EXHIBIT 99.3
CATUITY INC.
ARBN 089 327 882
APPENDIX 4E
PRELIMINARY FINAL REPORT
FULL YEAR ENDED DECEMBER 31, 2004
CONTENTS
RESULTS FOR ANNOUNCEMENT TO THE MARKET II
SUPPLEMENTARY APPENDIX 4E INFORMATION II
FINANCIAL STATEMENTS, FOOTNOTES AND MANAGEMENT'S DISCUSSION AND III
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Lodged with the ASX under Listing Rule 4.3A
APPENDIX 4E
PRELIMINARY FINAL REPORT
FULL YEAR ENDED DECEMBER 31, 2004
RESULTS FOR ANNOUNCEMENT TO THE MARKET
2003 2004
$US'000 $US'000
Revenues from ordinary activities down 85% US 4,982 to US 759
(Consolidated Statement of Operations)
Profit/(loss) from ordinary activities after tax
attributable to members up 506% US (595) to US (3,607)
(Consolidated Statement of Operations)
DIVIDENDS
The Company has not paid dividends in the past and does not anticipate paying
any dividends during 2005.
EXPLANATION OF REVENUE
Revenue includes software development revenue, service revenue and licence
revenue as shown in the Consolidated Statement of Operations.
EXPLANATION OF NET PROFIT/(LOSS)
Due to carry-forward losses the company did not record an amount for income tax
expense for the current or prior period.
For further explanations refer to Management's discussion and analysis of
financial condition and results of operations.
SUPPLEMENTARY APPENDIX 4E INFORMATION
2004 2003
NTA BACKING
Net tangible asset backing per ordinary share US $ 3.03 US $ 7.65
EPS
Earnings per security (basic and diluted) US $ (4.64) US $ (0.77)
CONTROLLED ENTITIES
The company did not gain or lose control over any entities during the year.
ASSOCIATES AND JOINT VENTURES
The Company did not participate in any material joint ventures or associations
with other organisations.
ACCOUNTING STANDARDS
The Company's accounts are prepared in conformance with US GAAP.
AUDIT OF ACCOUNTS
This Appendix 4E report is based on accounts which are in the process of being
audited by the Company's independent auditors.
II
CATUITY, INC.
CONSOLIDATED BALANCE SHEET
(all figures in USD)
DECEMBER 31
2004 2003
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,560,683 $ 5,768,828
Accounts receivable-trade, less allowance of
$5,000 in 2004, and $62,000 in 2003 36,211 402,109
Restricted cash 116,012 119,009
Work in process 0 70,692
Prepaid expenses and other 127,429 188,423
----------- -----------
Total current assets 2,840,335 6,549,061
Property and equipment, net 162,780 223,466
----------- -----------
Total Assets $ 3,003,115 $ 6,772,527
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 150,584 $ 101,335
Deferred revenue 266 110,561
Accrued compensation 317,433 405,228
Other accrued expenses 87,208 116,742
Trust liability 91,722 95,586
----------- -----------
Total current liabilities 647,213 829,452
Shareholders' equity:
Common stock - $.001 par value; Authorized -
6,666,667 shares: issued and outstanding
778,184 in 2004 and 776,374 in 2003 778 776
Preferred stock - $0.001 par value; Authorized -
666,667 shares -- --
Additional paid-in capital 36,603,127 36,979,841
Shareholder loans (79,533) (468,166)
Foreign currency translation adjustment 96,656 88,299
Accumulated deficit (34,265,126) (30,657,675)
----------- ------------
Total shareholders' equity 2,355,902 5,943,075
----------- -----------
Total Liabilities and Shareholders' Equity $ 3,003,115 $ 6,772,527
=========== ===========
See accompanying notes
3
CATUITY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(all figures in USD)
YEAR ENDED DECEMBER 31
------------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
REVENUES:
Software development revenue $ 248,379 $ 2,323,441 $ 1,666,890
Service revenue 467,533 902,222 1,258,996
License revenue 43,200 1,756,725 45,788
--------------- --------------- ---------------
Total revenue 759,112 4,982,388 2,971,674
Cost of revenue and other
operating expenses:
Cost of software development 103,151 1,341,619 981,329
Cost of service revenue 297,075 681,445 1,105,207
Research and development 1,282,753 415,809 539,282
Sales and marketing 867,362 1,290,899 1,758,245
General and administrative 1,912,999 1,972,656 1,470,324
General and administrative -
variable stock compensation
-- (41,996) (53,363)
--------------- --------------- ---------------
Total costs and expenses 4,463,340 5,660,432 5,801,024
--------------- --------------- ---------------
Operating loss (3,704,228) (678,044) (2,829,350)
Interest income 96,777 82,714 60,195
--------------- --------------- ---------------
Net loss $ (3,607,451) $ (595,330) $ (2,769,155)
=============== =============== ===============
Net loss per share - basic & diluted $ (4.64) $ (0.77) $ (4.87)
=============== =============== ===============
Weighted average shares
outstanding-basic & diluted 777,226 645,452 541,557
=============== =============== ===============
See accompanying notes
4
CATUITY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(all figures in USD)
YEAR ENDED DECEMBER 31
--------------------------------------------------
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,607,451) $ (595,330) $(2,769,155)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Stock based compensation -- (41,996) (53,363)
Depreciation and amortization 127,926 264,050 125,273
Non cash services -- -- 27,751
Changes in assets and liabilities:
Accounts receivable 365,898 (24,891) 291,264
Accounts payable 274,249 (201,379) 31,279
Deferred revenue (110,295) (1,701,365) 977,412
Accrued expenses and other liabilities (346,194) 138,145 (428,159)
Other assets 134,683 25,046 118,781
----------- ----------- -----------
Net cash used in operating activities (3,161,184) (2,137,720) (1,678,917)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (71,492) (287,099) (110,493)
Sale of Assets 4,253 -- --
----------- ----------- -----------
