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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
CATUITY, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock, $0.001 par value of Catuity, Inc. ("Catuity Common Stock")
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2) Aggregate number of securities to which transaction applies: 336,709
shares of Catuity Common Stock
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The proposed
aggregate value of the transaction for the purpose of calculating the
filing fee is $4,259,370. The aggregate value is the sum of (i) the
product of A$1,900,000 of Catuity Common Stock or 336,709 shares (the
number of shares of Catuity Common Stock to be issued in the acquisition
to shareholder of Loyalty Magic Pty Ltd., based on the per unit price
described above) and $4.37 (the average of the high and low price per
share of Catuity Common Stock reported on NASDAQ on May 10, 2005); and
(ii) A$3,600,000 or US$2,787,951 (the amount of cash consideration to be
paid in the Acquisition to shareholders of Loyalty Magic Pty Ltd).
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction: $4,259,370
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5) Total fee paid: $501.33
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
3) Filing Party:
- --------------------------------------------------------------------------------
4) Date Filed:
- --------------------------------------------------------------------------------
PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
NOTICE OF 2005 ANNUAL MEETING AND PROXY STATEMENT
CATUITY INC.
Alfred H. (John) Racine, III
President and
Chief Executive Officer
June 6, 2005
Dear Shareholder:
This year's annual meeting of shareholders will be held at the ASX
Theatrette, Level 3, 530 Collins Street, Melbourne Victoria 3000 Australia
on Tuesday July 19, 2005, at 9:30 A.M. Australian Eastern Standard Time
(Monday July 18, 2005 at 7:30 P.M. U.S. Eastern Daylight Time)
Your Board of Directors and I cordially invite you to attend. Registration
will begin at 9:00 A.M. Only those shareholders who owned shares on the
record date, June 1, 2005, are entitled to vote and attend the meeting.
During the course of the meeting there will be the usual time for
discussion of the items on the agenda and for questions regarding
Catuity's affairs. Directors and officers will be available to talk
individually with shareholders before and after the meeting.
The Company expects to hold an informational meeting in Sydney Australia,
and possibly other cities, prior to the annual meeting for shareholders
who may not be able to attend the annual meeting. A press release will be
issued to notify shareholders of times and dates, and meeting information
will be posted on the Company's website, www.catuity.com.
YOUR VOTE IS VERY IMPORTANT. SHAREHOLDERS OF RECORD CAN VOTE BY COMPLETING
AND MAILING YOUR PROXY CARD IN THE ENCLOSED ENVELOPE. IF YOUR SHARES ARE
HELD IN THE NAME OF A BANK, BROKER OR OTHER HOLDER OF RECORD, YOU WILL
RECEIVE INSTRUCTIONS FROM THE HOLDER OF RECORD THAT YOU MUST FOLLOW IN
ORDER FOR YOU TO VOTE YOUR SHARES.
If you have any questions about the meeting, please contact Mr. Jack
Lowry, Secretary of Catuity Inc., 2711 E. Jefferson Ave., Detroit Michigan
48207. The telephone number is 313-567-4348 extension 202. E-Mail:
jackl@catuity.com
Sincerely,
Alfred H. (John) Racine, III
President and CEO
NOTICE OF 2005 ANNUAL MEETING
CATUITY INC.
2711 JEFFERSON AVE. SUITE 37
DETROIT, MICHIGAN 48207 89-97 JONES ST.
UNITED STATES ULTIMO NSW 2007
AUSTRALIA
TIME............. 9:30 a.m. on Tuesday, July 19, 2005
Australian E.S.T. (7:30 P.M. on Monday
July 18, 2005 U.S. E.D.T.)
PLACE............ The ASX Theatrette, Level 3
530 Collins Street, Melbourne
Victoria 3000 Australia
PROPOSALS (1) To elect Duncan P.F. Mount as a director to hold office until
the next annual meeting and until his successor is duly elected.
(2) To elect Alfred H. (John) Racine III as a director to hold office
until the next annual meeting and until his successor is duly
elected.
(3) To elect Alexander S. Dawson as a director to hold office until
the next annual meeting and until his successor is duly elected.
(4) To elect Alan L. Gilman as a director to hold office until the
next annual meeting and until his successor is duly elected.
(5) To elect Clifford W. Chapman, Jr. as a director to hold office
until the next annual meeting and until his successor is duly
elected.
(6) To approve the acquisition of Loyalty Magic Pty Ltd pursuant to
Australian Stock Exchange Limited Listing Rules 11.1 and 11.1.2.
(7) To approve the issuance of shares of Catuity common stock for
the purpose of acquiring Loyalty Magic Pty Ltd and an offering
to raise the cash portion of the proceeds to be paid to Loyalty
Magic and for additional working capital in accordance with
Australian Stock Exchange Limited Listing Rule 7.1.
(8) To approve the issuance of shares of Catuity common stock for
the purpose of an offering to raise approximately A$2,000,000 in
the event Proposals 6 and 7 are not approved.
(9) To approve an increase in the number of shares authorized under
the Employee Stock Option Plan from 63,333 to 300,000 shares.
(10) To approve the grant of options to acquire 77,914 shares of
common stock to Mr. Alfred H. (John) Racine, III in accordance
with Australian Stock Exchange Limited Listing Rule 10.11.
(11) To approve the establishment of an Employee Restricted Stock
Plan.
(12) To approve the payment of $16,500 to Clifford W. Chapman Jr. for
Board of Director service from October 1, 2004 to June 30, 2005.
(13) To approve an increase in the total annual compensation that may
be paid to the Board of Directors in accordance with Australian
Stock Exchange Limited Listing Rule 10.17.
(14) To approve an increase in the number of stock options authorized
under the Director Stock Option Plan.
(15) To approve the establishment of a Director Restricted Stock Plan.
(16) To approve the issuance of securities to members of Catuity's
Board of Directors in the offering as required by Australian
Stock Exchange Limited Listing Rule 10.11.1.
RECORD DATE..... Only shareholders of record at the close of business on June 1,
2005 are entitled to notice of and to vote at the meeting or
any adjournment thereof. The stock transfer books will not be
closed between the record date and the date of the Annual
Meeting. A list of shareholders entitled to vote at the Annual
Meeting will be available for inspection at Catuity's offices.
ANNUAL REPORT... This proxy statement contains Catuity's audited financial
statements and management's discussion and analysis of results
of operations and financial condition. Catuity's Summary Annual
Report to Shareholders, which was mailed on or about April 29,
2005, contains our chairman's letter to shareholders,
consolidated financial statements, and an independent
registered public accounting firm's reports.
PROXY VOTING.... It is important that your shares be represented and voted at
the meeting whether you plan to attend the Annual Meeting or
not. Please MARK, SIGN, DATE AND PROMPTLY RETURN the enclosed
proxy card in the enclosed postage-paid envelope. Any proxy may
be revoked at any time prior to its exercise at the meeting.
/s/ John H. Lowry III
---------------------
JOHN H. LOWRY III
Secretary
Detroit, Michigan
June 6, 2005
TABLE OF CONTENTS
VOTING RIGHTS AND SOLICITATION............................................... 1
VOTING.................................................................... 1
PROXIES................................................................... 1
SOLICITATION OF PROXIES................................................... 1
PROPOSALS 1-5 (ELECTION OF DIRECTORS)....................................... 2
GENERAL................................................................... 2
BUSINESS EXPERIENCE OF DIRECTORS.......................................... 2
RECOMMENDATION OF THE BOARD OF DIRECTORS.................................. 3
PROPOSAL 6 (TO APPROVE THE ACQUISITION OF LOYALTY MAGIC PTY LTD)............ 4
SUMMARY TERM SHEET........................................................... 4
FORWARD LOOKING STATEMENTS................................................... 11
UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA..................... 12
COMPARATIVE, HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA............... 18
MARKET PRICE INFORMATION..................................................... 19
DIVIDEND POLICY.............................................................. 19
RISK FACTORS................................................................. 20
RISKS RELATED TO THE ACQUISITION.......................................... 20
RISKS RELATED TO THE BUSINESS OF THE COMBINED COMPANY..................... 23
THE ACQUISITION.............................................................. 25
REASONS FOR ACQUISITION................................................... 28
OPINION OF LEADENHALL..................................................... 29
ABSENCE OF DISSENTER'S OR APPRAISAL RIGHTS................................ 31
DIRECTORS FOLLOWING THE ACQUISITION....................................... 31
INTERESTS OF OFFICERS AND DIRECTORS IN THE ACQUISITION.................... 31
PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS............................... 31
CONSIDERATION RECEIVED BY OFFICERS AND DIRECTORS OF LOYALTY MAGIC......... 32
RESALES OF CATUITY COMMON STOCK........................................... 32
THE SHARE SALE AGREEMENT..................................................... 32
DETAILS................................................................... 32
OPTIONHOLDERS............................................................. 32
TIMING OF CLOSING......................................................... 33
CONSIDERATION............................................................. 33
PURCHASE PRICE ADJUSTMENT................................................. 33
ANTI-DILUTION PROVISIONS.................................................. 33
DOWNSIDE PROTECTION....................................................... 33
ESCROW.................................................................... 34
REPRESENTATIONS AND WARRANTIES............................................ 34
CONDUCT OF BUSINESS PRIOR TO ACQUISITION.................................. 36
ADDITIONAL COVENANTS...................................................... 37
PROTECTIVE COVENANTS...................................................... 37
CONDITIONS PRECEDENT TO CLOSING........................................... 37
TERMINATION OF THE SHARE SALE AGREEMENT................................... 38
INDEMNIFICATION........................................................... 38
FEES AND EXPENSES......................................................... 39
AMENDMENTS AND WAIVERS.................................................... 39
DESCRIPTION OF OTHER MATERIAL AGREEMENTS..................................... 39
BUSINESS OF CATUITY.......................................................... 39
CATUITY FINANCIAL INFORMATION................................................ 46
i
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CATUITY)............................................... 46
OVERVIEW OF SIGNIFICANT ACTIVITIES........................................... 46
FISCAL YEAR ENDED 2004 COMPARED TO 2003...................................... 47
FISCAL YEAR ENDED 2003 COMPARED TO 2002...................................... 48
LIQUIDITY AND CAPITAL RESOURCES (AS OF DECEMBER 31, 2004).................... 49
OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31,
2004.................................................................. 51
LIQUIDITY AND CAPITAL RESOURCES (AS OF MARCH 31, 2005)....................... 52
CRITICAL ACCOUNTING POLICIES AND ASSUMPTIONS................................. 52
REVENUE RECOGNITION.......................................................... 53
DEFERRED TAX ASSETS.......................................................... 53
ACCOUNTING FOR EQUITY INSTRUMENTS............................................ 54
BUSINESS OF LOYALTY MAGIC....................................................... 54
LOYALTY MAGIC FINANCIAL INFORMATION............................................. 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (LOYALTY MAGIC)......................................... 58
OVERVIEW OF SIGNIFICANT ACTIVITIES........................................... 58
TECHNOLOGY STRATEGY.......................................................... 58
PRODUCT SUITE................................................................ 59
SALES TEAM................................................................... 59
CRITICAL ACCOUNTING POLICIES AND ASSUMPTIONS................................. 61
REVENUE RECOGNITION.......................................................... 62
PROPOSAL 7 (TO APPROVE THE ISSUANCE OF SHARES OF CATUITY COMMON STOCK
FOR THE PURPOSE OF ACQUIRING LOYALTY MAGIC PTY LTD AND TO
PROVIDE WORKING CAPITAL).............................................. 63
LISTING RULE REQUIREMENTS.................................................... 63
GENERAL...................................................................... 63
TERMS OF OFFERING............................................................ 63
USE OF PROCEEDS.............................................................. 64
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 64
VOTING EXCLUSION STATEMENT................................................... 64
PROPOSAL 8 (TO APPROVE THE ISSUANCE OF SHARES OF CATUITY COMMON STOCK
FOR THE PURPOSE OF AN OFFERING IN THE EVENT THE LOYALTY
MAGIC ACQUISITION IS NOT APPROVED).................................... 64
GENERAL...................................................................... 64
TERMS OF OFFERING............................................................ 65
USE OF PROCEEDS.............................................................. 65
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 65
PROPOSAL 9 (TO APPROVE AN INCREASE IN THE NUMBER OF SHARES AUTHORIZED
UNDER THE EMPLOYEE STOCK OPTION PLAN)................................. 66
GENERAL...................................................................... 66
SHARES AUTHORIZED............................................................ 66
EMPLOYEE PLAN ADMINISTRATION................................................. 66
EMPLOYEE PLAN PARTICIPANTS................................................... 66
STOCK OPTIONS................................................................ 67
INCENTIVE STOCK OPTIONS...................................................... 67
VESTING OF OPTIONS........................................................... 67
EXERCISE OF OPTIONS.......................................................... 67
RIGHTS AS A SHAREHOLDER...................................................... 68
AMENDMENT.................................................................... 68
NEW EMPLOYEE PLAN BENEFITS................................................... 68
U.S. INCOME TAX CONSEQUENCES RELATING TO THE EMPLOYEE PLAN................... 68
OPTION AWARDS................................................................ 68
LIMITATION ON COMPENSATION DEDUCTIONS........................................ 69
WITHHOLDING OF TAX........................................................... 69
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 70
PROPOSAL 10 (TO APPROVE THE GRANT OF OPTIONS TO ALFRED H. (JOHN)
RACINE III)........................................................... 70
GENERAL...................................................................... 70
VOTING EXCLUSION STATEMENT................................................... 71
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 71
ii
PROPOSAL 11 (TO APPROVE THE 2005 EMPLOYEE RESTRICTED STOCK PLAN)............... 71
GENERAL...................................................................... 71
PURPOSE...................................................................... 71
ADMINISTRATION............................................................... 71
ELIGIBILITY.................................................................. 72
STOCK SUBJECT TO THE PLAN; LIMITATIONS ON AWARDS............................. 72
RESTRICTED SHARE AWARDS...................................................... 72
TERMINATION OF EMPLOYMENT.................................................... 72
TRANSFER RESTRICTIONS........................................................ 72
PARTICIPANT RIGHTS........................................................... 72
ADJUSTMENTS.................................................................. 72
AMENDMENT AND TERMINATION.................................................... 72
TAX WITHHOLDING.............................................................. 73
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES................................. 73
NEW PLAN BENEFITS............................................................ 73
VOTE REQUIRED................................................................ 73
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 73
PROPOSAL 12 (TO APPROVE A PAYMENT OF $16,500 TO CLIFFORD W. CHAPMAN JR. FOR
SERVICE ON OUR BOARD OF DIRECTORS FROM OCTOBER 21, 2004 TO
JUNE 30, 2005)........................................................ 74
GENERAL...................................................................... 74
VOTING EXCLUSION STATEMENT................................................... 74
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 74
PROPOSAL 13 (TO APPROVE AN INCREASE IN THE TOTAL ANNUAL COMPENSATION
THAT MAY BE PAID TO THE BOARD OF DIRECTORS)........................... 74
GENERAL...................................................................... 74
VOTING EXCLUSION STATEMENT................................................... 75
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 76
PROPOSAL 14 (TO APPROVE AN INCREASE IN THE NUMBER OF STOCK OPTIONS
AUTHORIZED UNDER THE DIRECTOR STOCK OPTION PLAN)...................... 76
GENERAL...................................................................... 76
SHARES AUTHORIZED............................................................ 76
ELIGIBLE DIRECTORS........................................................... 76
STOCK OPTIONS................................................................ 76
EXERCISE OF OPTIONS.......................................................... 77
RIGHTS AS A SHAREHOLDER...................................................... 77
AMENDMENT.................................................................... 77
U.S. INCOME TAX CONSEQUENCES RELATING TO THE DIRECTOR PLAN................... 77
GRANT OF OPTIONS............................................................. 77
WITHHOLDING OF TAX........................................................... 77
VOTING EXCLUSION STATEMENT................................................... 78
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 78
PROPOSAL 15 (TO APPROVE THE 2005 NON-EMPLOYEE DIRECTOR RESTRICTED
STOCK PLAN)........................................................... 78
PURPOSE...................................................................... 78
ADMINISTRATION............................................................... 78
ELIGIBILITY.................................................................. 78
STOCK SUBJECT TO THE PLAN; LIMITATIONS ON AWARDS............................. 78
RESTRICTED SHARE AWARDS...................................................... 79
TRANSFER RESTRICTIONS........................................................ 79
PARTICIPANT RIGHTS........................................................... 79
ADJUSTMENTS.................................................................. 79
AMENDMENT AND TERMINATION.................................................... 79
TAX WITHHOLDING.............................................................. 79
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES................................. 80
NEW PLAN BENEFITS............................................................ 80
VOTE REQUIRED................................................................ 80
VOTING EXCLUSION STATEMENT................................................... 80
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 80
iii
PROPOSAL 16 (TO APPROVE THE ISSUANCE OF SECURITIES TO MEMBERS OF OUR
BOARD OF DIRECTORS)................................................... 81
GENERAL...................................................................... 81
VOTING EXCLUSION STATEMENT................................................... 81
RECOMMENDATION OF THE BOARD OF DIRECTORS..................................... 81
CORPORATE GOVERNANCE............................................................ 81
BOARD COMMITTEES AND MEETINGS................................................ 81
REPORT OF INDEPENDENT DIRECTORS.............................................. 82
PERFORMANCE ENHANCEMENT...................................................... 83
ETHICS AND CODES OF CONDUCT.................................................. 83
RISK MANAGEMENT.............................................................. 84
CONTINUOUS DISCLOSURE........................................................ 84
OWNERSHIP OF SECURITIES......................................................... 85
COMPLIANCE WITH SEC REPORTING REQUIREMENTS................................... 86
EXECUTIVE COMPENSATION AND RELATED INFORMATION.................................. 86
COMPENSATION COMMITTEE REPORT................................................ 86
COMPENSATION PHILOSOPHY AND OBJECTIVES....................................... 86
COMPENSATION COMPONENTS AND PROCESS.......................................... 87
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.................. 87
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.................................. 88
EXECUTIVE COMPENSATION....................................................... 88
CERTAIN TRANSACTIONS............................................................ 92
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS......................... 92
INDEPENDENT PUBLIC ACCOUNTANTS............................................... 93
AUDIT FEES................................................................... 93
AUDIT RELATED FEES........................................................... 93
TAX FEES..................................................................... 93
ALL OTHER FEES............................................................... 93
SHAREHOLDER PROPOSALS FOR 2006 PROXY STATEMENT.................................. 95
OTHER MATTERS................................................................... 95
INDEX TO FINANCIAL STATEMENTS................................................... F-1
APPENDIX A - ALFRED H. (JOHN) RACINE III STOCK OPTION AGREEMENT................. A-1
APPENDIX B - CATUITY INC. 2005 EMPLOYEE RESTRICTED STOCK PLAN................... B-1
APPENDIX C - CATUITY INC. 2005 NONEMPLOYEE DIRECTOR RESTRICTED STOCK PLAN....... C-1
APPENDIX D - OPINION OF LEADENHALL AUSTRALIA PTY................................ D-1
APPENDIX E - SHARE SALE AGREEMENT............................................... E-1
iv
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
We are furnishing these proxy materials for the solicitation of proxies by
our Board of Directors for our Annual Meeting of Shareholders to be held on
Tuesday, July 19, 2005 at 9:30 a.m. Australian Eastern Standard Time at the ASX
Theatrette, Level 3, 530 Collins Street, Melbourne Victoria 3000 Australia
(Monday, July 18, 2005 at 7:30 p.m. United States Eastern Daylight Time) and at
any adjournments or postponements. We expect to mail these proxy materials on or
about June 14, 2005 to all shareholders entitled to vote at the Annual Meeting.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are listed in the accompanying Notice of Annual Meeting of Shareholders.
