) (156,350)
--------- ---------
Total comprehensive
loss $(359,103) $(657,129)
========= =========
7
CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LEGAL PROCEEDINGS
On March 28, 2002, the Company reached a binding agreement with Welcome
Real-Time (WRT) to settle the lawsuit WRT had filed in July 2000 alleging patent
infringement in Australia. The agreement resulted in the following:
- The immediate settlement and cessation of all legal action in
Australia with no material future financial consequences for either
party.
- A prohibition on both WRT and Catuity from initiating any patent legal
action between them anywhere in the world.
- A commitment by both parties to compulsory mediation and compulsory
binding arbitration should any future patent disputes occur anywhere
in the world.
With the settlement of the WRT lawsuit, Catuity has no legal proceedings to
which it is a party.
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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, transaction processors 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 using existing magnetic
stripe cards and/or smart cards.
For the three month period ended March 31, the Company's net revenue increased
to $976,000 in 2002 from $145,000 during the same period in 2001. Expenses,
excluding the non-cash, variable stock compensation credit recorded in the first
quarter of each year, decreased by approximately $178,000, or 11%, principally
due to the reduction in legal expenses associated with the Welcome Real-Time
(WRT) lawsuit. As a result, the Company's first quarter operating loss,
excluding the non-cash, variable stock compensation credit, was $434,000 in 2002
compared to $1,442,000 in 2001. The first quarter operating loss, including the
non-cash, variable stock compensation credit was $371,000 in 2002 compared to
$606,000 in 2001.
On March 28, 2002, the Company reached a binding agreement with WRT to settle
the lawsuit WRT had filed in July 2000. The agreement resulted in the following:
- The immediate settlement and cessation of all legal action in
Australia with no material future financial consequences for either
party.
- A prohibition on both WRT and Catuity from initiating any patent legal
action between them anywhere in the world.
- A commitment by both parties to compulsory mediation and compulsory
binding arbitration should any future patent disputes occur anywhere
in the world.
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, 2001.
9
CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET REVENUE
Net revenue in the three month period ended March 31, 2002 increased 573% to
$976,000 from $145,000 in the three month period ended March 31, 2001. In 2002,
approximately $721,000 of net revenue was related to software development
activities for U.S. customers, while an additional $245,000 related to service
revenues for installation, training and maintenance efforts on behalf of U.S.
customers.
PRODUCT DEVELOPMENT
Product development expenses principally consist of the costs associated with
the Company's software development team in Sydney, Australia. For the three
month period ended March 31, costs increased from $249,000 in 2001 to $287,000
(15%) in 2002. The principal source of the increase relates to an increase in
the number of Product Development staff to complete customer software
development work.
CUSTOMER IMPLEMENTATION AND SUPPORT
Customer implementation and support expenses consist of the costs associated
with the Company's customer implementation and support staff and facilities
located in Arlington, Virginia. For the three month period ended March 31, costs
increased from $259,000 in 2001 to $315,000 in 2002. The increase of $56,000, or
22%, was principally due to the hiring of additional staff needed to support
additional software development and customer service requirements.
SALES AND MARKETING
Sales and marketing expenses decreased from $579,000 in the three month period
ended March 31, 2001 to $489,000 in 2002. The decrease of $90,000, or 16%, was
principally due to a reduction in travel related costs in 2002 and non-recurring
sales costs in 2001.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include costs related to executive,
financial and administrative personnel, outside professional services, patents
and intellectual property defense, facilities and other general corporate
overhead. Expenses for the three month period ended March 31, 2002 were $318,000
compared to $501,000 in the same period in 2001. The decrease of $183,000 (37%)
relates primarily to a decrease in legal costs associated with the WRT lawsuit.
10
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 non-recourse
loans awarded in 1996, to a director and an officer in order to purchase the
Company's common stock. The non-recourse loans are treated as variable and
variable accounting has been adopted. The non-cash expense/(credit) recorded
each period is dependent on movements in the Company's price per share. For the
three month period ended March 31, 2002, a non-cash credit of $63,000 was
recorded due to downward movement in the Company's stock price. In the same
period in 2001, a non-cash credit of $836,000 was recorded.
INTEREST INCOME
Interest income decreased by $90,000, from $105,000 for the three month period
ended March 31, 2001 to $15,000 in 2002. The decrease in interest income is
attributable to lower cash balances invested in interest bearing accounts and
lower interest rates during the three month period ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the company had $3,785,000 in cash and cash equivalents, a
decrease of $680,000 from December 31, 2001.
Net cash used in operating activities was reduced to $624,000 for the three
month period ended March 31, 2002 compared with $1,448,000 for the three month
period ended March 31, 2001. The $824,000 reduction in the use of cash was
primarily due to the reduction in the operating loss excluding each year's
credit for non-cash stock compensation. The reduction in the operating loss
directly resulted from the $721,000 increase in revenue for the three month
period ended March 31, 2002.
During the three month period ended March 31, 2002 the Australian dollar
remained relatively stable against the U.S. dollar. The result of minor
fluctuations was a negative foreign currency effect on cash of approximately
$3,000.
The Company believes that its existing capital resources, combined with
collected revenues from signed contracts, are adequate to meet its cash
requirements for the next twelve months.
11
CATUITY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. Various factors may cause actual performance to differ from any of
the forward-looking statements contained in the Management Discussion and
Analysis of Financial Condition and Results of Operations. These include, but
are not limited to; currency exchange rates, inflation rates, recession, and
other external economic factors over which the Company has no control; the
timing and speed with which major customers and prospects execute their plans
for the use of loyalty and/or smart cards; the demand for, timing and market
acceptance of, new and existing smart card products; continued development of
the Company's software products; competitive product and pricing pressures;
patent and other litigation risk, the risk of key staff leaving the Company; as
well as the risk that major customers of the Company's products, including Visa,
reduce their requirements of or terminate their arrangements with the Company.
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.
12
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, 2002 and 2001 the Company's net current assets (defined as
current assets less current liabilities) subject to foreign currency risk are
$256,000 and $662,000. The potential decrease in net assets from a hypothetical
10% adverse change in quoted foreign currency exchange rates would be
approximately $25,600 and $66,200.
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 to a much lesser extent in 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
On May 1, 2001 the Company entered into an agreement with Greenstone Partners,
Inc. whereby the Company agreed to issue shares of common stock and options to
purchase shares of common stock in exchange for Greenstone's investor relations
services. Under the terms of the agreement, Greenstone received a total of
30,000 shares of the Company's common stock, vesting at the rate of 3,000 shares
per month and the option to purchase 25,000 shares of the Company's common stock
at $4.00 per share between August 1, 2001 and May 1, 2004, unless the agreement
terminated by the Company. The Company terminated the agreement and the issuance
of shares to Greenstone ended on February 15, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
ITEM 5. OTHER INFORMATION
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, 2002.
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 5/8/02
-------------------------------------
Michael V. Howe
President and Chief Executive Officer
By: /s/ John H. Lowry 5/8/02
-------------------------------------
John H. Lowry
Chief Financial Officer
14