Net cash used in investing activities (67,239) (287,099) (110,493)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of expenses 14,057 4,130,121 941,829
Repayment of fractional shares related
to reverse stock split (2,136) -- --
Repayment of Shareholder Loan -- 41,665 --
----------- ----------- -----------
Net cash provided by financing activities 11,921 4,171,786 941,829
Foreign exchange effect on cash 8,357 410,414 (5,835)
----------- ----------- -----------
Net increase/(decrease) in cash and cash
equivalents (3,208,145) 2,157,381 (853,416)
Cash and cash equivalents, beginning of period 5,768,828 3,611,447 4,464,863
----------- ----------- -----------
Cash and cash equivalents, end of period $ 2,560,683 $ 5,768,828 $ 3,611,447
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Taxes paid $ -- $ -- $ --
=========== =========== ===========
Interest paid $ -- $ -- $ --
=========== =========== ===========
See accompanying notes
5
CATUITY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(all figures in USD)
FOREIGN TOTAL
COMMON STOCK (AT PAR) ADDITIONAL SHAREHOLDER CURRENCY ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAID IN CAPITAL LOANS TRANSLATION DEFICIT EQUITY
--------- ----------- --------------- ----------- ------------ ------------- -------------
Balances at January 1, 2002 536,612 $ 537 $ 32,223,640 $ (757,733) $ (316,280) $(27,293,190) $ 3,856,974
Issuance of common stock 31,085 31 959,308 959,339
Exercise of options 67 0 1,691 1,691
Sale of option right 8,550 8,550
Stock based compensation (53,363) (53,363)
Net loss (2,769,155) (2,769,155)
Foreign currency translation (5,835) (5,835)
-------------
Comprehensive loss (2,774,990)
--------- ----------- ------------ ---------- ------------ ------------ -------------
Balances at December 31, 2002 567,764 $ 568 $ 33,139,826 $ (757,733) $ (322,115) $(30,062,345) $ 1,998,201
Issuance of common stock 208,543 208 4,127,614 4,127,822
Exercise of options 67 0 2,299 2,299
Repayment of shareholder loan 41,665 41,665
Adjust shareholder loan to fair
value (247,902) 247,902 0
Stock based compensation (41,996) (41,996)
Net loss (595,330) (595,330)
Foreign currency translation 410,414 410,414
-------------
Comprehensive loss (184,916)
--------- ----------- ------------ ---------- ------------ ------------ -------------
Balances at December 31, 2003 776,374 $ 776 $ 36,979,841 $ (468,166) $ 88,299 $(30,657,675) $ 5,943,075
Issuance of common stock 1,810 2 14,055 14,057
Repayment of fractional shares (2,136) (2,136)
related to reverse stock split
Adjust shareholder loan to
current fair market value (388,633) 388,633
Net loss (3,607,451) (3,607,451)
Foreign currency translation 8,357 8,357
-------------
Comprehensive loss (3,599,094)
--------- ----------- ------------ ---------- ------------ ------------ -------------
Balances at December 31, 2004 778,184 $ 778 $ 36,603,127 ($ 79,533) 96,656 ($ 34,265,126) $ 2,355,902
========= =========== ============ ========== ============ ============ =============
See accompanying notes
6
NOTE 1. DESCRIPTION OF BUSINESS
Catuity provides loyalty and gift card application software to retailers,
and to companies that provide services or hardware to retailers, via a
Catuity hosted solution or on a custom installation basis. The Company
also provides services to retailers, Point of Sale (POS) equipment
providers, and Merchant Services Providers to assist them in quickly and
efficiently implementing the changes that are frequently necessary at the
POS in today's retail environment.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidation of the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company transactions and balances have been eliminated.
REVENUE RECOGNITION
The three distinct revenue streams that result from the Company's business
activities are license revenue, software development revenue, and service
revenue.
License Revenue: License revenue is recognized in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, which
provides for recognition of revenue when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations remain on the Company's part with regard to implementation,
the fee is fixed and determinable, and collectibility is probable. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative
fair value of each element. Revenue recognized from multiple-element
arrangements is allocated to undelivered elements of the arrangement, such
as maintenance, based on the relative fair value of each element. The
Company's determination of fair value of each element in multi-element
arrangements is based on vendor-specific objective evidence (VSOE). The
Company limits its assessment of VSOE for each element to either the price
charged when the same element is sold separately or the price established
by management for an element not yet sold separately. The Company has
established VSOE for maintenance services. The Company does not generally
provide for a right of return in its license contracts.
Software Development Revenue: Software development revenue includes
integration, customization and development fees of both the customer's
hardware and software and the Company's software. Software development
revenue is billed on a fixed price basis. The Company recognizes revenue
on fixed price contracts using the proportional performance method in
accordance with SAB 101, Revenue Recognition in Financial Statements, and
SAB 104, Revenue Recognition, based on hours incurred as a proportion of
estimated total hours 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 work in
process in the consolidated balance sheet. Billings in excess of revenue
are recorded as deferred revenue until revenue recognition criteria are
met. The Company generally does not provide for a right of return in its
software development contracts.