We have described each proposal in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION
All references to numbers of shares throughout this Proxy Statement
reflect the one (1) share for fifteen (15) shares reverse stock split that was
approved by shareholders and completed in November 2004.
VOTING
Our Common Stock is the only type of security entitled to vote at the
Annual Meeting. On June 1, 2005, the record date for determination of
shareholders entitled to vote at the Annual Meeting, there were 778,184
shares of Common Stock outstanding. Each shareholder of record on June 1,
2005 is entitled to one vote for each share of Common Stock held on that date.
One third of the outstanding shares of Common Stock entitled to vote must be
present or represented at the Annual Meeting in order to have a quorum for the
conduct of business generally. Abstentions and broker non-votes are counted as
present for the purpose of determining the presence of a quorum for the
transaction of business. In the election of directors, the five candidates
receiving the highest number of affirmative votes will be elected. Any other
matters to be considered at the Annual Meeting require the approval by
affirmative vote of a majority of our outstanding voting shares present or
represented and entitled to vote on those matters at the Annual Meeting.
Abstentions and broker non-votes can have the effect of preventing approval of a
proposal where the number of affirmative votes, though a majority of the votes
cast, does not constitute a majority of the shares present or represented and
entitled to vote on the particular matter. The inspector of election appointed
for the Annual Meeting will tabulate all votes. The inspector will separately
tabulate affirmative and negative votes, abstentions, and broker non-votes.
PROXIES
Whether or not you are able to attend the Annual Meeting, we urge you to
vote your proxy. Catuity's Board of Directors is soliciting your proxy, and the
Board will vote your proxy as you direct on your proxy when properly completed.
If you sign and return your proxy but do not specify any voting directions, your
proxy will be voted "FOR" the proposals, and in the discretion of the proxy
holders as to other matters that may properly come before the Annual Meeting.
You may revoke or change your proxy at any time before the Annual Meeting. To do
this, send a written notice of revocation or another signed proxy with a later
date to Catuity's Secretary at our principal executive office in Detroit,
Michigan or our Australian office in Ultimo NSW before the beginning of the
Annual Meeting. You may also revoke your proxy by attending the Annual Meeting
and voting in person.
SOLICITATION OF PROXIES
Catuity will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the proxy,
and any additional solicitation material we furnish to shareholders. We will
furnish copies of solicitation material to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to the beneficial owners,
and we have retained Proxy Services Inc. to assist us in this endeavor. We
anticipate that we will pay US$1,500, plus reasonable out of pocket expenses,
for these services. The original solicitation of proxies by mail may be
supplemented by a solicitation by telephone, telegram, or other means by our
Directors, officers, or employees. We
1
will not pay any additional compensation to these individuals for these
services. Except as described above, we do not presently intend to solicit
proxies other than by mail or via the Internet.
As used in this proxy statement, "Company," "us," "we," "our," and similar
terms means Catuity, Inc., a Delaware corporation, and one or more of its
subsidiaries.
PROPOSALS 1-5
(ELECTION OF DIRECTORS)
GENERAL
The names of our nominees for director, their positions and offices with
Catuity are set forth in the table below. The proxy holders intend to vote all
proxies received by them in the accompanying form for the nominees listed below
unless otherwise instructed. If any nominee is unable or declines to serve as a
director at the time of the Annual Meeting, the proxies will be voted for any
nominee who your Board may designate to fill the vacancy. As of the date of this
Proxy Statement, the Board of Directors is not aware of any nominee who is
unable or will decline to serve as a director. The five nominees receiving the
highest number of affirmative votes of the shares entitled to vote at the Annual
Meeting will be elected directors to serve until the next Annual Meeting and
until their successors have been elected and qualified. Shareholders may not
cumulate votes in the election of directors.
NAME AGE POSITION(S)
- ---- --- -----------
Duncan P.F. Mount 57 Director and Chairman (1),(2)
Alfred H. (John) Racine III 40 Director, President and Chief Executive Officer
Alexander S. Dawson 61 Director (1), (2)
Alan L. Gilman 61 Director (1), (2)
Clifford W. Chapman 36 Director
Jr.
- -------------------
(1) Member, Audit Committee
(2) Member, Compensation Committee
BUSINESS EXPERIENCE OF DIRECTORS
Duncan P.F. Mount is currently our non-employee Chairman. He has served as
our Chairman since May 2003 and as a non-employee Director of Catuity from
December 1999 to May 2003, and as a non-employee Director of Chip Application
Technologies Limited, our wholly owned subsidiary, from March 1999 to December
1999. From October 1996 to September 1999, he was the Asian adviser to CEF.TAL
Investment Management Limited, a Hong Kong based joint venture between the
Canadian Imperial Bank of Commerce, Cheung Kong Holdings Limited and TAL
Investment Counsel. He spent 17 years in Hong Kong as the Managing Director of
Gartmore Investment Management Limited, from May 1980 to October 1988, and as
managing director of CEF Investment Management Limited from May 1988 to October
1996, entities which are fund management and investment companies. From October
1996 to December 1998, he was Managing Director of CEF.TAL Australia Limited. He
holds a Bachelor and Master of Arts degree in Economics and Law (Hons) from
Cambridge University.
Alfred H.(John) Racine III is currently serving a one year term as our
President and Chief Executive Officer and as a member of the Board of Directors.
He began his term with Catuity on September 23, 2004. From 1997 to September
2004, Mr. Racine was the founding partner of Altamont Partners, a
Charlottesville, VA based strategy and merger advisory firm specializing in
payments companies. From 1995 to 1997, he was a principal at SNL Financial, a
merger and financial analytics provider for the financial service industry,
which is also located in Charlottesville. Prior to SNL, he spent five years in a
variety of operational and strategic roles in the financial service division of
Thomson Financial. These roles ranged from senior editor of American Banker to
managing strategic, marketing and product development. Mr. Racine began his
career as a prize-winning journalist. He studied journalism and political
science at Southern Illinois University at Carbondale.
2
Alexander S. Dawson is currently one of our non-employee Directors. He
served as the Chairman of Chip Application Technologies Limited, our wholly
owned subsidiary, from November 1992 to December 1999. From April 1987 to
January 1991, he was Chief Executive Officer of Arnotts Ltd., Australia's
largest biscuit and snack food manufacturing company. From January 1988 to
December 1990, he was a member of the Business Council of Australia. He served
as Chairman of United Distillers (Australasia) Limited from August 1994 to March
1996. He has a Bachelor of Commerce degree from the University of New South
Wales, a Master of Business Administration from Columbia University and is a
Fellow of the Institute of Chartered Accountants in Australia.
Alan L. Gilman is currently one of our non-employee Directors. He joined
the Board of Directors, following his retirement from Arthur Andersen LLP, on
July 1, 2000 and serves as chairman of the Audit and Compensation Committees of
the Board. Previously Mr. Gilman spent over 20 years with Arthur Andersen LLP
specializing in the retail industry. From September 1992 to August 1999 he
served as the managing partner of Senn-Delaney, a unit of Arthur Andersen
specializing in the retail industry. In addition to his role with Senn-Delaney,
he held worldwide leadership responsibility for Arthur Andersen's retail
industry and consumer products activities. Prior to September 1992, he was an
Audit Partner at Arthur Andersen focusing primarily on retail, distribution and
advertising. Mr. Gilman holds a bachelor's degree in accounting from Wayne State
University and is a Certified Public Accountant.
Clifford W. Chapman Jr. joined our Board in September 2004 as one of our
non-employee Directors. From 2002 to 2004, as CEO, he led the turnaround of
mindSHIFT Technologies, a managed services provider focused on IT outsourcing
for small and medium enterprises. From 1998 to 2000, he was the V.P. of Business
Integration for AppNet, a full service internet professional service and managed
services company. In 1995, he co-founded NMP a full service consulting business
and managed hosting company. He holds an MBA from Columbia Business School and a
Bachelor of Science in Computer Engineering from Lehigh University.
2004 DIRECTOR COMPENSATION
During 2004, all non-employee directors, other than Clifford W. Chapman
Jr., received a $10,000 annual retainer fee, paid in quarterly payments of
$2,500 following each calendar quarter, for serving on the Board. The Chairman
of the Board receives an additional $10,000 per year for serving as Chairman.
Each director receives $12,000 in fees for attendance at Board meetings, so long
as the Director attends at least 75% of the meetings held during the year. Fees
of $7,500 per year are paid to the Chairperson of the Audit Committee and $5,000
per year to Board members serving as audit committee members. The Chairperson of
the Compensation Committee receives $5,000 per year and members of the committee
receive $2,000 per year. Under the Director Stock Option Plan, upon the date a
person first becomes a member of the Board, the director automatically receives
stock options to acquire 667 Catuity shares. In addition, on the last business
day of September of every year, the Chairman receives 417 stock options and each
director then in office receives 333 stock options. The exercise price per share
of any option granted is the fair market value on the date of grant and the
option shares are fully vested on the date of grant. The Company believes that
its Director Stock Option Plan, as approved by shareholders, is beneficial
because it helps to align the independent director's interests with those of its
shareholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
ALL OF THE NOMINEES LISTED ABOVE.
3
PROPOSAL 6
(TO APPROVE THE ACQUISITION OF LOYALTY MAGIC PTY LTD)
SUMMARY TERM SHEET
This summary term sheet highlights the material information contained in
this proposal, but may not contain all of the information that is important to
you. You should read carefully this entire proxy statement, including the
attachments and the other documents to which we refer you for a more complete
understanding of the acquisition that is the subject of this proposal.
ASX LISTING RULE REQUIREMENTS
This proposal seeks your approval of the acquisition of Loyalty Magic Pty
Ltd in accordance with Australian Stock Exchange Limited Listing Rule 11.1 and
to approve the change in the nature or scale of the activities of our business
as a result of the acquisition of Loyalty Magic Pty Ltd in accordance with
Australian Stock Exchange Limited Listing Rule 11.1.2.
THE ACQUISITION
(PAGE 25)
We entered into a Share Sale Agreement, dated March 17, 2005, with the
shareholders of Loyalty Magic Pty Ltd, an Australian corporation. Under the
terms of the Share Sale Agreement, such shareholders agreed to sell all of the
outstanding shares of Loyalty Magic to us. As a result of the acquisition,
Loyalty Magic will become our wholly owned subsidiary.
THE COMPANIES
CATUITY, INC.
2711 E. Jefferson Ave.
Detroit, Michigan 48207
313-567-4348
www.catuity.com
Catuity provides technology-based solutions to retailers, which is
designed to increase the profitability of its customers at the point of sale
(POS). Today, Catuity sells a hosted, application service provider (ASP) based
system that enables the processing of member-based loyalty programs and which
can deliver customized discounts, promotions, rewards and points-based programs
which are designed to help retailers find, keep and profit from their best
customers. Catuity also enables gift card solutions. In 2004, Catuity introduced
the first version of its new platform, the Catuity Advanced Loyalty System
(CALS). The system enables robust and highly customizable programs that work on
a retailer's payments terminals, electronic cash register and on their internal
store networks. Catuity also offers IT services to retailers to support their
POS systems maintenance and custom development needs for both Catuity's
technology and that of third parties.
LOYALTY MAGIC PTY LTD
Level 5
140 Bourke Street
Melbourne, VIC 3000
Australia
61 3 8663 3200
www.loyalty-magic.com
4
Loyalty Magic is in the business of "Relationship Marketing Solutions" and
"Marketing Automation." Loyalty Magic's products have an established ability to
communicate with diverse range of devices. Loyalty Magic provides technology
solutions and services to its clients to improve their marketing and
relationship management capabilities. Loyalty Magic provides end-to-end
solutions for clients, from consulting in relationship marketing and management
programs, to program implementation, to metrics and reports analysis leading to
program improvement. Loyalty Magic provides its clients with a hosted loyalty
system on an ASP basis and also licenses its loyalty and reward software to
clients who choose to host their own applications. Loyalty Magic's program
administration and technical support services are provided to ASP clients.
Software customization and other project related services are provided to
clients who license Loyalty Magic's software.