Service Revenue: Service revenue includes training, consulting,
installation support, post-installation support and maintenance fees.
Training, consulting, installation support and post-installation support
are generally billed on a time and material basis and revenue is
recognized as the service is provided. Maintenance revenues are recognized
ratably over the maintenance term. Payments for service revenues are
generally not refundable.
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.
7
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to 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
The Company records an allowance against gross accounts receivable to
provide for doubtful accounts. The allowance is estimated based on the age
of the receivable, specific circumstances surrounding the collection of an
invoice and historical data on allowances as a percentage of aged accounts
receivables. Actual collection on accounts may differ from the allowance
the Company has estimated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and marketable
securities. The Company places its cash and marketable securities with
high credit qualified institutions. At times, the amount of cash on
deposit in banks may be in excess of the respective financial
institution's FDIC insurance limit.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
expense is 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 Australian subsidiaries are translated in
accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation". All balance sheet accounts for the
Australian subsidiaries 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 month
in which the transaction occurs. All cumulative translation gains and
losses are included as a separate component of shareholders' equity in the
consolidated balance sheet. Currency transaction gains and losses are
included in the consolidated statement of operations and are not material
for all years presented.
The Company accounts for foreign currency exchange gains or losses on
inter-company transactions in accordance with SFAS No. 52, "Foreign
Currency Translation". Transactions occurring between the Company's U.S.
office and the Australian office are considered to be of a long-term
investment nature as settlement is not anticipated in the foreseeable
future. Inter-company balances are eliminated and do not appear on the
consolidated financial statements of the Company. Any gain or loss on the
inter-company balance caused by foreign currency translation adjustments
is shown in the equity section of the balance sheet and is not included in
determining net profit/(loss).
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 issued 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
8
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Had compensation costs for stock-based awards issued to employees been
determined consistent with SFAS No. 123, the Company's net loss and net loss per
share would have been reported as follows:
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
----------- ----------- -----------
Net Loss as Reported $(3,607,451) $ (595,330) $(2,769,155)
=========== =========== ===========
Add: Total stock-based employee
compensation expense determined
under fair value based method
for all awards ( 47,224) (305,681) 679,524)
----------- ----------- -----------
Pro forma net loss $(3,654,675) $ (901,011) $(3,448,679)
----------- ----------- -----------
Loss per share:
basic & diluted - as reported $ (4.64) $ (0.77) $ (4.87)
Pro forma basic & diluted
loss per share $ (4.70) $ (1.16) $ (6.06)
=========== =========== ===========
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 2004, 2003, and 2002 grants:
DECEMBER 31
------------------------------
2004 2003 2002
----- ----- -----
Risk Free Interest Rate 2.00% 2.00% 2.00%
Expected Dividend Yield -- -- --
Expected Lives (years) 1.13 0.62 1.27
Expected Volatility 0.862 0.717 0.773
For all fixed awards issued to employees, the Company records an expense based
on the intrinsic value at the date of grant and amortizes it over the vesting
period. For variable awards issued to employees, we record an expense based on
the intrinsic value at each balance sheet date until the contingency is resolved
and number or price is known. For variable awards issued to non-employees, the
Company records an expense based on the fair value of the options at each
balance sheet date.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 31
-----------------------
2004 2003
--------- ---------
Computer equipment $ 558,759 $ 605,055
Leasehold improvements 69,912 67,169
Office furniture and equipment 99,622 139,225
--------- ---------
$ 728,293 $ 811,449
Less accumulated depreciation (565,513) (587,983)
--------- ---------
$ 162,780 $ 223,466
========= =========
NOTE 4. COMMITMENTS AND CONTINGENCIES
During December 2004 the Company's R&D team, located in Sydney Australia,
vacated its existing office space and relocated to a new office building.
Although there has been no formal claim filed, the Company believes it is
possible for the Company to have an outstanding monetary obligation if the lease
agreement related to the vacated space that expired in December 2003, is
determined to have been extended for an additional 4 year period. The Company
believes that at the time the office space was vacated, there was only a
month-to-month rental agreement in effect. If a claim is filed, and a legal
determination is made that a long-term lease did in fact exist, then the Company
could be obligated to pay the landlord for some amount of rental losses, which
can not be estimated at this time.
As of December 31, 2004, the Company had entered into employment agreements with
3 employees. Under each of the three agreements, in the event employment is
terminated ( other than voluntarily by the employee or by the Company for cause
), the Company is committed to make a one-time redundancy payment.
9
NOTE 5. SHAREHOLDERS' EQUITY
REVERSE STOCK SPLIT
On November 1, 2004, the Company held, a special shareholders meeting in Sydney
Australia for the purpose of seeking support of a majority of all shares
outstanding for a reverse stock split, also known as a share consolidation. The
reverse stock split became necessary to bring the Company into compliance with
Nasdaq's on-going listing rule requiring that shares on Nasdaq trade above
$1.00. The proposal passed, authorizing the Board to effect a split. Immediately
after the special shareholders meeting, the Board of Directors unanimously
authorized a 1 for 15 reverse split effective on November 12, 2004, the earliest
date that trading could begin in the post-reverse shares. The balance sheet,
earnings per share, and all other appropriate data have been restated to reflect
the reverse split.