ACQUISITION CONSIDERATION
(PAGE 33)
Unless otherwise indicated, all dollar amounts specified in this summary
refer to Australian dollars. At the close of business on June 3, 2005 (the first
practicable date prior to the filing date of this proxy statement), the
Australian dollar was equal to US$.7545.
Subject to the adjustment provisions set forth below, in exchange for all
of the outstanding shares and stock options of Loyalty Magic, the Loyalty Magic
shareholders will receive an aggregate of A$1,900,000 worth of newly issued
Catuity common stock ("Consideration Securities") and A$3,600,000 in cash. Based
on the number of shares of our common stock outstanding on June 3, 2005,
immediately following completion of the acquisition, and without taking into
account any adjustments including the effects of the offering described below,
the Loyalty Magic shareholders will own, in the aggregate, approximately 32% of
our outstanding common stock on an undiluted basis.
In order to raise the funds necessary to pay the cash portion of the
consideration and to raise additional working capital of A$2,000,000, Catuity
intends to conduct an offering of its common stock, which we may refer to as the
offering, in Australia. Catuity will seek to raise approximately A$7,000,000.
The aggregate number of shares to be issued in the offering will depend on the
price of the shares sold in the offering.
CONSIDERATION ADJUSTMENTS
(PAGE 33)
The consideration (both cash and Consideration Securities) may be adjusted
to reflect changes in the amount of cash or cash equivalents on the balance
sheet of Loyalty Magic on the closing date from a required base of A$300,000.
The consideration will be reduced (proportionately between cash and stock) to
the extent the cash and cash equivalents of Loyalty Magic on the closing date
are less than A$300,000. The purchase price will be increased if Loyalty Magic's
cash and cash equivalents on the closing date exceed A$300,000 as a direct
result of Loyalty Magic having entered into a "Qualifying Agreement" after the
date of the Share Sale Agreement. Whether a new agreement signed between March
17, 2005 and the closing date of the acquisition will be considered a Qualifying
Agreement (as opposed to an agreement entered into in the ordinary course of
business) will be determined by the chief executive officers of each of Catuity
and Loyalty Magic acting reasonably and in accordance with the guidance set
forth in the Share Sale Agreement. The amount by which the purchase price will
be increased will also be determined by the chief executive officers of each of
Catuity and Loyalty Magic acting reasonably and in accordance with the guidance
set forth in the Share Sale Agreement.
ANTI-DILUTION PROVISIONS
(PAGE 33)
The number of Consideration Securities may also be adjusted if Catuity
issues shares of its common stock at a price less than A$5.10 within the six
month period following the closing of the acquisition. If this occurs, the
number of Consideration Securities will be increased to reflect the number that
would have been issued at the lower price.
5
LIMITED PRICE PROTECTION
(PAGE 33)
Up to 150,000 of the Consideration Securities (as adjusted for any further
Consideration Securities issued as a result of the anti-dilution provisions and
for any Consideration Securities that are sold in the offering) will carry
limited downside price protection. This downside protection will only be
available on these shares if the price of Catuity's common stock (as reported on
NASDAQ) is lower than A$5.10 or any lower effective issue price ("Required
Price") resulting from the operation of the anti-dilution provisions of the
Share Sale Agreement. If the downside protection becomes available, the holders
of these shares will be entitled to be paid a cash sum by Catuity if they are
unable to sell these Consideration Securities for a price that is at least the
Required Price during the six month period following the release of these shares
from any effective escrow. The Loyalty Magic Shareholders are obligated to sell
their Consideration Securities in a fair and reasonable manner so as to ensure
that there is an orderly and efficient market for Catuity shares and so as to
not cause any undue fluctuations in the trading price of Catuity's common stock.
The maximum amount that Catuity will be required to pay in respect of this
downside protection is A$510,000. This price protection ends at such time as the
Loyalty Magic shareholders have received A$775,000 from the sale of their
specified shares in the public market during the 6 month period referred to
above. While A$510,000 is the maximum amount Catuity would pay, management
estimates a more likely range that Catuity would be likely to pay is A$0 -
A$300,000.
OTHER ADJUSTMENTS
(PAGE 33)
The Share Sale Agreement contains detailed provisions regarding
adjustments for certain tax liabilities of Loyalty Magic and its subsidiaries,
including purchase price adjustments. For more detailed information, we refer
you to pages 33 and 34 of this proxy statement.
OPTION HOLDERS
(PAGE 32)
We have agreed, on behalf of Loyalty Magic as part of the A$5.5 million
purchase price, to pay each Loyalty Magic optionholder, except Chris Leach,
managing director of Loyalty Magic, an amount in cash equal to the difference
between the cash consideration payable per share and the optionholder's exercise
price per share. Mr. Leach will be paid partially in cash and partially in
shares of our common stock. All Loyalty Magic options will be cancelled as a
result of acquisition.
ESCROW
(PAGE 34)
Approximately A$750,000 of cash and Consideration Securities will be held
in escrow for six months after the closing of the acquisition, unless Catuity
delivers notice to the escrow agent regarding a claim for indemnification. This
amount is to secure the Loyalty Magic shareholders' indemnification and warranty
obligations under the Share Sale Agreement.
TIMING OF COMPLETION OF ACQUISITION
(PAGE 33)
The acquisition will be completed on the second business day after all of
the conditions to closing set forth in the Share Sale Agreement have been
satisfied or, where legally permissible, waived by the party entitled to the
benefit of such condition (see "--Material Conditions to the Closing of the
Acquisition" below).
We anticipate completing the acquisition during the third calendar quarter
of 2005. However, because the acquisition is subject to certain approvals and
other conditions, we cannot predict exactly when the acquisition will be
completed.
6
REASONS FOR THE ACQUISITION
(PAGE 28)
Our Board of Directors determined that the acquisition of Loyalty Magic
and its combination with our company would create a stronger, more competitive
industry participant, based on potential benefits that include:
- the complementary nature of the companies' markets, products,
technologies and customers;
- the more diversified portfolio of products that will result from the
combination of the companies;
- the opportunity to accelerate revenue growth as a result of being
able to offer Loyalty Magic's products to Catuity's customers and
prospective customers and to offer Catuity's products to Loyalty
Magic's customers and prospective customers;
- the potential ability of the combined company to effectively develop
new products and improve existing products by sharing technologies
and intellectual property;
- the expansion of our presence in new and current markets;
- the development of an international platform for future acquisitions
as and when attractive opportunities arise (we do not have any
plans, proposals, commitments or agreements to make any other
acquisitions at this time); and
- the management team in place at Loyalty Magic.
Our board of directors also recognized a number of risks and uncertainties
inherent in the acquisition, but concluded that, on balance, the potential
benefits outweighed the risks associated with the transaction. To review the
background and reasons for the acquisition in more detail, see pages 25 through
28.
RISKS RELATED TO THE ACQUISITION AND THE BUSINESS OF THE COMBINED COMPANY
(PAGE 20)
By voting to approve the acquisition, you will be voting to approve the
combination of the businesses of our company and Loyalty Magic, which we refer
to as the "combined company". In considering whether to vote your shares in
favor of the acquisition, you should carefully consider various potential
negative factors and risks, including the following:
- the issuance of our common stock in the acquisition and in the
offering will result in substantial dilution to our current
shareholders;
- the number of shares of our common stock to be issued in the
acquisition may be increased if Catuity issues shares of its common
stock at a price lower than A$5.10 during the six month period
following the closing;
- some or all of the potential benefits of the acquisition may not be
realized;
- we may not be successful in integrating the two businesses;
- the risks associated with diverting management resources from
day-to-day operational matters, as well as other strategic
opportunities;
- the risk of management and employee disruption associated with the
acquisition, including the risk that, despite the efforts of
management, key personnel might not remain employed with the
combined company; and
7
- the risk that acquisition and related integration activities may
require more capital and other resources resulting in a greater
reduction of our cash reserves and other resources than originally
anticipated.
We urge you to read carefully the risk factors discussed in the section of
this proposal entitled "Risk Factors" beginning on page 20.
MATERIAL CONDITIONS TO THE COMPLETION OF THE ACQUISITION
(PAGE 37)
The obligations of Catuity and the holders of a majority of Loyalty
Magic's shares to complete the sale and purchase of the Shares under the Share
Sale Agreement are subject to the satisfaction of each of the following
customary conditions:
- obtaining all legal and regulatory approvals in the United States,
Australia and other jurisdictions;
- on the closing date, Catuity's common stock is listed on the NASDAQ
and ASX;
- successful closing of an offering in an amount of at least A$5.6
million;
- execution of an employment contract with Chris Leach;
- completion of the business, operational and financial due diligence
of Loyalty Magic by Catuity;
- written confirmation of the cash and cash equivalents on the balance
sheet of Loyalty Magic as at the Completion Date.
- written confirmation that Loyalty Magic's intellectual property is
not subject to any third party claims or third party infringement
claims and completion of a technical and product audit;
- execution of an escrow agreement between the holders of a majority
of Loyalty Magic's shares and Catuity with respect to their holdings
in Catuity post-acquisition;
- execution of confidentiality between Loyalty Magic and each of its
employees;
- all representations and warranties made by the holders of a majority
of Loyalty Magic's shares in the Share Sale Agreement are true and
correct in all material respects as of the date made unless Catuity
has accepted a written notification from such shareholders regarding
such representation and warranty; and
- completion of the business, operational and financial due diligence
of Catuity by Loyalty Magic.
INDEMNIFICATION PROVISIONS
(PAGE 38)
The Share Sale Agreement contains detailed provisions regarding the
indemnification obligations of the parties. Specifically, the Share Sale
Agreement requires us to indemnify the Loyalty Magic shareholders from any
damages they incur as a result of any misrepresentation or inaccuracy in any of
the representations, warranties or covenants made by us in the Share Sale
Agreement or if we fail to fulfill our obligations under the Share Sale
Agreement.
Subject to certain exceptions, the holders of a majority of Loyalty
Magic's shares are obligated to indemnify us from any damages we incur as a
result of any misrepresentation or inaccuracy in any of the representations,
warranties or covenants made by such shareholders in the Share Sale Agreement or
if they fail to fulfill any of their material obligations under the Share Sale
Agreement. Each such shareholder's liability is limited as set forth in the
Share Sale Agreement.
8
Other than a tax-related claim, we must make any claim for indemnification
within six months of the closing. We must make any tax-related claim within the
period in which the Australian Tax Office is able to make a claim against
Loyalty Magic, but in any event no later than seven years after the relevant
rebate or tax event. We cannot make a claim with respect to a breach or series
of related breaches if the amount claimed is less than A$50,000. Further, we
cannot make a claim until the aggregate of all claims we have against the
Loyalty Magic shareholders exceeds A$200,000.
Disputed claims for indemnification are subject to mediation. If mediation
fails, the dispute may be submitted to court in Victoria, Australia, unless the
holders of a majority of Loyalty Magic's shares unanimously agree to have the
claim arbitrated.
PROTECTIVE COVENANTS
(PAGE 37)
Except as otherwise specifically permitted, the Share Sale Agreement
prohibits any of the Loyalty Magic shareholders from:
- engaging in the loyalty and relationship marketing solutions
business;
- employing any person who was an employee of Loyalty Magic at any
time during the 12 months immediately preceding the Completion Date;
- interfering with any relationship between us and our employees,
contractors, suppliers or customers; and
- using or disclosing any of Loyalty Magic's confidential information.
These restrictions are applicable to the United States, Canada and
Australia for a one year period from and after the Completion Date.
If these restrictions become invalid or unenforceable, they may be reduced
in accordance with the terms of the Share Sale Agreement.
INTERESTS OF OUR EXECUTIVE OFFICERS AND DIRECTORS IN THE ACQUISITION
(PAGE 31)
None of our directors, executive officers or any of their respective
affiliates have any direct or indirect interest in the acquisition. None of our
directors are affiliated with or have any interest in Loyalty Magic or any of
its shareholders.
ABSENCE OF DISSENTER'S OR APPRAISAL RIGHTS
(PAGE 31)
Our shareholders are not entitled to dissenter's or appraisal rights under
Delaware law in connection with the acquisition.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
(PAGE 64)
After careful consideration, our Board of Directors has determined that
the acquisition is in the best interest of Catuity and its shareholders. The
Board has unanimously approved the acquisition and unanimously recommends a vote
"FOR" approval of the acquisition.
9
OPINION OF LEADENHALL
(PAGE 29)
Leadenhall has completed a valuation of the acquisition and provided a
report to our Board of Directors to the effect that, based on and subject to the
assumptions made, matters considered and limitations on its review as set forth
in the report, as of May 6, 2005, the acquisition consideration to be paid by us
in the acquisition to the Loyalty Magic shareholders is fair, from a financial
point of view to our shareholders. We paid Leadenhall a fee of A$35,000 in
connection with the fairness opinion. The full text of Leadenhall's opinion is
attached to this proxy statement as Appendix D. We encourage you to read the
text of the opinion in its entirety for a description of the procedures
followed, assumptions made, matters considered and limitation on the review
undertaken. LEADENHALL'S OPINION IS ADDRESSED TO OUR BOARD OF DIRECTORS, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE OR ACT ON ANY MATTER RELATING TO THE ACQUISITION AND THE
ISSUANCE OF OUR COMMON STOCK IN THE ACQUISITION.
EFFECT OF A NEGATIVE VOTE ON THE PROPOSAL TO APPROVE OF THE ACQUISITION OR THE
PROPOSAL TO APPROVE THE ISSUANCE OF OUR COMMON STOCK IN THE ACQUISITION
If our shareholders do not approve the acquisition proposal or the
proposal to issue our common stock in the acquisition and related offering, we
will abandon our efforts to acquire Loyalty Magic. If the proposal is not
approved, we intend to proceed with a smaller offering of approximately A$2.0
million to ensure the company has sufficient working capital for continuing
operations.
REGULATORY FILINGS
In connection with the acquisition:
- we have made and will continue to make the required filings under
the Securities Exchange Act of 1934, as amended, relating to the
acquisition and the issuance of our common stock in the acquisition,
including the filing of this proxy statement with the SEC pursuant
to Regulation 14A under the Exchange Act; and
- we intend to file a Notification Form: Listing of Additional Shares
with NASDAQ for the purpose of listing the shares of our common
stock to be issued to the Loyalty Magic shareholders in the
acquisition.
We also plan to conduct a registered offering of our common stock in
Australia. We intend to raise up to A$7 million from this offering. The offering
will be conducted pursuant an exemption from registration under Regulation S
promulgated under the Securities Act of 1933. In order to maintain this
exemption, persons or entities located in the United States will not be
permitted to participate in this offering. See "Proposal 7 - Terms of Offering."
OTHER IMPORTANT TERMS OF ACQUISITION
To learn more about the other important terms of the acquisition, you
should read carefully the sections of this proxy statement titled "The
Acquisition" beginning on page 25, the "Share Sale Agreement" beginning on
page 32, and each of the appendices to this proxy statement.
10
FORWARD LOOKING STATEMENTS
This proxy statement contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements include statements as to:
- the benefits expected to result from the acquisition of Loyalty
Magic;
- the performance and financial condition of Catuity, Loyalty Magic or
the combined company following the acquisition; and
- the anticipated closing date of the acquisition.
Any statements contained in this proxy statement, including statements to
the effect that Catuity or Loyalty Magic or their respective management
"believes," "expects," "anticipates," "plans," "may," "will," "should,"
"projects," "continues," or "estimates" or statements concerning "potential" or
"opportunity" or other variations thereof or comparable terminology or the
negative thereof, that are not statements of historical fact are intended to
identify forward-looking statements and should be considered forward-looking
statements. Such statements, including statements under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Catuity" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Loyalty Magic " are subject to risk and
uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. Forward-looking statements
represent our reasonable belief and are based on our current expectations and
assumptions with respect to future events. While we believe our expectations and
assumptions are reasonable, they involve risks and uncertainties beyond our
control that could cause the actual results or outcome to differ materially from
the expected results or outcome. We provide a cautionary discussion of risks and
uncertainties under "Risk Factors," beginning on page 20 of this proxy
statement.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason. All subsequent forward-looking statements
attributable to Catuity or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this proxy statement. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this proxy statement may
not occur.