LIMITED RECOURSE LOANS
In 1995 and 1996, the Company issued loans to a former Australian director for
the purpose of purchasing approximately 18,400 shares of the Company's stock.
The Company's recourse for repayment of the loans is limited to after-tax
dividends and proceeds from the disposal of the shares. In 1999, $75,000 AUD of
the loan was repaid ($48,000 USD at the exchange rate in effect on the date of
the transaction) related to the sale of 1,667 shares. In the fourth quarter of
2003, approximately $60,750 AUD was repaid ($42,000 USD at the exchange rate in
effect on the date of the transaction) related to the sale of 1,350 shares. In
each reporting period the Company records a debit or a credit to expense for the
loans based on the difference between the loan share grant price and the
Company's share price at the respective period ending balance sheet dates, on a
cumulative basis. For the years ended December 31, 2004, 2003 and 2002, credits
of $0, $41,996 and $53,363 respectively were recorded. The amount of the loan
outstanding is re-valued at each respective balance sheet date if the Company's
period ending fair market price per share is below the price per share at which
the loan was made. The offsetting entry is made to additional paid in capital.
EMPLOYEE STOCK OPTION PLAN
The Company's shareholders approved the establishment of an Employee Stock
Option Plan ("Plan") at a March 2000 special meeting of shareholders. 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 or the average
closing price of the stock for the 30 calendar days preceding the grant date,
whichever is higher. Option vesting schedules are determined by the Board of
Directors at the time of issuance, but are generally over one to three years
from the date of the grant. Employees must exercise the options within two to
six months of terminating their employment with the Company or the options
lapse.
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 ("Plan")
effective October 1, 2000 for outside Directors. The Plan is designed to provide
a portion of the outside Director's compensation through stock options. Under
the Plan, outside Directors receive 667 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 receives 333
non-qualified option shares on the last business day in September 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 occurs first. The Plan is limited so that no more than 8,667
option shares may be outstanding at any one time.
OPTIONS ISSUED TO THIRD PARTIES
While the Company did not grant options to purchase shares of common stock to
third parties during 2004 or 2003, options were issued during the year ended
December 31, 2002, primarily for services provided to the Company. The Company
valued these options using the Black-Scholes valuation model. Expense relating
to these options amounted to $8,550 was charged to operations in the year they
were granted as they vested immediately.
10
SUMMARY OF STOCK OPTIONS/WARRANTS
The following is a summary of stock and warrant activity:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTION PRICE
SHARES PER SHARE
-------- ---------
Outstanding at January 1, 2002 76,829 $103.50
Granted 20,407 $ 40.65
Cancelled/lapsed (15,563) 79.05
Exercised (67) 25.35
-------- -------
Outstanding at December 31, 2002 81,606 $ 95.25
Granted 19,310 $ 33.90
Cancelled/lapsed (21,117) 108.30
Exercised (67) 34.50
-------- -------
Outstanding at December 31, 2003 79,732 $ 86.85
Granted 7,179 $ 5.21
Cancelled/lapsed (33,281) 53.58
Exercised 0 0.00
-------- -------
Outstanding at December 31, 2004 53,630 $ 91.02
The weighted average fair value of options/warrants granted during the three
years ended December 31, 2004, 2003 and 2002 were $3.09, $12.90 and $17.10,
respectively. The weighted average fair value is calculated using the
Black-Scholes valuation model.
The following is additional information relating to options outstanding as of
December 31, 2004:
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
- ----------------- --------- --------- ----------- --------- --------
$ 4.35 - $ 33.60 8,083 $ 15.99 4.05 4,466 $ 19.56
$39.60 - $ 66.70 12,580 $ 48.62 3.45 12,580 $ 48.62
$90.69 - $129.75 15,634 $ 103.19 3.91 15,634 $ 103.19
$142.50 - $185.59 17,333 $ 145.81 3.98 17,333 $ 145.81
The dilutive effect of stock options has not been included in the loss per share
calculation, as the effect would be anti-dilutive.
COMMON STOCK
On January 21, 2003 the members of the Board of Directors adopted the Catuity,
Inc. 2003 Executive Director Stock Purchase Plan ("Plan") which became effective
upon approval by the Company's shareholders at a March 2003 special meeting of
shareholders. Under the Plan, executive directors may elect to purchase shares
of the Company's common stock at the closing price of the stock on the last
trading day of each month. The plan automatically terminates on the date all
shares approved under the Plan have been purchased unless terminated earlier by
the Board of Directors. The maximum number of shares that may be purchased under
the plan is 6,667 shares.
On November 20, 2002 the members of the Board of Directors approved the
establishment of an Executive Stock Purchase Plan ("Plan") for executives of the
Company. Under the plan, executive employees could elect to purchase shares of
the Company's common stock at the closing price of the stock on the last trading
day of each month beginning in December 2002. The maximum number of shares that
could be purchased under the plan was 1,667 shares. The Plan terminated in
November 2003 in accordance with the plan document.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 666,667 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
11
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
In July 2003, the Company concluded a private placement in Australia of 200,000
shares of the Company's common stock to seven accredited investors at a price of
$30.00 AUD per share ($19.50 USD based on the foreign exchange rate in effect on
the date of the transaction). The price represented an 11% discount to the
shares' fair market value on the Australian Stock Exchange (ASX) on the
transaction date. The Company issued the shares in two tranches - the first on
July 25, 2003 for 41,667 shares (the maximum permitted under ASX listing rules
prior to receiving shareholder approval) and the second for 158,333 shares on
September 22, 2003 following shareholder approval at a special meeting of
shareholders on September 19, 2003. The Company paid a placement fee of 3% of
the purchase price to the Placement Agent for both tranches. The second tranche
of shares included 13,067 shares sold to Mr. Duncan P.F. Mount, Chairman of the
Company. The proceeds from all of the placement shares were added to the
Company's general working funds to be used for general operating purposes. The
shares were sold without registration under US securities laws pursuant to an
exemption from such registration.