11
UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table provides unaudited selected pro forma consolidated
financial data as of and for the year ended December 31, 2004. The unaudited pro
forma consolidated balance sheet data and the unaudited consolidated statement
of operations data presented below as of December 31, 2004, and for the year
ended December 31, 2004, have been derived from the financial information of our
Company and Loyalty Magic appearing elsewhere in this proxy statement. The
information in the table below should be read in conjunction with the audited
consolidated financial statements of our Company and Loyalty Magic and related
notes. This pro forma data is not necessarily indicative of amounts which would
have been achieved had the acquisition been consummated at the beginning of the
periods presented and should not be construed as representative of future
operations.
CATUITY INC.
Year Ended December 31, 2004
(in thousands except per share data)
Pro Forma Consolidated (unaudited)
----------------------------------
Statement of Operations Data:
Net Revenues $2,833
Operating Loss ($4,015)
Net Loss ($3,823)
Net Loss per Share-basic & diluted ($ 1.89)
Balance Sheet Data:
Total Assets $9,623
Total Shareholders' Equity $8,164
12
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements give
effect to our proposed acquisition of Loyalty Magic Pty. Ltd. The acquisition
will be accounted for under the purchase method of accounting in accordance with
Statement of Financial Accounting Standard (SFAS) No. 141 "Business
Combinations" (SFAS 141). Under the purchase method of accounting, the total
estimated purchase price is allocated to the net tangible and intangible assets
of Loyalty Magic, based on their fair values as of the completion of the
acquisition. Independent valuation specialists have conducted an independent
valuation in order to assist our management in determining the fair values of
these assets. The preliminary work performed by the independent valuation
specialists has been considered in management's estimates of the fair values
reflected in these unaudited pro forma consolidated financial statements. A
final determination of these fair values, which cannot be made prior to the
completion of the acquisition, will include management's consideration of a
final valuation prepared by the independent valuation specialists. This final
valuation will be based on the actual net tangible assets of Loyalty Magic that
exist as of the date of completion of the acquisition. Amounts preliminarily
allocated to intangible assets with definite lives may increase significantly,
which could result in a material increase in amortization expense. Therefore,
the actual amounts recorded as of the completion of the acquisition may differ
materially from the information presented in these unaudited pro forma
consolidated financial statements.
The unaudited pro forma balance sheet as of December 31, 2004 gives effect
to the proposed acquisition as if it occurred on December 31, 2004. Our
consolidated balance sheet information was derived from our audited consolidated
balance sheet as of December 31, 2004, which is incorporated by reference, and
Loyalty Magic's unaudited balance sheet as of December 31, 2004. The unaudited
pro forma consolidated statement of operations for our fiscal year ended
December 31, 2004 is presented as if the transaction was consummated on January
1, 2004 and combines our historical results for the twelve months ended December
31, 2004 with Loyalty Magic's unaudited results for the twelve months ended
December 31, 2004.
The unaudited pro forma consolidated financial statements have been
prepared by our management for illustrative purposes only and are not
necessarily indicative of the consolidated financial position or results of
operations in future periods or the results that actually would have been
realized had Catuity and Loyalty Magic been a combined company during the
specified period. The pro forma adjustments are based on the information
available at the time of the preparation of this proxy statement. The unaudited
pro forma consolidated financial statements, including the notes thereto, are
qualified in their entirety by reference to, and should be read in conjunction
with, Catuity's audited financial statements for our fiscal year ended December
31, 2004; Loyalty Magic's audited financial statements for its fiscal year ended
30 June 2004; and Loyalty Magic's unaudited statement of operations for the
six-months ended December 31, 2004, all of which are either included elsewhere
in this proxy statement or incorporated by reference.
Further, the unaudited pro forma consolidated financial statements do not
include any adjustments for liabilities resulting from integration planning, as
our management is in the process of making these assessments and estimates of
these costs that are not currently known. Management of both Catuity and Loyalty
Magic also expect that the combining of the businesses will generate cost
savings and revenue synergies that have not been included in the unaudited pro
forma consolidated financial statements. Certain reclassifications have been
made to conform Loyalty Magic's financial statements to Catuity's presentation.
In addition to the receipt of the final valuation, the impact of ongoing
integration activities, the timing of completion of the acquisition and other
changes in net tangible and intangible assets of Loyalty Magic that occur prior
to completion of the acquisition could cause material differences in the
information presented.
For purposes of the accompanying unaudited pro forma consolidated
financial statements, amounts denominated in Australian dollars in Loyalty
Magic's financial statements have been converted to United States dollars using
the December 31, 2004 exchange rate, of .7801, for purposes of the balance sheet
and the average exchange rate, of .73713, for the statement of operations for
the year ended December 31, 2004.
13
CATUITY INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(all amounts in USD)
(Unaudited)
DECEMBER 31, 2004
--------------------------------------------------------
LOYALTY PRO FORMA PRO FORMA
CATUITY MAGIC ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------- ------------
Assets
Current Assets:
Cash and cash equivalents $ 2,560,683 $ 97,760 $ 4,680,600 A $ 4,530,683
(2,808,360)B
Accounts receivable-trade, less 36,211 542,861 -- 579,072
allowance
Restricted cash 116,012 -- -- 116,012
Investments -- 322 -- 322
Prepaid expenses and other 127,429 24,312 -- 151,741
----------- ----------- ----------- ------------
Total current assets 2,840,335 665,255 1,872,240 5,377,830
Non-Current Assets:
Property and equipment, net 162,780 135,209 -- 297,989
Capital leasing, net -- 70,197 -- 70,197
Goodwill -- -- 2,914,131 B 2,535,807
(378,324)C
Other intangible assets 1,532,439 B 1,532,439
----------- ----------- ----------- ------------
Total non-current assets 162,780 205,406 4,068,246 4,436,432
----------- ----------- ----------- ------------
Total Assets $ 3,003,115 $ 870,661 $ 5,940,486 $ 9,814,262
=========== =========== =========== ============
Liabilities and Shareholders'
Equity
Current Liabilities:
Accounts payable $ 150,584 $ 127,036 $ 277,620
Deferred revenue 266 114,569 114,835
Accrued compensation 317,433 163,990 481,423
Other accrued expenses 87,208 21,582 156,020 B 428,631
163,821 A
Trust liability 91,722 -- 91,722
----------- ----------- ----------- ------------
Total current liabilities 647,213 427,177 319,841 1,394,231
Capital leasing liability 65,160 65,160
Shareholders' equity:
Common stock - 778 2,105,825 (2,105,825)C 2,028
301 B
949 A
Additional paid-in capital 36,603,127 -- 1,481,889 B 42,600,846
4,515,830 A
Shareholder loans (79,533) -- (79,533)
Foreign currency translation
adjustment 96,656 -- 96,656
Accumulated deficit (34,265,126) (1,727,501) 1,727,501 C (34,265,126)
----------- ----------- ----------- ------------
Total shareholders' equity 2,355,902 378,324 5,620,645 8,354,871
----------- ----------- ----------- ------------
Total Liabilities and
Shareholders' Equity $ 3,003,115 $ 870,661 $ 5,940,486 $ 9,814,262
=========== =========== =========== ============
14
CATUITY INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(all amounts in USD)
(Unaudited)
DECEMBER 31, 2004
----------------------------------------------------------
LOYALTY PRO FORMA PRO FORMA
CATUITY MAGIC ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------- ------------
Revenue :
Project 248,379 $ 240,481 $ 488,860
Service revenue 467,533 1,770,607 2,238,140
License revenue 43,200 63,115 106,315
----------- ----------- ------------- ------------
Total revenue 759,112 2,074,203 2,833,315
COST OF REVENUE AND OTHER OPERATING
EXPENSES:
Cost of Project revenue 103,151 549,460 652,611
Cost of service revenue 297,075 883,481 1,180,556
Cost of license revenue -- -- --
Research and development 1,282,753 163,951 1,446,704
Sales and Marketing 867,362 80,582 947,944
General and administrative 1,912,999 555,926 151,408 D 2,620,333
----------- ----------- ------------- ------------
Total costs and expenses 4,463,340 2,233,400 151,408 6,848,148
----------- ----------- ------------- ------------
Operating income/(loss) (3,704,228) (159,197) (151,408) (4,014,833)
Interest income 96,777 8,929 105,706
Income tax (expense)/benefit -- 85,750 85,750
----------- ----------- ------------- ------------
Net income/(loss) $(3,607,451) $ (64,518) (151,408) $ (3,823,377)
=========== =========== ============= ============
Net income/(loss) per share-basic &
diluted $ (4.64) $ (1.89)
=========== =========== ============= ============
Weighted average shares
outstanding-basic & diluted 777,226 2,027,240
=========== =========== ============= ============
15
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On March 17, 2004 we entered into the share sale agreement ("Agreement")
pursuant to which we agreed to acquire all of the outstanding capital of Loyalty
Magic. Pursuant to the Agreement, Catuity agreed to pay $3.6 million Australian
dollars (or approximately $2.8 million U.S. dollars using the exchange rate on
December 31, 2004) in cash and issue securities worth $1.9 million Australian
dollars (or approximately $1.48 million U.S. dollars using the exchange rate on
December 31, 2004) in exchange for 100% of Loyalty Magic's share capital.
The aggregate purchase price to acquire Loyalty Magic is $5.5 million
Australian dollars. For the purpose of these unaudited pro forma consolidated
financial statements, we have assumed that Catuity's common stock price is $4.93
USD per share (based on an average of closing prices for Catuity's stock on the
Nasdaq SmallCap market from March 15, 2005 through March 21, 2005, the five
trading days centered on the day the transaction was announced). Estimated
direct transaction expenses of $200,000 Australian dollars (or approximately
$156,000 U.S. dollars using the exchange rate on December 31, 2004) have been
included as a part of the total purchase cost.
The preliminary estimated total purchase cost of Loyalty Magic is as
follows:
IN U.S. DOLLARS (USING THE EXCHANGE
IN AUSTRALIAN DOLLARS RATE OF DECEMBER 31, 2004)
--------------------- -----------------------------------
Cash payment $3,600,000 $2,808,360
Value of Securities issued 1,900,000 1,482,190
Estimated transaction costs 200,000 156,020
---------- ----------
Preliminary estimated total purchase cost $5,700,000 $4,446,570
Under the purchase method of accounting, the total estimated purchase
price as shown in the table above is allocated to the net tangible and
intangible assets of Loyalty Magic based on their estimated fair values as of
the date of the completion of the acquisition. Based on information currently
available, subject to potentially material changes upon receipt of an
independent final valuation of the acquisition and other factors described in
the introduction to these unaudited pro forma consolidated financial statements,
the preliminary estimated purchase price is allocated as follows:
IN U.S. DOLLARS (USING THE EXCHANGE
IN AUSTRALIAN DOLLARS RATE OF DECEMBER 31, 2004)
--------------------- -----------------------------------
Net working capital $ 305,189 $ 238,078
Property & Equipment 263,308 205,406
Capital lease obligations (83,528) (65,160)
Identifiable intangible assets 1,964,413 1,532,439
Goodwill 3,250,618 2,535,807
---------- ----------
Preliminary estimated total purchase cost (1) $5,700,000 $4,446,570
(1) No adjustment has been made to the purchase price to reflect a cash balance
below $300,000 Australian dollars, as the Company expects that the cash balance
will be at $300,000 Australian dollars at the close of the transaction. In the
event that the cash balance is below $300,000 Australian dollars at the close of
the transaction, goodwill will be reduced for the decrease in purchase price.
The estimated identifiable intangible assets are as follows:
VALUE (IN U.S. DOLLARS) LIFE (IN YEARS)
---------------------- --------------
Trademarks $ 535,577 indefinite
Software 408,357 5
Customer contracts 273,197 5
Customer relationships 150,972 10
In process R&D 164,336 N/A
----------
Total estimated identifiable intangible assets $1,532,439
2. Pro Forma Adjustments
A. Adjustment to reflect gross proceeds of $4,680,600 ($6 million
Australian dollars) from the issuance of 949,367 shares of Catuity
common stock at $4.93 U.S. dollars per share, net of estimated costs
of $163,821 U.S. dollars to raise capital, in order to fund the
purchase of Loyalty Magic and to provide increased working capital;
16
B. Adjustment to record: (1) $2,808,360 U.S. dollars of the purchase
price paid in cash to Loyalty Magic shareholders (2) $1,482,190 for
the issuance of 300,647 shares of Catuity common stock at $4.93 U.S.
dollars per share and (3) less $156,020 of estimated direct costs in
order to complete the acquisition;
C. Adjustment to eliminate historical shareholders' equity of Loyalty
Magic.
D. Adjustment to reflect the preliminary estimated amount of
amortization of acquired intangible assets with finite lives.
U.S. GAAP Adjustments
3. Certain adjustments have been made to the unaudited historical
financial statements of Loyalty Magic as of December 31, 2004, to
conform to U.S. GAAP. (i) Approximately A$210,000 of expenses
related to web development and new platform development that were
previously capitalized have been expensed in accordance with U.S.
GAAP. (ii) Approximately A$34,250 of revenue previously recognized
was deferred in accordance with U.S. GAAP.
17
COMPARATIVE, HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table provides certain historical per share data and
consolidated per share data on an unaudited pro forma basis after giving effect
to the acquisition using the purchase method of accounting. The pro forma
consolidated per share data was derived from financial information of our
Company and Loyalty Magic appearing elsewhere in this proxy statement. The
information in the table below should be read in conjunction with the historical
consolidated financial statements of our Company and Loyalty Magic and related
notes. The pro forma data is not necessarily indicative of amounts which would
have been achieved had the acquisition been consummated at the beginning of the
periods presented and should not be construed as representative of future
operations.
CATUITY INC.
Year Ended December 31, 2004
----------------------------
Pro Forma
Consolidated
Historical ------------
---------- (unaudited)
Cash dividends per share None None
Loss per share from continuing
operations- basic & diluted (1) $(4.64) $(1.89)
Book value per share (2) $ 3.03 $ 4.03
(1) Historical loss per share from continuing operations is calculated by
dividing our net loss for the period by the weighted average shares of our
common stock outstanding for the period. Pro forma consolidated loss per
share from continuing operations is calculated by dividing pro forma
consolidated net loss for the period by the weighted average share of our
common stock outstanding for the period, after giving effect to the
acquisition and the issuance of shares to raise capital as if these events
had been completed on January 1, 2004.
(2) Historical book value per share is calculated by dividing our total
shareholders' equity as of December 31, 2004 by the shares of our common
stock outstanding at that date. Pro forma consolidated book value per
share is calculated by dividing pro forma consolidated shareholders'
equity as of December 31, 2004 by the sum of (i) shares of our common
stock outstanding at that date, and (ii) shares issued pursuant to the
acquisition of Loyalty Magic and the issuance of shares to raise capital.
18
MARKET PRICE INFORMATION
Our high and low sales prices on the ASX and NASDAQ for the quarter ended
March 31, 2005 and each quarter within the last two fiscal years are shown
below, both in Australian dollars and in U.S. dollars. We completed a reverse
stock split in November 2004, therefore, all prices below have been adjusted to
show the retroactive effect of the reverse stock split.
HIGH LOW HIGH LOW
PERIOD (AUSTRALIAN $) (AUSTRALIAN $) (UNITED STATES $) (UNITED STATES $)
- ---------------------- -------------- -------------- ----------------- -----------------
2005:
First Quarter $ 7.00 $ 3.90 $ 8.30 $ 3.47
2004:
First Quarter $ 42.00 $ 12.30 $ 42.00 $10.65
Second Quarter $ 16.50 $ 6.45 $ 17.25 $ 4.50
Third Quarter $ 10.65 $ 5.10 $ 6.75 $ 3.30
Fourth Quarter $ 6.00 $ 4.36 $ 9.10 $ 3.30
2003:
First Quarter $ 60.00 $ 45.75 $ 36.00 $26.25
Second Quarter $ 53.25 $ 32.25 $ 34.50 $21.00
Third Quarter $ 88.50 $ 32.25 $ 52.50 $20.10
Fourth Quarter $ 42.00 $ 30.45 $ 29.55 $23.25
On March 16, 2005, the trading day immediately prior to the public
announcement of the execution of the Share Sale Agreement, the reported high and
low sales prices per share of our common stock on NASDAQ were $5.79 and $4.70,
respectively. On June 3, 2005, the last practicable trading day prior to the
date of this proxy statement, the reported high and low sales prices per share
of our common stock on NASDAQ were $4.10 and $4.01, respectively.
As of June 1, 2005, the record date for the annual meeting, we had 3,146
holders of record of our common stock.
DIVIDEND POLICY
We have not, to date, paid any dividends on our common stock. While it is
our present intention to maintain this policy, the declaration of dividends is
at the discretion of our board of directors and will be determined by our board
after consideration of various factors, including, our liquidity and financial
condition.
19
RISK FACTORS
By voting to approve the acquisition and the issuance of our common stock
in the acquisition and the offering, you will be voting to approve the
combination of the businesses of our company and Loyalty Magic, which we may
refer to below as the "combined company." Such a combination involves a high
degree of risk and consequently, in addition to all of the other information
contained in this proxy statement and its attachments, you should consider
carefully the following risk factors before determining how to vote.
RISKS RELATED TO THE ACQUISITION
THE NUMBER OF SHARES OF OUR COMMON STOCK TO BE ISSUED IN THE ACQUISITION WILL
NOT BE ADJUSTED FOR ANY INCREASES IN THE MARKET VALUE OF OUR COMMON STOCK THAT
MAY OCCUR PRIOR TO COMPLETION OF THE ACQUISITION, WHICH COULD RESULT IN AN
EFFECTIVE INCREASE IN THE DOLLAR VALUE OF THE ACQUISITION CONSIDERATION WE PAY
TO ACQUIRE LOYALTY MAGIC.
The number of shares of common stock that we will issue to the Loyalty Magic
shareholders in the acquisition will not be adjusted to take into account any
increase in the market value of our common stock greater than A$5.10 that may
occur prior to completion of the acquisition. Under the Share Sale Agreement, we
are required to issue A$1.9 million worth of shares of common stock to the
Loyalty Magic shareholders. The number of shares of common stock which we are
required to issue under the Share Sale Agreement has been determined by
reference to a share price of A$5.10. If the share price of our common stock
rises above A$5.10, the value of the shares of our common stock issued to
Loyalty Magic shareholders will be greater than A$1.9 million. This would have
the effect of increasing the aggregate dollar value of the acquisition
consideration we have agreed to pay to acquire Loyalty Magic, while the value of
Loyalty Magic will be unaffected.
THE ISSUANCE OF APPROXIMATELY 372,549 SHARES OF OUR COMMON STOCK TO THE LOYALTY
MAGIC SHAREHOLDERS IN THE ACQUISITION WILL RESULT IN SUBSTANTIAL DILUTION TO OUR
CURRENT STOCKHOLDERS.
The issuance of approximately 372,549 shares of our common stock to the
Loyalty Magic shareholders in the acquisition will significantly dilute the
voting power and ownership percentage of our current stockholders. Based on the
number of shares of our common stock outstanding as of June 1, 2005, the record
date for the annual meeting, the approximately 372,549 shares of our common
stock to be issued in the acquisition would constitute approximately 32% of the
outstanding shares of our common stock immediately following completion of the
acquisition, on a primary basis. Based on the same number of outstanding shares
of our common stock as of June 1, 2005, our current stockholders in the
aggregate would hold approximately 68% of the outstanding shares of our common
stock immediately following completion of the acquisition, on a primary basis.
This percentage will be reduced if any shares of our common stock are issued at
a price that is lower than A$5.10 during the six month period following the
closing of the acquisition, as this will trigger the anti-dilution provisions of
the Share Sale Agreement that require further shares of our common stock to be
issued to the Loyalty Magic shareholders.
THE ISSUANCE OF APPROXIMATELY 1,555,550 SHARES OF OUR COMMON STOCK IN OUR
OFFERING WILL RESULT IN SUBSTANTIAL DILUTION TO OUR CURRENT STOCKHOLDERS.
In order to raise the funds necessary to pay the cash portion of the
consideration to the Loyalty Magic shareholders and to raise additional working
capital, we intend to offer shares of our common stock in a offering in
Australia. We intend to raise approximately A$7,000,000 in the offering. The
aggregate number of shares to be issued in the offering will depend on the
offering price of the shares sold in the offering. Based on the closing price of
our common stock (as quoted on ASX) on June 3, 2005, we will be required to
issue
20
approximately 1,555,550 shares to purchasers in the offering. The issuance of
these shares will significantly dilute the voting power and ownership percentage
of our current stockholders. Based on the number of shares of our common stock
outstanding as of June 1, 2005, the record date for the annual meeting (after
giving effect to the issuance of shares to the Loyalty Magic shareholders), the
approximately 1,555,550 shares of our common stock to be issued in the offering
would constitute approximately 56% of the outstanding shares of our common stock
immediately following completion of the offering, on an undiluted basis. Based
on the same number of outstanding shares of our common stock as of June 1, 2005
(after giving effect to the issuance of shares to the Loyalty Magic
shareholders, our current stockholders in the aggregate would hold approximately
44% of the outstanding shares of our common stock immediately following the
issuance of shares to the Loyalty Magic shareholders and completion of the
offering, on an undiluted basis. The Loyalty Magic shareholders and the
purchasers in our offering may sell substantial amounts of our common stock in
the public market which could cause the market price of our common stock to
fall, and could make it more difficult for us to raise capital through public
offerings or other sales of our capital stock.
WE ARE REQUIRED TO PROVIDE LIMITED PRICE PROTECTION TO THE LOYALTY MAGIC
SHAREHOLDERS THAT MAY REQUIRE US TO PAY CERTAIN AMOUNTS TO SUCH SHAREHOLDERS,
WHICH COULD HAVE AN ADVERSE EFFECT ON THE COMBINED COMPANY'S RESULTS OF
OPERATIONS.
We are required to provide the Loyalty Magic shareholders limited price
protection if the closing price of our common stock (as quoted on NASDAQ) on the
last business day immediately prior to the date on which the common stock issued
as consideration to the Loyalty Magic shareholders is released from escrow, the
weighted average share price of our common stock (as quoted on NASDAQ) for the
immediately preceding 20 trading days is less than A$5.10 (or such lower
effective price at which those shares were deemed to be issued as a result of
the triggering of anti-dilution protections provided to the Loyalty Magic
shareholders). In such event, six months after the date on which those shares
are released from escrow we will pay certain specified Loyalty Magic
shareholders who receive our stock as partial consideration in the acquisition
an amount up to the difference between such weighted average share price and
A$5.10 (or such effective price at which those shares were deemed to be issued
as a result of the triggering of anti-dilution protections provided to the
Loyalty Magic shareholders). We are required make such payment only to those
Loyalty Magic shareholders who are named, and with respect to those shares
specified. The named shareholders must request such payment. The maximum amount
we will pay to all such shareholders is A$510,000. This price protection ends at
such time as such shareholders have received A$775,000 from the sale of the
specified shares of stock in the open market or by a payment made under these
provisions.
INTEGRATION OF THE BUSINESSES OF OUR COMPANY AND LOYALTY MAGIC MAY BE DIFFICULT
AND WILL CONSUME SIGNIFICANT FINANCIAL AND MANAGERIAL RESOURCES, WHICH COULD
HAVE AN ADVERSE EFFECT ON THE COMBINED COMPANY'S RESULTS OF OPERATIONS.
Following the acquisition, the combined company will attempt to integrate
our company's and Loyalty Magic's respective products and services and will
begin to share common systems, procedures and controls. We will need to overcome
significant challenges in order to realize the expected benefits and synergies
from the acquisition. These challenges include the timely, efficient and
successful execution of a number of post-transaction activities, including:
- integrating the operations of Loyalty Magic with our operations;
- retaining and assimilating key personnel of Loyalty Magic;
- integrating product offerings;
- coordinating sales and marketing efforts to effectively communicate
the capabilities of the combined company;
- demonstrating to the customers of both companies that the
combination will not result in adverse changes in product quality or
customer service and will, in fact, improve service an product
quality;
21
- coordinating and rationalizing research and development activities
of the combined company to achieve the timely introduction of new
products with appropriately reduced costs;
- preserving important relationships of both companies and resolving
potential conflicts that may arise; and
- creating and implementing uniform standards, controls, procedures,
policies and information systems.
The execution of these post-transaction activities will involve
significant risks and may not be successful. Risks associated with these
activities include:
- the potential disruption of our ongoing business operations and
distraction of our management from day-to-day operational matters,
effective management of sales opportunities and timely development
of other strategic opportunities;
- a potential strain on our financial and managerial controls and
reporting systems and procedures;
- unanticipated expenses and potential delays related to integration
of the operations, technology and other resources of Loyalty Magic;
- the inability of the combined company to increase product sales;
- the failure of key markets for the combined company's products to
develop to the extent or as rapidly as currently expected;
- the impairment of relationships with customers or suppliers;
- the impairment of relationships with employees or the inability to
retain key employees;
- greater than anticipated costs and expenses related to
restructuring, including employee severance or relocation costs and
costs relating to vacating facilities;
- a significant reduction in our cash resources which, among other
things, could potentially have an adverse effect on our ability to
fund other strategic acquisitions (although we do not have any
plans, proposals, commitments or agreements to make any other
acquisitions at this time); and
- potential unknown liabilities associated with the acquisition and
the combined operations that may not be fully covered by
indemnification obligations of the Loyalty Magic shareholders.
In addition, the differences in the two companies cultures could present
significant obstacles to the timely, cost-effective integration of the
companies. We may not succeed in addressing these risks or other problems that
may be encountered in connection with the acquisition. The inability to
successfully integrate the operations, technology and personnel of both
companies, or any significant delay in achieving integration, could have a
material adverse effect on the business and results of operations of the
combined company after the completion of the acquisition and, as a result, on
the market price of our common stock.
THE SIGNIFICANT DIRECT AND INDIRECT COSTS OF THE ACQUISITION AND INTEGRATION
COULD ADVERSELY AFFECT THE FINANCIAL PERFORMANCE OF THE COMBINED COMPANY.
We expect to incur approximately $170,000 of costs in connection with the
acquisition, including:
- the fees of Leadenhall in connection with its delivery of a
valuation opinion to our board of directors;
22
- costs and expenses for services provided by our lawyers, accountants
and other professionals in connection with the acquisition and our
offering; and
- the legal costs incurred by the Loyalty Magic shareholders and
Loyalty Magic that in connection with the acquisition, up to a
maximum amount of A$25,000.
This amount is an estimate and could increase. Furthermore, the costs and
expenses we incur in connection with the acquisition, other than the transaction
expenses incurred by the Loyalty Magic shareholders and Loyalty Magic that are
related to the acquisition must be paid even if the acquisition is not
completed.
If the acquisition is completed, the transaction costs and expenses
attributable to financial advisory, legal and accounting services incurred by us
and the transaction expenses incurred by the Loyalty Magic shareholders and
Loyalty Magic that will be paid by us under the terms of the Share Sale
Agreement will be capitalized as a component of the purchase price. Goodwill
associated with the acquisition will be required to be tested at least annually
for impairment, and we will be required to record a charge to earnings, in an
amount that is not currently estimable, if there is an impairment in the value
of such goodwill at a later date. Other intangible assets acquired in connection
with the acquisition will be amortized over their estimated useful lives.
We expect to charge the other transaction costs and expenses during the
periods in which they are incurred, which will reduce our earnings or increase
our losses during those periods. We might not be able to manage these
acquisition-related costs effectively, and they could be higher than we
currently estimate. If we do not manage these costs effectively, our business
operations, financial results and stock price could be adversely effected.
RISKS RELATED TO THE BUSINESS OF THE COMBINED COMPANY
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE LOYALTY MAGIC'S EMPLOYEES INTO OUR
CORPORATE AND EMPLOYEE CULTURE AFTER THE ACQUISITION, POTENTIAL BENEFITS COULD
BE LOST OR DIMINISHED.
The combined company will face challenges inherent in merging distinct
employee and corporate cultures into an integrated whole. The inability to
successfully integrate employee and corporate cultures, or any significant delay
in achieving a successful integration, could adversely affect the combined
company's ability to retain and attract personnel, could result in the loss or
decrease of efficiency and/or the synergies expected to be achieved as a result
of the acquisition, and could have a material adverse effect on the combined
company and the market price of our common stock after completion of the
acquisition.
THE COMBINED COMPANY WILL FACE INTENSE COMPETITION, WHICH COULD RESULT IN LOWER
REVENUES, HIGHER RESEARCH AND DEVELOPMENT EXPENDITURES AND ADVERSELY AFFECT THE
COMBINED COMPANY'S RESULTS OF OPERATIONS.
Both our company and Loyalty Magic operate in industries characterized by
aggressive competition, rapid technological change, evolving technology
standards and short product life cycles. Many competitors of the combined
company utilize similar technologies to that of the combined company and have
substantially greater resources and expertise in financial, technical and
marketing areas than the combined company will have. Competitors of the combined
company may introduce products that are competitively priced, have increased
performance or functionality or incorporate technological advances that the
combined company has not yet developed or implemented.
To remain competitive, the combined company must continue to develop,
market and sell new and enhanced products at competitive prices, which will
require significant research and development expenditures. If the combined
company does not develop new and enhanced products or if it is not able to
invest adequately in its research and development activities, its business,
financial condition and results of operations could be negatively impacted.
UNLESS IT KEEPS PACE WITH CHANGING TECHNOLOGIES, THE COMBINED COMPANY COULD LOSE
CUSTOMERS AND FAIL TO WIN NEW CUSTOMERS.
The future success of the combined company will depend upon its ability to
develop and introduce a variety of new products and services and enhancements to
these new products and services in order to address the changing
23
needs of the marketplace. The combined company may not be able to accurately
predict which technologies customers will support. If the combined company does
not introduce new products, services and enhancements in a timely manner, if it
fails to choose correctly among technical alternatives or if it fails to offer
innovative products and services at competitive prices, customers may forego
purchases of the combined company's products and services and purchase those of
its competitors.
IF THE COMBINED COMPANY'S PRODUCTS DO NOT PERFORM AS PROMISED, THE COMBINED
COMPANY COULD EXPERIENCE INCREASED COSTS, LOWER MARGINS AND HARM TO ITS
REPUTATION.
The failure of the combined company's products to perform as promised
could result in increased costs, lower margins and harm to the reputation of the
combined company. This could result in contract terminations and have a material
adverse effect on the business and financial results of the combined company.
IF THE COMBINED COMPANY FAILS TO ADEQUATELY MANAGE ITS RESOURCES, IT COULD HAVE
A SEVERE NEGATIVE IMPACT ON ITS FINANCIAL RESULTS OR STOCK PRICE.
The combined company could be subject to fluctuations in technology
spending by existing and potential customers. Accordingly, the combined company
will have to actively manage expenses in a rapidly changing economic
environment. This could require reducing costs during economic downturns and
selectively growing in periods of economic expansion. If the combined company
does not properly manage its resources in response to these conditions, the
results of operations of the combined company could be negatively impacted.
FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO
THE COMBINED COMPANY'S BUSINESS.
The growth strategy of the combined company could include additional
acquisitions of companies or technologies that complement those of the combined
company. Future acquisitions by the combined company could involve risks
inherent in acquisitions, such as:
- challenges associated with integrating acquired technologies and business
of operations acquired companies;
- exposure to unknown liabilities;
- diversion of managerial resources from day-to-day operations;
- possible loss of key employees, customers and suppliers;
- higher than expected transaction costs; and
- additional dilution to our existing shareholders if we use our common
stock as consideration.