At a special meeting of the shareholders on March 26, 2003 the Company's
shareholders approved the sale of 6,000 common shares and 2,000 warrant shares
to Boom Australia Pty. Ltd. ("Boom"), the family trust of Mr. Duncan P.F. Mount,
Chairman of the Company. The aggregate offering price was $337,500 AUD ($189,900
USD), which is net of a 3% placement fee paid to the investor. These shares were
sold without registration under US securities laws pursuant to an exemption from
such registration. The 2,000 warrant shares expired in November 2004 and had an
exercise price of $63 AUD ($33.75 USD).
In November 2002, the Company received net proceeds of $925,000 from the private
placement of common stock to accredited professional investors in Australia at a
price of $56.25 AUD per share ($31.65 USD based on the foreign exchange rate in
effect on the date of the transaction). The price equaled the fair market value
of the shares on the Australian Stock Exchange (ASX) on the transaction date. In
addition, one warrant share at an exercise price of $63 AUD ($38.55 USD) for
every three (3) shares purchased were granted, and expire in November 2004. The
exercise price of the warrants represented approximately a 12% premium over the
fair market price of the Company's shares on the date of transaction. A
placement fee of 3% of the purchase price was paid to each investor. Net
proceeds from the placement were $925,000.
NOTE 6. INCOME TAXES
The components of profit/(loss) before income taxes and extraordinary items
consisted of the following:
YEAR ENDED DECEMBER 31
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Domestic ($4,251,120) ($1,065,811) ($3,904,994)
Foreign 643,669 470,481 1,135,839
----------- ----------- -----------
Loss before income taxes and
extraordinary item ($3,607,451) ($595,330) ($2,769,155)
=========== =========== ===========
There has been no provision for income taxes for any period as the Company has
incurred operating losses and provided a full valuation allowance against the
tax benefit of those operating losses in the United States. The Company has
utilized net operating loss carryforwards to offset operating earnings in
Australia. The provision for income taxes at statutory rates is reconciled to
the reported provision for income taxes as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------
2004 2003 2002
----------- ----------- ----------
Income taxes at statutory tax rate $(1,226,533) $ (202,412) $ (941,513)
Variable stock compensation 0 12,599 16,009
Utilization of operating
loss carryforward (193,101) (141,144) (340,752)
Valuation allowance 1,445,381 362,440 1,327,700
Other (25,747) (31,482) (61,445)
----------- ----------- ----------
Provision for income taxes $ -- $ -- $ --
=========== =========== ==========
12
The statutory tax rate was 34% for the years ended December 31, 2004, 2003 and
2002. 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
------------------------------
2004 2003
------------- -----------
Deferred tax assets:
Net operating loss carry-forwards $ 11,579,661 $10,327,480
Other 48,068 136,052
------------- -----------
Total deferred tax assets 11,627,729 10,463,532
Valuation allowance (11,627,729) (10,463,532)
------------- -----------
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 reserved by a valuation allowance.
As of December 31, 2004, the Company had operating loss carry-forwards of
$20,000,000 expiring in various amounts in 2020 and 2021 in the United States
and $15,900,000 in Australia. Utilization of the net operating loss
carry-forwards in Australia are subject to either the continuity of ownership
test or the continuation of same business test at the time the losses are
utilized in accordance with Subdivision 165 and Subdivision 166 of the
Australian Income Tax Assessment Act of 1997. Utilization of the net operating
loss carry-forwards in the United States are subject to limits due to continuity
of ownership tests under Section 382 of the Internal Revenue Service Code.
NOTE 7. DEFINED CONTRIBUTION PLAN
On behalf of its Australian employees, the Company contributes a government
mandated percentage of each employees' gross salary to a defined contribution
plan. The prescribed charge percentage was 9% for the three years ended December
31, 2004, 2003 and 2002. The Company's contributions were $96,111, $132,321, and
$115,001 for the three years ended December 31, 2004, 2003 and 2002
respectively.
There is a 401-K plan available for employees in the U.S. The Company has not
made matching contributions to the 401-K plan to date.
NOTE 8. RESTRICTED CASH
The Company was and continues to be the trustee of a bank account related to the
use of its Transcard software product that was discontinued in August 2001. When
consumers transferred funds to their cards, the funds were deposited into this
trust account. The funds were debited from the account electronically and paid
to merchants when transaction information relating to cardholder usage was
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 $91,722 and $95,586 at December 31, 2004 and 2003,
respectively.
On August 31, 2001, in accordance with an agreement between the Company and
Westbus Pty Limited, the Transcard system was discontinued. As of that date, no
additional cards were issued and consumers could no longer use their cards to
purchase goods or services. The Company is serving as the administrator to
refund all requested prepaid balances remaining on consumers' cards as of the
date the system was discontinued.
In addition, the Company had restricted cash of $24,290, and $23,424 as of
December 31, 2004 and 2003, respectively, related to an amount held as security
for an operating lease.