If we fail to manage these challenges adequately, our results of
operations and stock price could be adversely affected.
GENERAL ECONOMIC CONDITIONS COULD AFFECT THE BUYING AND CONTRACT RENEWAL CYCLES
OF CUSTOMERS.
The business of the combined company will be selling products and services
to retailers. The business of retailers is greatly affected by economic cycles,
including, but not limited to, factors such as interest rate and currency
fluctuations, matters which affect their cost of goods, and labor costs.
Importantly, a retailer's ability to sell its products is also influenced by
consumer confidence in how the general condition of the economy may affect their
personal well-being. As such, the combined company will face the risk that
general economic conditions, such as slow economic growth and the effects of
events such as Sept. 11, 2001, could have an adverse impact on our business.
Such adverse impacts could cause customers to delay, defer, cancel or otherwise
reconsider a purchasing decision.
24
THE ACQUISITION
BACKGROUND OF THE ACQUISITION
It is the intent of this section to provide a detailed chronology and
context for the major events which lead to the execution of the Share Sale
Agreement. At all times, negotiations were collegial and during the course of
the discussions, the management teams and boards of directors established a
clear understanding of the strengths and weaknesses of the respective companies
and created a shared plan for the growth of the combined company.
Our board of directors was actively involved in the discussions and
negotiating strategies and reviewed the drafts of the legal agreements, which
led to, and include, the Share Sale Agreement. In monthly board meetings and in
frequent individual teleconferences to provide status and issue updates,
expressions of support and approval were requested and always unanimously
received.
Generally, all dates listed are to the best recollection of the
participants in the transaction and are U.S. calendar dates; provided, however,
that meetings held face-to-face in Sydney or Melbourne conform to the Australian
calendar, which is effectively one day ahead of the U.S.
In April, 2004, our board of directors approved a new strategic direction
for Catuity. The board determined that strategic acquisitions would play an
important role in implementing this new strategy. In meetings immediately before
and leading up to the 2004 Annual Meeting of Shareholders in Sydney, Australia,
the board determined that we should focus on delivering loyalty and gift card
solutions to North American retailers. In doing so, we decided and, on May 11,
2004, publicly announced that we would move away from our existing smart
card-focused technology platform. At the same time, we determined that we would
seek to merge with or acquire companies which were (i) profitable; and (ii)
focused on serving the loyalty processing needs of North American retailers.
As part of our new strategy, on June 4, 2004 we engaged the firm of
Altamont Partners, and specifically Mr. Alfred H. (John) Racine, III, its
founding partner, to proactively seek merger partners or acquisition targets in
the U.S., Canada and Australia. At the time, our management team began to meet
with companies which were focused on selling loyalty solutions, payment
solutions, information technology or "IT" related services and consulting
services to our target market of retailers. Separately, but closely related to
our new strategy, we also began a proactive effort to sell to or exclusively
license or partner with other firms who were specifically focused on geographic
markets outside of North America where the our existing technology, commonly
referred to as Cat X or the smart loyalty platform, could be marketed. We
determined that our smart loyalty technology would be potentially valuable
outside of North America in markets where the global Europay/MasterCard/Visa
(EMV) chip card standards were being mandated and where adoption was well
underway by card issuers and retailers. Through Mr. Racine, we contacted key
executives and business managers at more than 100 firms based in or serving
markets in Europe, the Middle East, Africa, and Asia-Pacific, including
Australia. We also publicized our interest in industry trade journals and
through well respected advisers and consultants to broaden the pool of potential
buyers or partners for our technology. Discussions were held with more than 20
firms. One of those firms was Loyalty Magic Pty Ltd, which expressed an interest
on or about July 12, 2004. At the time, Loyalty Magic was reviewing a business
opportunity in which the prospective client was committed to using a smart card
based solution. Pursuant to a standard mutual non-disclosure agreement, we
reviewed our technical capabilities with Chris Leach, the managing director and
CEO of Loyalty Magic. Loyalty Magic determined that our smart loyalty technology
did not fit its needs at the time.
On or about August 10, 2004, we initiated preliminary discussions with Mr.
Leach about Loyalty Magic's interest in a business combination. Through these
discussions we learned more about Loyalty Magic's technology, product focus,
customer mix, financial operations and ownership structure. At this time, we
also learned that Loyalty Magic was undergoing a restructuring to streamline its
tiered capital structure and to facilitate a possible sale of the company. We
learned that many of the long-term investors in Loyalty Magic, which was founded
in 1994, were interested in liquidity. Equally important, we learned that
Loyalty Magic's largest shareholder, A-B Venture Fund Company Pty Ltd, a
Sydney-based venture capital fund, was advocating the outright sale of the
company. At our August 17, 2004 board meeting, Mr. Racine delivered a report on
the due diligence process relating to Loyalty Magic.
25
Mr. Racine was introduced to Roger Buckeridge, the co-founder of Allen &
Buckeridge and a managing partner of A-B Venture Fund Company Pty Ltd. In
preliminary meetings held in Sydney on August 20, 2004 Mr. Buckeridge indicated
that Catuity could provide the Loyalty Magic shareholders with access to the
U.S. capital markets through its listing on NASDAQ. He also mentioned that his
fund, while fully supportive of Loyalty Magic, was looking to create an exit
strategy for its investment by 2007, when the fund would mature. We were
represented in those discussions by two of our directors, Messrs. Alexander S.
Dawson and Duncan P.F. Mount.
Mr. Racine traveled to Australia in mid-August to conduct preliminary due
diligence on Loyalty Magic and other potential targets and to better understand
the market for loyalty and related services. During this trip, Mr. Racine met
with a total of four companies to discuss a possible business combination with
Catuity. From August 23 through August 24, 2004, Mr. Racine worked in the
Melbourne offices of Loyalty Magic to review financial, operational, legal, and
customer records. During that time, Mr. Racine also met with key Loyalty Magic
employees and received a demonstration of the its sales process and ASP
technology. Separately, Mr. Racine met with Mr. Buckeridge and Mr. Leach,
informally, to better understand the issues and concerns of the Loyalty Magic
board members and shareholders if a transaction were to proceed. The parties
discussed the possible valuation and structure of a transaction and identified
concerns to be addressed during further due diligence and negotiations. These
issues included, but were not limited to, the risks associated with each
company; opinions on the management teams of both companies; identification of
the benefits of the combined company; discussions about the capital needs of the
combined company; and a review of legal, financial and regulatory issues which
would need to be addressed, including the potential for NASDAQ compliance
issues. Both sides agreed on an informal process for ensuring continuous
disclosure of material and confidential information.
At the end of the initial due diligence effort, Mr. Racine briefed our
board by email and phone and met in Sydney with Mr. Dawson and Mr. Mount to
discuss how to proceed. At that meeting, held at the Sydney Westin on in late
August, 2004, the directors indicated that they believed that a change in
executive management would be necessary in order to consummate a transaction and
execute on our new strategy. On behalf of the board, Mr. Mount, our
non-management chairman, asked Mr. Racine, if he would accept the position of
President and CEO. Ultimately, Mr. Racine accepted the position. Mr. Racine
entered into a one-year employment contract on September 23, 2004. At that time,
Altamont Partner's fee-based relationship with us was cancelled. Also, our board
was expanded to include a new director, Clifford W. Chapman Jr.
As a result of the management change, active negotiations and due
diligence with Loyalty Magic were temporarily deferred. Informal exchanges of
information continued, however, between Mr. Racine and Mr. Leach. In mid-October
of 2004, Mr. Racine travelled to Australia to meet with certain of our
shareholders to brief them, in public sessions, on our recovery strategy. Our
board invited Mr. Leach and Mr. Buckeridge to attend the public briefings. They
attended an informational shareholder session held in our Sydney office on
October 20, 2004 and afterwards, participated in a demonstration of our
technology. In addition, Messrs. Buckeridge and Leach met informally with Mr.
Racine and three of our directors, Messrs. Dawson and Mount and Mr. Chapman.
During the course of the meeting, it was determined that Mr. Chapman, who has
extensive experience with technology companies and in merger and acquisition
activities, would travel to Melbourne to conduct high-level due diligence of
Loyalty Magic. This occurred on October 22, 2004. Mr. Chapman endorsed
proceeding with discussions and subsequently shared his favorable views with the
full Board.
With full and unanimous support from our board on November 12, 2004, Mr.
Racine delivered a letter of intent to Mr. Leach. The non-binding offer proposed
a total consideration of approximately A$4.98 million, which included
A$4,097,000 to be paid at closing with 50% paid in cash and 50% paid in shares
of Catuity's common stock. Additionally an earn-out provision allowed for up to
another A$881,736 to be paid in additional shares of Catuity's common stock
based on Loyalty Magic's performance through December 31, 2005. As a result of
negotiations, a second draft of the letter of intent was sent to Loyalty Magic
on November 15, 2004 proposing an increase in the purchase price to
approximately A$5.5 million. This included the payment of A$4,625,513 at the
closing of the transaction, with 50% to be paid in cash and 50% in shares of our
common stock. Again, the agreement provided for an earn-out provision which
allowed for up to another A$881,736 to be paid in additional shares of common
stock based on Loyalty Magic's performance through December 31, 2005. On
November 16, 2004, our board authorized a final letter of intent that was
delivered to Loyalty Magic on November 18, 2004. That third and final version of
the letter of intent provided for a total consideration of A$6,000,000.00 with
60% of the amount paid in cash and the remaining 40% paid in shares of our
common stock. Among other provisions, the letter of intent required that Loyalty
Magic have at least $400,000 in cash or cash equivalents on hand at the closing
of the
26
transaction and that any shortfall would result in a dollar-for-dollar reduction
in the final purchase price. On November 23, 2004 Loyalty Magic responded with
questions about Catuity, the timing for executing on its new strategy and the
amount and possible structure of a capital raise. At this time, Mr. Racine and
Mr. Buckeridge negotiated directly on key points of the transaction. These
points included anticipated terms of a capital raise to support the transaction;
issues of board structure, including a possible seat on the board by Mr.
Buckeridge; and our plan to regain full compliance with NASDAQ listing
requirements. Mr. Mount was apprised of these discussions. On November 25, 2004,
the Board of directors of Loyalty Magic authorized the execution of the November
18th version of the letter of intent. The letter of intent had an initial
expiration date of January 12, 2005.
During the week of December 6, 2004, certain of our executives traveled to
Melbourne to conduct financial, legal, operational, technical and strategic due
diligence on Loyalty Magic. The due diligence team included, Mr. Racine, Jack
Lowry, our Chief Financial Officer and John Chappell, one of our senior software
engineers. These individuals conducted technical due diligence on Loyalty Magic.
During the course of a week, Messrs. Racine, Lowry and Chappel reviewed the
records of Loyalty Magic, conducted face-to-face conversations with Loyalty
Magic team members and directors to better understand the business, its sales
backlog and development process. Separately, Messrs. Racine, Lowry and Chappel
spoke with competitors of Loyalty Magic, retailers and others to gain a more
detailed understanding of the market and Loyalty Magic's good reputation in the
Australian market.
Based on their review of Loyalty Magic's business, Catuity, working with
its legal counsel, Arnold Bloch Leibler in Melbourne, created the first draft of
the Share Sale Agreement to acquire Loyalty Magic. The agreement was reviewed,
discussed and authorized by our board. That document reflected the financial
terms of the letter of intent and, for the first time, spelled out important
provisions such as indemnification, warranties and the conditions to close the
transaction. The Share Sale Agreement was provided to Loyalty Magic on or about
December 15, 2004. On December 30, 2004, Mr. Leach responded with comments which
principally included objections to the levels of liability that the Loyalty
Magic's shareholders would bear. Mr. Leach proposed that the Loyalty Magic
shareholders' bear no liability for future tax claims which occurred before the
transaction was closed. Further, Mr. Leach proposed that the total liability of
the Loyalty Magic Shareholders be capped at A$500,000. Catuity strongly objected
and negotiations did not progress until on or about January 11, 2005, when a new
version of the Share Sale Agreement was issued with language proposing a
mediation process for resolving disputes related to claims and potential
liabilities. This new version of the agreement also provided details for an
escrow structure in which a portion of the consideration would be held until
potential claims were resolved. The letter of intent expired on January 12,
2005, ending the exclusivity period. In good faith, both sides agreed to extend
the full terms of the letter of intent, including the exclusivity period, while
discussions continued.
As both sides continued to negotiate the various terms and conditions of
the Share Sale Agreement, Loyalty Magic informed us that it had been notified by
an existing customer in writing that it intended to terminate its business
relationship with Loyalty Magic. Loyalty Magic advised us during the customer
review process in December 2004 that this customer might be at risk because it
had been acquired by a new parent company, which had publicly expressed a desire
to move away from the use of loyalty programs. At this point, we slowed the
negotiating process and again conducted a detailed review with Mr. Leach of the
Loyalty Magic's prospects and sales management approach. Every account or
prospect considered material to Loyalty Magic's financial performance through
2006 was individually reviewed. Upon completion of this review, Mr. Racine told
both Mr. Leach and Mr. Buckeridge that we would proceed with a final agreement
only if the total consideration was reduced. Mr. Racine, Mr. Leach, Mr.
Buckeridge and the legal counsel representing the Loyalty Magic shareholders,
Cameron Billingsley met at the Sydney offices of Allen & Buckeridge in early
February, 2005. Mr. Racine laid out the rationale for a lower purchase price,
noting that a successful capital raise would require a valuation that investors
saw as reasonable and a financial forecast which shareholders would believe was
achievable. After sometimes tense and pointed discussions, both sides agreed to
a reduced purchase price of A$5,500,000.00 with a requirement that Loyalty Magic
have at least A$300,000.00 in cash or cash equivalents available at the closing.
The consideration paid to the Loyalty Magic shareholders would be paid 65% in
cash and 35% in shares. On February 4, 2005, the board of directors of Loyalty
Magic recommended the approval of the terms of the transaction to its
shareholders. In the days that followed, numerous discussions were held about
warranties and other provisions in the Share Sale Agreement. Most significantly,
the two sides debated and ultimately agreed on provisions in the Share Sale
Agreement that would allow us to increase the total size of the capital raise
and to provide for a limited lockup arrangement with respect to the shares
issued to the Loyalty Magic shareholders. Mr. Buckeridge, whose interests
27
were most directly affected by this provision, made it clear that he would not
sign the final agreement unless certain "downside protections" were provided to
the Loyalty Magic shareholders.
On March 1, 2005, the Loyalty Magic shareholders provided their first
draft of their disclosure letter to be included in the Share Sale Agreement. On
March 2, 2005, Mr. Buckeridge, Mr. Leach, Loyalty Magic's counsel, Mr.
Billingsley and Craig Holden, an associate of Mr. Buckeridge's met at Allen &
Buckeridge's offices in Sydney. Brian Meltzer and Michelle Benson of Loyalty
Magic also attended by telephone. Mr. Racine and Michael Dodge, a partner with
Arnold Bloch Leibler, represented Catuity. As a result of that meeting,
substantially all the final details were resolved. On March 9, 2005, the Loyalty
Magic shareholders delivered the disclosure schedules to us for review.
Following a careful review of these schedules, we determined that no substantive
issues existed. The final version of the Share Sale Agreement was delivered to
all parties on March 15, 2005 and was formally executed on March 17, 2005.
Subsequent to the announcement of the execution of the Agreement, we
formally engaged advisers and counsellors to assist in the closing of the
transaction and the capital raise transaction. We continue to engage in almost
daily discussions with the management of Loyalty Magic, including periodic
reviews of issues and events which support the forecasts of costs and revenues
presented to us during our due diligence review of Loyalty Magic. On May 8,
2005, our Board agreed to accept Leadenhall's opinion and approved the filing of
this proxy statement.