NOTE 9. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
As of December 31, 2004, the Company is organized and operates in one business
segment, providing loyalty software for retailers and processors. For the year
ended December 31, 2004, one U.S. customer represented 75% of net revenue while
two U.S. customers each represented 11% of net revenue.
13
Two U.S. customers represented 85% and 14% of net revenue for the year ended
December 31, 2003. The same two customers represented 80% and 16% of net revenue
for the year ended December 31, 2002.
The following table shows net revenues and long-lived assets by geographic area.
2004 2003 2002
----------------------- ---------------------- -----------------------
LONG-LIVED NET LONG-LIVED NET LONG-LIVED NET
ASSETS REVENUES ASSETS REVENUES ASSETS REVENUES
---------- --------- ---------- ---------- ---------- ----------
U.S $ 81,101 $ 759,112 $ 88,789 $4,982,388 $ 98,402 $2,971,674
Australia 81,679 -- 134,677 -- 102,015 --
---------- --------- ---------- ---------- ---------- ----------
Total $ 162,780 $ 759,112 $ 223,466 $4,982,388 $ 200,417 $2,971,674
========== ========= ========== ========== ========== ==========
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2004 2004 2004 2004
---------- ----------- ------------ -----------
Net revenues $ 478,536 $ 135,279 $ 104,303 $ 40,994
Total direct cost of revenue 238,821 75,292 67,621 18,492
---------- ----------- ------------ -----------
Gross Margin $ 239,715 $ 59,987 $ 36,682 $ 22,502
Total operating expenses 874,270 1,222,782 1,183,755 782,307
---------- ----------- ------------ -----------
Operating loss (634,555) (1,162,795) (1,147,073) (759,805)
---------- ----------- ------------ -----------
Total other income 30,914 23,291 19,614 22,958
---------- ----------- ------------ -----------
Net loss $ (603,641) ($1,139,504) ($ 1,127,459) ($ 736,847)
========== =========== ============ ===========
Net loss per share-
basic & diluted ($ 0.78) ($ 1.47) ($ 1.45) ($ 0.95)
========== =========== ============ ===========
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2003 2003 2003 2003
---------- ----------- ------------ -----------
Net revenues $1,475,167 $ 1,666,009 $ 1,117,493 $ 723,719
Total direct cost of revenue 335,924 601,958 671,094 414,088
---------- ----------- ------------ -----------
Gross Margin $1,139,243 $ 1,064,051 $ 446,399 $ 309,631
Total operating costs and
expenses (1) 852,240 1,089,418 822,335 873,375
---------- ----------- ------------ -----------
Operating income/(loss) 287,003 (25,367) (375,936) (563,744)
---------- ----------- ------------ -----------
Total other income 17,687 10,602 15,371 39,054
---------- ----------- ------------ -----------
Net income/(loss) $ 304,690 ($ 14,765) ($ 360,565) ($ 524,690)
========== =========== ============ ===========
Net income/(loss) per
share-basic & diluted $ 0.54 ($ 0.03) ($ 0.58) ($ 0.68)
========== =========== ============ ===========
(1) Includes non-cash variable stock compensation expense/(credit) of
($39,702), ($918), and ($1,376), in the three month periods ended June 30,
September 30, and December 31, 2003 respectively. There was no non-cash
variable stock compensation expense/(credit) recognized in the quarter
ended March 31, 2003
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW OF SIGNIFICANT ACTIVITIES
Catuity's Business
Catuity provides loyalty and gift card application software to retailers, and to
companies that provide services or hardware to retailers, via a Catuity hosted
solution or on a custom installation basis. The Company also provides services
to retailers, Point of Sale (POS) equipment providers, and Merchant Services
Providers to assist them in quickly and efficiently implementing the changes
that are frequently necessary at the POS in today's retail environment.
Catuity Operations
2004 was a year of significant change for Catuity. As we have reported
throughout 2004, in late February, Target Corporation decided to discontinue its
issuance of smart cards and phase out of its participation in the Visa Smart
Rewards platform. Catuity's loyalty software was one of the principal drivers of
the Smart Rewards program that had been, and was being, developed by Visa for
retailers. Target's decision resulted in Visa ceasing operation of the Smart
Rewards program in October 2004. In addition, Target's decision to discontinue
issuing smart cards signaled to the U.S. retail and credit card industries that
the much anticipated growth in the use of smart cards in the United States was
going to be much longer in arriving than had been expected.
As a result of this significant development, management determined it was
necessary to substantially revise its corporate strategy away from the smart
card market and began work on a new strategic plan in March 2004. Prior to the
Target Corporation decision, the Company had focused its efforts on licensing
its smart card based loyalty software to large retailers in North America. From
its strategic planning efforts, the Company determined that its business focus
should be on providing a hosted or customized software solution for chain
retailers (and their partners) and on providing services to retailers, merchant
service providers, and POS equipment manufacturers for their needs at the point
of sale. As a result, the Company's market focus is on middle tier retailers
with approximately 50 to 250 stores, and in particular, pharmacy chains, home
improvement, auto services and other chain retailers looking to improve customer
retention, add new customers, and increase each customer's average spend amount.