Arnold Bloch Leibler, counsel for Catuity in connection with the
acquisition of Loyalty Magic, is a leading provider of legal advice on
commercial transactions, specifically mergers and acquisitions, in the
Australian market. As such, certain members of ABL, as the firm is commonly
known, have in the past, and may in the future, represent the current
shareholders of Loyalty Magic in connection with matters unrelated to the
acquisition.
REASONS FOR ACQUISITION
Our board unanimously recommends that the shareholders approve the
proposed acquisition of Loyalty Magic. Management believes the transaction
supports our publicly stated growth strategy. The reasons for completing the
acquisition can be summarized as follows:
- The acquisition provides a growth platform in the Australian and New
Zealand marketplaces with the potential for new business
relationships in other markets;
- Loyalty Magic offers complimentary products, as well as new services
to those offered by us and has an established customer base which
enhances the credibility of the combined company to serve clients
and prospects in North America;
- The proposed acquisition and our offering will strengthen our
balance sheet and improve our perception in the market as we compete
for business in North America, Australia and other markets;
- Loyalty Magic's capital investments in calendar year 2004, its
expanded operations, and its key personnel will allow us to defer or
eliminate similar investments; and
- We will be able to market Loyalty Magic's applications in the U.S.,
while Loyalty Magic will be able to market our applications in
Australia.
The decision by our board of directors to enter into an agreement to
acquire Loyalty Magic has been driven by benefits on many levels. Since our 2004
Annual Shareholder Meeting held on May 12, 2004, our board has consistently
indicated that a key element of our strategy is to acquire companies whose
business focus is complimentary to ours. The acquisition of Loyalty Magic is an
important step in creating a loyalty processing company focused on delivering
profits. The completion of the acquisition establishes our credibility as an
acquirer with other potential acquisition targets, especially those in the U.S.
Since the announcement of the Loyalty Magic acquisition, Catuity has restarted
or accelerated conversations with other target companies in both Australia and
the U.S. No assurances can be made at this time that any of those discussions
will result in the consummation, announcement or completion of a subsequent
acquisition or other business combination.
28
In addition, we also believe the acquisition makes solid business sense on
an operational basis. Loyalty Magic currently serves 26 established customers,
including some household names in the Australian retail market. In undertaking
this acquisition, we believe that Loyalty Magic has a reputation for delivering
successful loyalty programs to its clients and that this reputation can be
leveraged into increased market share in Australia and in other selected
markets. We also believe that Loyalty Magic's products will provide us with a
capability to serve smaller to mid-size North American clients more economically
than with our larger, more feature-rich platform. Our strategy is to operate
both platforms, in parallel, to serve the differing needs of clients and
prospects in North America, both large and small. This approach is consistent
and widely practiced across the payment processing industry. Clients and
prospects have differing levels of need and technological sophistication. It is
important to be able to offer choices between a more basic and lower cost
platform, such as the Loyalty Magic technology, and a more robust and
feature-rich capability such as our CALS. The acquisition is also an excellent
way to acquire and more fully utilize existing personnel's skills and key
talents. Operationally, Loyalty Magic has developed and successfully deployed
applications which extend loyalty solutions to kiosks, over a wireless local
area network, and other e-commerce platforms. All of these points of customer
contact are increasingly important to the strategies of retailers in Australia
and North America. The proven track record of Loyalty Magic in delivering these
innovations will enhance the credibility of the combined company as we execute
our sales strategy in both markets. Additionally, Loyalty Magic has an
established expertise and reputation in managing confidential and critical
client information on behalf of clients. We estimate that Loyalty Magic manages
data on consumers which represent at least one in ten households in Australia.
We will be able to build on the experience, knowledge, credibility and
technological infrastructure of Loyalty Magic to enhance the combined company's
ability to sell and deliver those same services in North America.
OPINION OF LEADENHALL
We engaged Leadenhall Australia Ltd, or Leadenhall, to review the
acquisition of Loyalty Magic and advise us as to whether acquisition of Loyalty
Magic is fair, from a financial point of view, to our shareholders. On May 6,
2005, Leadenhall delivered its opinion to our board of directors that, from a
financial point of view, the acquisition is fair to us. We paid Leadenhall a fee
of A$35,000 in connection with the fairness opinion. The full text of
Leadenhall's opinion is attached to this proxy as Appendix D. We encourage you
to read the text of the opinion in its entirety for a description of the
procedures followed, assumptions made, matters considered and limitations on the
review undertaken.
LEADENHALL'S OPINION IS ADDRESSED TO OUR BOARD OF DIRECTORS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDERS
SHOULD VOTE OR ACT ON ANY MATTER RELATING TO THE ACQUISITION AND THE ISSUANCE OF
COMMON STOCK IN THE ACQUISITION.
We retained Leadenhall to provide our Board of Directors with an
independent opinion of the fairness of the proposed transaction with Loyalty
Magic. Additionally, Leadenhall assessed the value of our equity both before and
after the completion of the proposed acquisition and prepared a purchase price
allocation compliant with SFAS 141. We imposed no limitations on the scope of
Leadenhall's investigation or the procedures to be followed by it in rendering
its opinion. Leadenhall's opinion was provided for the information and
assistance of the board in connection with its consideration of the acquisition
of Loyalty Magic.
In arriving at its opinion, Leadenhall reviewed and analyzed:
- Audited financial statements of Loyalty Magic for the fiscal years
ending June 30, 2002 through June 30, 2004;
- Certain interim financial statements prepared by the management of
Loyalty Magic, including for the periods ending January 31, 2005 and
February 28, 2005;
- Earnings and Cash Flow forecasts for Catuity and Loyalty Magic for
the financial years ending December 31, 2005 to December 31, 2010;
- An executed copy of the Share Sale Agreement by and among Catuity
and the shareholders of Loyalty Magic; and
- Financial Statements of Catuity as filed with the SEC and the ASX
for the periods ending December 31, 2002 to December 31, 2004.
29
Leadenhall also held discussions with members of Catuity's and Loyalty
Magic's senior management regarding their assessment of past and current
business operations, financial condition, and future prospects of the Catuity
and Loyalty Magic.
In arriving at its opinion, Leadenhall assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of that
information and further relied upon the assurances of our management that they
were not aware of any facts or circumstances that would make that information
inaccurate or misleading. With respect to the financial projections we provided
Leadenhall, upon our advice and the advice of Loyalty Magic, Leadenhall assumed
that those projections had been reasonably prepared on a basis reflecting the
then best currently available estimates and judgments of our management and the
management of Loyalty Magic as to future financial performance and that both
companies would perform substantially in accordance with those projections. In
arriving at its opinion, Leadenhall conducted only a limited physical inspection
of our properties and facilities and those of Loyalty Magic and did not make or
obtain from third parties any evaluations or appraisals of our assets or
liabilities or those of Loyalty Magic. Leadenhall's opinion necessarily is based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date of its opinion letter. Leadenhall expressed no opinion
as to the prices at which the shares of our common stock may trade at any time
following the consummation of the acquisition of Loyalty Magic.
In connection with rendering its opinion, Leadenhall performed certain
financial, comparative and other analyses, as described below. The preparation
of a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and, therefore, such an
opinion is not readily susceptible to summary description. Furthermore, in
arriving at its fairness opinion, Leadenhall did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Leadenhall believes that its analyses must be considered as a whole
and that considering any portion of such analyses and of the factors considered,
without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying the opinion. In its analyses,
Leadenhall made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond our control.
The standard of value adopted in Leadenhall's opinion is Fair Market
Value. Fair Market Value is defined as the price, expressed in terms of cash
equivalents, at which property would change hands between the hypothetical
willing and able buyer and a hypothetical willing and able seller, acting at
arm's length in an open and unrestricted market, when neither is under any
compulsion to buy or sell or when both parties have reasonable knowledge of the
relevant facts. This valuation was prepared on a going concern basis. In
reaching its conclusions, Leadenhall considered a number of customary approaches
in assessing the transaction, including a cost approach, an income approach and
a market approach. The cost approach was deemed to be inappropriate as Catuity
and Loyalty Magic were assumed to be going concerns. At the time Leadenhall
prepared its report, it was unaware of appropriately comparable transactions for
comparison to the acquisition of Loyalty Magic. As such, Leadenhall determined
that a comparable market approach was not appropriate for determining the value
of Loyalty Magic. However, given that Catuity is a publicly traded company, on
both the Australian Stock Exchange and NASDAQ, Leadenhall did review comparable
companies to determine the value of Catuity. As a result, the income approach
was deemed appropriate for the valuation of Loyalty Magic and the income and
market approaches were adopted for the valuation of Catuity.
30
FAIR MARKET VALUE ANALYSIS
The table below illustrates Leadenhall's opinion that the consideration to
be offered to Loyalty Magic is less than the Fair Market Value.
US $000
--------
LOYALTY MAGIC FAIR MARKET 5,212.1
CONSIDERATION 4,225.7
--------
EXCESS OF VALUE OVER CONSIDERATION $ 986.4
========
POTENTIAL CHANGE IN CATUITY EQUITY VALUE - USD
The table below illustrates the potential pre and post fair market
value of Catuity common equity on a minority basis. The currency of the value
per share is USD. The table illustrates that the change in equity value is
approximately 5% depending on the valuation approach considered.
SYNTHESIS OF DISCOUNTED CASH FLOW AND MARKET VALUE PER SHARE
PRE ACQ ACQ POST ACQ %CHANGE
------- ------ -------- -------
DISCOUNTED CASH FLOW $ 3.66 $ 3.98 $ 3.85 5.3%
MARKET VALUE (CURRENT & POTENTIAL) $ 3.73 $ 4.06 $ 3.92 5.2%
Leadenhall is a Corporate Adviser of over twenty years and is the holder
of an Australian Financial Services License issued by the Australian Securities
and Investments Commission ("ASIC"). Leadenhall specializes in financial
valuations including the valuation of companies, businesses and intangible
assets. Leadenhall is a member of the Australian Taxation Office national panel
for valuations and the ASIC Panel of Independent Experts. Leadenhall has
provided numerous fairness opinions in Australian merger and acquisition
transactions.
No material relationship has existed between Leadenhall and Catuity or
Leadenhall and Loyalty Magic prior to the date of this proxy statement.
Leadenhall did not determine, nor did it recommend, the amount of consideration
to be paid to the Loyalty Magic shareholders. We selected Leadenhall because of
its expertise, reputation and familiarity with the Australian markets and
because its professionals have substantial experience in transactions comparable
to the acquisition.
ABSENCE OF DISSENTER'S OR APPRAISAL RIGHTS
Catuity's shareholders are not entitled to dissenter's or appraisal rights
under Delaware law or the rules and regulations of the ASX in connection with
the acquisition of Loyalty Magic.
DIRECTORS FOLLOWING THE ACQUISITION
The Board of Directors of Catuity will not change following the completion
of the acquisition of Loyalty Magic.
INTERESTS OF OFFICERS AND DIRECTORS IN THE ACQUISITION
None of our directors or executive officers or any of their respective
associates has any direct or indirect interest in the acquisition of Loyalty
Magic.
PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
Other than as described under "--Background of the Acquisition" or
elsewhere in this proxy statement:
- there have been no past contacts, transactions or negotiations
between Catuity or, to the best of its knowledge, any of its
directors, executive officers, control persons or other affiliates
on the one hand,
31
and Loyalty Magic or any of its directors, executive officers,
control persons or other affiliates, on the other hand, concerning a
merger, consolidation or acquisition, a tender offer or other
acquisition of securities, an election of directors, or a sale or
other transfer of a material amount of assets; and
- neither Catuity nor, to the best of its knowledge, any of its
directors, executive officers, control persons or other affiliates
is a party to any present or proposed material agreement,
arrangement or transaction, or otherwise has any understanding or
relationship with Loyalty Magic or any of its officers, directors,
control persons or other affiliates that would require disclosure
herein under the rules and regulations of the SEC.
CONSIDERATION RECEIVED BY OFFICERS AND DIRECTORS OF LOYALTY MAGIC
To the extent that the executive officers and directors of Loyalty Magic
own shares of Loyalty Magic, such officers and directors will receive their
pro-rata portion of the consideration paid by us in the acquisition.
RESALES OF CATUITY COMMON STOCK
In order to raise the proceeds necessary to pay the cash portion of the
consideration to the Loyalty Magic shareholders (and to raise additional working
capital), we intend to conduct an offering of our common stock in Australia. The
offering will be conducted pursuant to an exemption from registration under
Regulation S ("Regulation S") promulgated under the Securities Act. (See
"Proposal 7 - Terms of Offering"). If the Loyalty Magic acquisition is not
approved, we intend to conduct a smaller offering in Australia to raise
approximately A$2,000,000. This offering will also be conducted pursuant to an
exemption from registration under Regulation S. (See "Proposal 8 - Terms of
Offering").
THE SHARE SALE AGREEMENT
This section of the proxy statement provides a summary of all the material
provisions of the Share Sale Agreement, but it may not contain all the
information that is important to you. We urge you to carefully read the Share
Sale Agreement, which can be found as Appendix E to this Proxy Statement.
DETAILS
Pursuant to the terms of the Share Sale Agreement, Catuity will acquire
all of Loyalty Magic's issued and outstanding shares of stock ("Shares") from
the Loyalty Magic shareholders ("LM Shareholders"). As a result of this
transaction, Loyalty Magic will become a wholly owned subsidiary of the Catuity.
OPTIONHOLDERS
Loyalty Magic has issued options to purchase 206,062 of its shares to
certain persons. All of the options issued by Loyalty Magic to its employees
will be cancelled immediately prior to closing in exchange for an amount that is
equal to the difference between the amount of cash consideration paid to the
Loyalty Magic shareholders, other than those owned by Chris Leach (as adjusted
in accordance with the formulas described below), on a per share basis, and the
exercise price of the relevant options. Catuity has agreed to pay these amounts
on behalf of Loyalty Magic. This amount is included in the total consideration
described below. Mr. Leach will be paid partially in cash and partially in
shares of Catuity common stock.
32
TIMING OF CLOSING
The sale and purchase of the Shares will be completed on the date that is
two business days after the date on which the last of the conditions to closing
set forth in the Share Sale Agreement have been satisfied or waived or such
later date as Catuity and the holders of a majority of Loyalty Magic's
outstanding shares ("Majority Shareholders") may agree. We expect to complete
the sale and purchase of the Shares during the third quarter of 2005, however,
because the transaction is subject to certain approvals and other conditions we
cannot predict exactly when the closing will occur.
CONSIDERATION
In exchange for the Shares, the LM Shareholders will receive A$3,600,000
in cash and A$1,900,000 worth of newly issued shares of Catuity's common stock
("Consideration Securities"). The cash payment and the value of the
Consideration Securities may be adjusted in accordance with the adjustment
provisions described below.
PURCHASE PRICE ADJUSTMENT
The cash payment and the value of the Consideration Securities may be
adjusted to reflect changes in the level of cash or cash equivalents on the
balance sheet of Loyalty Magic at closing from a required base of A$300,000. The
total consideration will be reduced dollar for dollar (proportionately between
cash and stock) to the extent the cash and cash equivalents of Loyalty Magic on
the closing date are less than A$300,000. The cash portion of the consideration
will be increased dollar for dollar to the extent Loyalty Magic's cash and cash
equivalents on the closing date exceed A$300,000 as a direct result of Loyalty
Magic having entered into a "Qualifying Agreement" after the date of the Share
Sale Agreement. Whether a new Agreement signed between March 17, 2005 and the
closing date of the acquisition will be considered a Qualifying Agreement (as
opposed to an agreement entered into in the ordinary course of business) will be
determined by the chief executive officers of each of Catuity and Loyalty Magic
acting reasonably and in accordance with the guidance set forth in the Share
Sale Agreement.