In September 2004, the Board hired John Racine, who as a consultant to Catuity
had been the architect of the Company's revised strategy, to become its
President and CEO. Mr. Racine was the founder and managing principal of Altamont
Partners. Mr. Racine, and Altamont Partners, specialize in the payments
industry, were retained in March to advise the Company on its business strategy
and merger & acquisition alternatives. During 2004, additional management
changes were made in order to align the experience and skills of key personnel
in the Company with those needed to succeed in it's new market focus. In
addition, in September the Board of Directors asked Mr. Clifford Chapman to join
the Board. Mr. Chapman is very experienced in turnaround company situations and
also brings substantial merger & acquisition experience to the board.
In May of 2004, the minimum bid price for Catuity shares on Nasdaq had remained
below $1.00 for 30 consecutive days, resulting in the Company being out of
compliance with one of Nasdaq's continuous listing requirements. In order to
regain compliance, on November 1, 2004, the Company held, a special shareholders
meeting in Sydney Australia for the purpose of seeking shareholder support for a
reverse stock split, also known as a share consolidation. The proposal
overwhelmingly passed, authorizing the Board to effect a reverse split.
Immediately after the special shareholders meeting, the Board of Directors
unanimously authorized a 1 for 15 reverse split to be effective on November 12,
2004, the earliest date that trading could begin in the post-reverse shares. As
a result of the reverse stock split, on December 2, 2004, the Company regained
compliance with all of Nasdaq's continued listing requirements. The balance
sheet, earnings per share, and other appropriate data in the enclosed financial
statements have been restated to reflect the reverse stock split.
The Company believes that once its 2004 audit is complete, that its total
shareholders' equity at December 31, 2004, will be below Nasdaq's minimum
continued listing requirement of $2.5M. As a result, the Company anticipates
that, in the near future, it will work within Nasdaq's established procedures to
address the compliance deficiency.
Throughout 2004, Catuity worked on developing its next generation of loyalty
software to meet the needs of retailers in its target markets. The new software,
nicknamed the Catuity Advanced Loyalty System (CALS), is not dependent on smart
cards and is versatile in its ability to run on the three most common operating
systems and three most common databases in use today. The new software is also
designed to significantly reduce the time and cost necessary to integrate it
with Point of Sale (POS) devices used by
15
retailers. The result is that CALS is expected to provide the Company with the
ability to implement loyalty programs for retailers more quickly, easily and for
less cost than in the past. The first release of the CALS product was completed
in November 2004. The Company intends to make further investments in CALS over
time to continually improve it, but at a much lower level than was expended in
2004.
Catuity's 2004 revenue declined to $750,000 from $5 million in 2003 due to the
cessation of new development efforts and phasing out of the Visa Smart Rewards
platform. Expenses were reduced by approximately $1.2 million, despite incurring
one-time severance costs and significant research and development cost on CALS.
Most importantly, as the Company entered 2005, it had significantly reduced its
monthly expense run rate. While the Company has undergone significant
downsizing, it also has undertaken efforts to retain its key people that have
the expertise needed to sell to and service its existing customers and its
targeted customers. Management believes the Company is in a position to
significantly grow revenue without having to add significant cost in order to do
so.
FISCAL YEAR ENDED 2004 COMPARED TO 2003 (all figures in USD and rounded to
nearest $1,000)
In 2004, total revenues were $759,000. These revenues were derived from $248,000
in software development (a decrease of $2,075,000 or 89% over 2003), $468,000 in
services related to implementation, training and support activities (a decrease
of $435,000 or 48% over 2003) and $43,000 in customer license fees (a decrease
of $1,714,000 over 2003). The significant decrease in all three revenue streams
was primarily due to the phase-out of the smart Visa Rewards system that
utilized Catuity's loyalty software.
Cost of software development revenue primarily consists of salaries, employee
benefits, related expenses and office overhead for the portion of time spent by
our technical staff who work on software development for customers. Cost of
software development decreased $1,238,000 or 92%, to $103,000 for the year ended
December 31, 2004 from $1,342,000 for the year ended December 31, 2003. The
decrease in cost of software development corresponded with the decrease in
software development revenue and significant reductions in staffing that
occurred in the 4th quarter of 2004.
Cost of service revenue primarily consists of salaries, employee benefits,
related expenses and office overhead for the customer implementation and support
staff for the portion of their time spent on service related activities. Cost of
service revenue decreased $384,000, or 56%, to $297,000 for the year ended
December 31, 2004 from $681,000 for the year ended December 31, 2003 The
decrease in cost of service corresponded with the decrease in service revenue.
Research and Development expenses consist primarily of salaries, employee
benefits and overhead cost, incurred primarily by our technical staff for the
portion of their time spent furthering the development of Catuity's software
products. Research and development expenses increased $867,000, or 208%, to
$1,283,000 for the year ended December 31, 2004 from $416,000 for the year ended
December 31, 2003. The increase in R&D cost reflected the increase in staff
hours spent on the development of the Company's new loyalty software
application, CALS.
Sales and marketing expenses consist primarily of salaries, employee benefits,
travel, marketing, public relations and related overhead costs of the sales and
marketing department. Sales and marketing expenses decreased $424,000, or 33%,
to $867,000 for the year ended December 31, 2004 from $1,291,000 for the year
ended December 31, 2003. The decrease was primarily related to reductions in
staff size, lower professional services costs, and a decrease in travel.
General and administrative expenses consist primarily of salaries, employee
benefits, related overhead costs and professional service fees. General and
administrative expenses decreased $60,000, or 3%, to $1,913,000 for the year
ended December 31, 2004 from $1,973,000 for the year ended December 31, 2003.
General and administrative expenses in 2004 include an accrual related to
severance pay for the Company's former CEO, per contractual obligations.
On-going general & administrative expenses are expected to continue to decline.
General and administrative - variable stock compensation expense/(credits) are
due to the Company's 1995 non-recourse loans to the Company's former Chairman to
acquire stock and are of a non-cash expense/(credit) in nature. In 2004, no
expense/(credit) was recorded as the Company's stock price was below the average
loan share price and the cumulative stock compensation expense balance was zero.
The Company's variable stock compensation expense/(credits) are solely
attributable to movements in the Company's stock price from period to period.
Other income increased in 2004 to $97,000 compared to $83,000 in 2003. Interest
income earned in Australia was positively impacted in 2004 by a 13% increase in
the average exchange rate for the Australian dollar compared to the U.S. dollar
and a 11% increase in the average interest rate on short-term deposits.
16
FISCAL YEAR ENDED 2003 COMPARED TO 2002 (all figures in USD and rounded to
nearest $1,000)
In 2003, total revenues were $4,982,000. These revenues were derived from
$2,323,000 in software development (an increase of $656,000 or 39% over 2002),
$1,757,000 in customer license fees (an increase of $1,711,000 over 2002) and
$902,000 in services relating to implementation, training and support activities
(a decrease of $357,000 or 28% over 2002). The increase in software development
revenue in 2003 was primarily due to the delivery of several major releases of
the Smart Visa Rewards program. License revenue increased significantly in 2003
as a result of the production use of our software at Visa and Target. The
decrease in service revenue in 2003 compared to 2002 was primarily due to a
large service project in 2002, for which we utilized outside resources.
Direct cost of software development revenue primarily consists of salaries,
employee benefits, related expenses and office overhead for the portion of time
spent by our technical staff located in Sydney, Australia, and our project
managers and business analysts located in Arlington, Virginia, who also work on
software development activities. Direct cost of software development increased
$361,000 or 37%, to $1,342,000 for the year ended December 31, 2003 from
$981,000 for the year ended December 31, 2002. Expenses incurred in Australia
increased in U.S. dollar terms in 2003 due to a 20% increase in the average
exchange rate for the Australian dollar compared to the U.S. dollar. 2003
expenses were also higher because more time was spent on customer related
development projects in 2003 compared to 2002. The increase in direct cost of
software development corresponded with the increase in software development
revenue.
Direct cost of service revenue primarily consists of salaries, employee
benefits, related expenses and office overhead for the customer implementation
and support staff in Arlington, Virginia, for the portion of their time spent on
service related activities. Direct cost of service revenue decreased $424,000,
or 38%, to $681,000 for the year ended December 31, 2003 from $1,105,000 for the
year ended December 31, 2002. The decrease principally resulted from the
Arlington service staff's increased focus on development and sales & marketing
activities versus service related activities. The decrease in direct cost of
service corresponded with the decrease in service revenue. 2003 expenses also
reflected a decrease due to the elimination of the use of outside contractors,
and lower costs associated with project related staff transfers from Australia.
Research and Development expenses consist primarily of salaries, employee
benefits and overhead cost, incurred primarily by the technical staff in Sydney
Australia, for the portion of their time spent on research and development
activities. Research and development expenses decreased $123,000, or 23%, to
$416,000 for the year ended December 31, 2003 from $539,000 for the year ended
December 31, 2002. The decrease principally resulted from increased efforts
related to billable customer development projects versus internal research and
development activities.
Sales and marketing expenses consist primarily of salaries, employee benefits,
travel, marketing, public relations and related overhead costs of the sales and
marketing department. Sales and marketing expenses decreased $467,000, or 27%,
to $1,291,000 for the year ended December 31, 2003 from $1,758,000 for the year
ended December 31, 2002. The decrease was primarily related to reductions in
staff size, lower professional services costs, and a decrease in travel.
General and administrative expenses consist primarily of salaries, employee
benefits, related overhead costs and professional service fees. General and
administrative expenses increased $502,000, or 34%, to $1,972,000 for the year
ended December 31, 2003 from $1,470,000 for the year ended December 31, 2002.
On-going general & administrative expenses were consistent between 2002 and
2003. The unfavorable expense variance in 2003 compared to 2002 was primarily
the result of two non-recurring credits in 2002 versus a non-recurring expense
that occurred in 2003. In 2002 the reversal of accrued legal fees related to a
legal settlement at costs less than anticipated and a reduction to the provision
for doubtful accounts receivable resulted in non-recurring expense credits of
approximately $250,000. The 2002 credits, combined with a 2003 accrual for
severance pay for the Company's former Chairman, per contractual obligations,
accounted for the expense increase in 2003.
General and administrative - variable stock compensation expense/(credits) are
due to the Company's 1995 non-recourse loans to the Company's former Chairman to
acquire stock and are of a non-cash expense/(credit) in nature. In 2003, a
credit of $42,000 was recorded compared to a credit of $53,000 for the year
ended December 31, 2002. The Company's variable stock compensation
expense/(credits) are solely attributable to movements in the Company's stock
price from period to period.
Other income increased in 2003 to $83,000 compared to $60,000 in 2002. Interest
income earned in Australia was positively impacted in 2003 by a 20% increase in
the average exchange rate for the Australian dollar compared to the U.S. dollar.
The Company maintained a higher cash balance in Australia in 2003 compared to
2002.
17