ANTI-DILUTION PROVISIONS
The number of Consideration Securities may also be adjusted if Catuity
issues shares of its common stock at a price lower than A$5.10 during the six
month period following the closing. If this occurs the number of Consideration
Securities will be increased to reflect the number that would have been issued
at the lower price. Any other equity securities issued to a person acquiring
those new shares will also be issued to the LM Shareholders. For example, if
other equity securities, such as warrants or options, are issued together with
the new shares of common stock to participants in our offering, warrants or
options of that kind must be issued on a pro-rata basis to the Loyalty Magic
shareholders to whom the Consideration Securities were issued.
DOWNSIDE PROTECTION
Up to 150,000 of the Consideration Securities (as adjusted for any further
Consideration Securities issued due to the anti-dilution provisions and as
reduced due to any Consideration Securities that are sold in a an offering) will
carry downside protection. This downside protection will only be available on
these shares if the closing price of Catuity's common stock (as quoted on
NASDAQ) is lower than A$5.10 or any lower effective issue price ("Required
Price") resulting from the anti-dilution provisions. If the downside protection
is available, the holders of these shares will be entitled to be paid a cash sum
by Catuity if they are unable to sell their Consideration Shares for a price
that is at least the Required Price during the six months following the time at
which these shares are released from escrow. The LM Shareholders are obligated
to sell their Consideration Securities in a fair and reasonable manner so as to
ensure that there is an orderly and efficient market for Catuity shares and that
there is not undue fluctuations in the trading price of the Catuity shares. The
maximum amount that the Catuity will be required to pay in respect of downside
protection is A$510,000. This price protection ends at such time as such
shareholders have received A$775,000 from the sale of their respective shares in
during the six month period referred to above.
33
ESCROW
The Majority Shareholders and Catuity will jointly instruct an escrow
agent to hold A$259,091 worth of Consideration Securities and A$490,909 in cash.
Such shares and cash will be held by the escrow agent for a period of six months
following the closing date. This amount is to secure payment of any
indemnification claims we might have against the LM Shareholders under the Share
Sale Agreement. Shares and cash may be released from escrow prior to the
expiration of the six month period in order to satisfy the LM Shareholders'
obligations to us.
REPRESENTATIONS AND WARRANTIES
The Share Sale Agreement contains various representations and warranties
made by the LM Shareholders, subject to the qualifications set forth in the
Share Sale Agreement, including the following:
- the LM Shareholders ownership of the Shares free and clear of any
encumbrances;
- the power and authority of each LM Shareholder to enter into and
perform its obligations under the Share Sale Agreement; and
- that each LM Shareholder is not insolvent and the transfer of the
Shares will not breach any obligation or agreement binding on such
LM Shareholder.
The Share Sale Agreement contains various representations and warranties
made by the Majority Shareholders, subject to the qualifications set forth in
the Share Sale Agreement, including in relation to the following matters:
- the capital structure of Loyalty Magic;
- that Loyalty Magic is validly incorporated and is not insolvent;
- that the financial statements of Loyalty Magic were prepared in
accordance with the accounting standards approved by Australian law
and give a fair and true view of the assets and liabilities,
financial position and the state of affairs of Loyalty Magic;
- standard financial warranties regarding any outstanding liabilities
of Loyalty Magic;
- the valid ownership of all of the assets of Loyalty Magic;
- the maintenance and accuracy of Loyalty Magic records including tax
records;
- the absence of any pending or threatened prosecution, litigation or
arbitration proceedings relating to Loyalty Magic's business and no
unsatisfied judgments against Loyalty Magic;
- the existence and identification of all insurance policies for the
benefit of Loyalty Magic and that each insurance policy is currently
in full force and effect and all applicable premiums have been paid;
- Loyalty Magic beneficially owns or has an enforceable right to use
all of its intellectual property rights listed in the schedules to
the Share Sale Agreement, the use of Loyalty Magic's intellectual
property rights does not infringe upon the intellectual property of
any third party and Loyalty Magic does not use or acquire in its
business any intellectual property rights other than those listed in
the schedule to the Share Sale Agreement;
- Loyalty Magic owns, licenses or leases all the software set out in
the schedule to the Share Sale Agreement, the software has no
material defects or viruses and the computer systems and servers
used by Loyalty Magic to operate its business and such systems are
operated at a level acceptable for adequate operation of the
business;
34
- the accounts of Loyalty Magic include all items of plant and
equipment owned by Loyalty Magic with a written-down value in excess
of A$10,000, all plant and equipment of Loyalty Magic is in
reasonable working condition and is in the physical possession of
Loyalty Magic or a client of Loyalty Magic in the ordinary course of
business;
- all business premises leased or occupied by Loyalty Magic in respect
of its business are set out in the schedules to the Share Sale
Agreement and Loyalty Magic has exclusive occupation of its business
premises (free from all encumbrances, unusual restrictions or third
party rights);
- there has been no claim, breach or circumstance likely to give rise
to any claim or breach in respect of any environmental law;
- all material contracts of Loyalty Magic are set out in the schedules
to the Share Sale Agreement are valid, binding and enforceable;
- there has been no notice from any of the suppliers or customers to
alter, suspend, terminate or materially limit its relationship with
Loyalty Magic or in relation to the acquisition of the Shares by
Catuity;
- Loyalty Magic has not breached the provisions of the Trade Practices
Act (which regulates anti-trust and consumer protection matters in
Australia) or any consumer product legislation;
- the employees listed in the Share Sale Agreement are the only
employees of Loyalty Magic and the contractual terms of their
employment are set out in their respective employment agreements;
- all the required statutory pension payments for the employees have
been made by Loyalty Magic;
- the facts set out in the schedules to the Share Sale Agreement are
true and correct in all material respects and are not, whether by
omission or information or otherwise, materially misleading or
deceptive, all information relating to Loyalty Magic which is
prudent to a prospective purchaser of Shares will want to know, has
been disclosed to such purchaser, the Majority Shareholders make no
representations or warranties in relation to any forecast concerning
future matters; and
- that Loyalty Magic has complied with all tax laws.
The Share Sale Agreement contains representations and warranties made by
Catuity, subject to the qualifications set forth in the Share Sale Agreement,
including in relation to the following matters:
- Catuity has the power and authority to enter into and perform its
obligations under the Share Sale Agreement;
- the Agreement is binding on Catuity and will not violate any law, or
any of Catuity's organizational documents;
- Catuity will transfer good and marketable title and full beneficial
title of the Consideration Securities to the LM Shareholders;
- the issuance of the Consideration Securities will not contravene any
provision of the General Corporation Law of the State of Delaware or
any other applicable law;
- Catuity acknowledges that it has had the opportunity to conduct due
diligence on Loyalty Magic which was guided by the view and
information provided by or on behalf of Loyalty Magic; and
- Catuity has filed all of the forms required by any tax authority.
35
CONDUCT OF BUSINESS PRIOR TO ACQUISITION
From the date of the Share Sale Agreement until the closing date, unless
Catuity first consents in writing, Loyalty Magic will:
- use its best efforts to preserve the goodwill of its business;
- operate and account for the Business in the ordinary and usual
course of business;
- conduct the Business so as to comply with all applicable laws; and
- give reasonable access to Catuity to all available records.
The LM Shareholders must ensure that, from the date of the Share Sale
Agreement to the closing date, unless Catuity first consents in writing, Loyalty
Magic will:
- not dispose of any of its assets, other than in the normal course of
business and for arm's-length value;
- not encumber any assets owned by it;
- not incur any financial indebtedness in excess of A$10,000, except
in the usual course of business, or provided in its 2005 business
plan;
- not enter into any employment contract, or renew or amend any
existing employment contract, except in the usual course of
business, or provided in its 2005 business plan;
- use its best efforts to preserve intact its current business
relationships;
- not make any tax election (including an election to enter into any
consolidation effective at any time prior to the closing) or settle
any income tax liability, unless that settlement is required by law,
is supported by an opinion of counsel and is reasonably acceptable
to Catuity;
- not make any changes in accounting methods, except if required by a
change in the accounting standards applicable to Australian law;
- not lease, license or otherwise dispose of any of its assets, except
in the ordinary course of business consistent with past practices
and at fair value;
- not make any capital expenditure in excess of the amount specified
in its 2005 business plan;
- maintain each of the insurance policies in force on November 30,
2004 and promptly notify Catuity if any renewal proposal is not
accepted by the relevant insurer;
- continue to make capital expenditures in amounts and at the times
provided for in its 2005 business plan;
- not voluntarily cease to do business with any existing customer
without obtaining the prior written consent of Catuity; and
- not, without the prior written consent of Catuity, alter its capital
or issue any securities, declare or pay any dividend or
distributions to its shareholders, distribute or return any capital
to its shareholders, make a distribution or re-evaluation of assets,
alter its constitution, buy back or redeem any of its shares or pay
any bonuses to executive or employees, except in accordance with
past practices.
36
ADDITIONAL COVENANTS
The Share Sale Agreement also contains certain additional covenants of the
parties, including the following:
- after the closing, Catuity will, upon request of any of the LM
Shareholders, give the LM Shareholders reasonable access to the
records handed over to Catuity at closing which relate to the period
before the closing;
- subject to legal requirements and permitted disclosures to officers
and professional advisers, no party may disclose the provisions of
the Share Sale Agreement, or any other transactions the subject of
the Share Sale Agreement, unless the other party has agreed in
writing; and
- unless required by law, no party may make any press or other
announcement or release relating to the Share Sale Agreement or any
transactions the subject of the Share Sale Agreement without the
prior written approval of the other party as to the form and manner
of the announcement or release.
PROTECTIVE COVENANTS
Subject to certain exceptions, the Share Sale Agreement provides that in
consideration for the Catuity entering into the Agreement, each Majority
Shareholder agrees that it will not and will compel the other LM Shareholders to
not:
- carry on any business or activity which is or may be competitive
with the business of the combined company;
- engage or employ any person who at the time during the 12 months
immediately preceding the Completion Date was employed or engaged in
the Business;
- interfere with the relationship between the Catuity and its
employees, contractors, suppliers or customers; and
- use or disclose to any third party any confidential information.
anywhere in the United States of America, Australia or Canada ("Restriction
Area") for one year from the Completion Date ("Restriction Period"). If a
covenant and restriction is or becomes invalid or unenforceable because the
Restriction Area or Restriction Period is considered unreasonably large, the
Restriction Area or Restriction Period will be reduced to the subsequent area or
period listed in the Share Sale Agreement.
CONDITIONS PRECEDENT TO CLOSING
The obligations of Catuity and the Majority Shareholders to complete the
sale and purchase of the Shares under the Share Sale Agreement are subject to
the satisfaction of each of the following conditions:
- obtaining all legal, securities and regulatory approvals in the
United States, Australia and other jurisdictions;
- on the closing date, Catuity's common stock is listed on the NASDAQ
and ASX;
- the successful closing of an offering by Catuity to raise at least
A$5.6 million
- execution of an agreement with an escrow agent in relation to the
cash and Consideration Securities being escrowed;
- execution of an employment contract with Chris Leach;
37
- completion of the business, operational and financial due diligence
of Loyalty Magic by Catuity;
- written confirmation of the cash and cash equivalents on the balance
sheet of Loyalty Magic as of the closing date.
- written confirmation that Loyalty Magic's intellectual property is
not subject to any third party claims, third party infringement
claims and completion of technical and product audit;
- execution of the escrow agreements between the Majority Shareholders
and Catuity;
- execution of confidentiality agreements between Loyalty Magic and
its employees;
- all representations and warranties contained in the Share Sale
Agreement are true and correct in all material respects as of the
date made unless Catuity has accepted a written notification from
Majority Shareholders regarding such representation and warranty;
and
- completion of the business, operational and financial due diligence
of Catuity by Loyalty Magic.
TERMINATION OF THE SHARE SALE AGREEMENT
The Share Sale Agreement may be terminated if any of the conditions
precedent are not satisfied by June 30, 2005 at the option of the party entitled
to the benefit of such condition precedent. The Share Sale Agreement may be
terminated by Catuity at any time if the LM Shareholders do not comply with
their obligations under the Share Sale Agreement.
INDEMNIFICATION
Catuity has agreed to indemnify the LM Shareholders from all damages that
the LM Shareholders may incur as a result of a misrepresentation or inaccuracy
in any of Catuity's representations, warranties or covenants or any failure by
Catuity to fulfil its obligations under the Share Sale Agreement.
Each of the Majority Shareholders has agreed to indemnify Catuity from any
damages it may incur as a result of any material breach of any representation,
warranty or covenant made by the Majority Shareholders and any failure by the
Majority Shareholders to fulfil any of their respective obligations under the
Agreement, except the Majority Shareholders are not liable to Catuity to the
extent that:
- a claim relates to things done after the date of the Share Sale
Agreement at the request or with the approval of Catuity;
- a claim arises after closing date;
- a claim has been fairly and accurately disclosed to Catuity;
- a claim is covered under insurance; and
- a claim exceeds the amount of the consideration received by that
Majority Shareholder in respect of the sale by it of its shares of
Loyalty Magic.
Other than a tax-related claim, we must make any claim for indemnification
within 6 months of the closing. We must make any tax-related claim within the
period in which the Australian Tax Office is able to make a claim against
Loyalty Magic, but in any event no later than 7 years after the relevant rebate
or tax event. We cannot make a claim with respect to a breach or series of
related breaches if the amount claimed is less than A$50,000. Further, we cannot
make a claim until the aggregate of all claims we have against the Loyalty Magic
shareholders exceeds A$200,000.
38
Disputed claims for indemnification are subject to mediation. If mediation
fails, the dispute may be submitted to court in Victoria, Australia, unless
Majority Shareholders unanimously agree to have the claim arbitrated.
FEES AND EXPENSES
Catuity will bear all stamp duty payable in connection with the Share Sale
Agreement. Subject to the stamp duty, the parties will each bear their own
legal, accounting and other costs and expenses in connection with the
preparation and execution of the Share Sale Agreement and the transactions
contemplated under this Share Sale Agreement.
AMENDMENTS AND WAIVERS
The Share Sale Agreement may not be amended or modified unless the
amendment or variation is in writing signed by all parties. Waiver of any power
or right under the Share Sale Agreement must be in writing signed by the party
entitled to the benefit of that power or right and is effective only to the
extent set out in that written waiver.
DESCRIPTION OF OTHER MATERIAL AGREEMENTS
EMPLOYMENT AGREEMENT WITH CHRIS LEACH
As a condition precedent to Loyalty Magic's obligation to consummate the
acquisition, we are required to enter into an employment agreement with Chris
Leach, the current managing director of Loyalty Magic. We are currently
negotiating the terms of the employment agreement with Mr. Leach. We have
reached general agreement on the term of the contract, the responsibilities of
Mr. Leach and a general framework for his compensation, including performance
based incentives. We expect to finalize Mr. Leach's employment agreement prior
to the date of our 2005 Annual Meeting of Shareholders.
BENEFICIAL OWNERSHIP PRE- AND POST-ACQUISITION OF LOYALTY MAGIC
The following table provides certain information regarding the
beneficial ownership of our capital stock prior to and following completion of
the acquisition of Loyalty Magic by (i) each person known by us to beneficially
own or who is expected to own more than five percent of our common stock; (ii)
our Chief Executive Officer and the four most highly compensated executive
officers that earned more than US$100,000 (salary and bonus) for all services
rendered in all capacities to us during the year ended December 31, 2004
(including our former Chief Executive Officer, Michael Howe); (iii) each of our
Directors; (iv) all of our Directors and executive officers as a group; and (v)
all of the current shareholders of Loyalty Magic as a group.
The post acquisition information included in the table below assumes a
per share price of A$5.00, the closing price on the Australian Stock Exchange on
May 25, 2005.
<Table>
<Caption>
Prior to Acquisition Following Acquisition
Percent Percent
Name and Address of Amount and Nature of Common Owned Amount and Nature of Common Owned
Beneficial Owner Stock Beneficially Owned(1) (2) Stock Beneficially Owned(1) (2)(3)
- -------------------------------- -------------------------------- ------------ ---------------------------------- ------------
Acorn Capital Limited
Level 12, 90 Collins Street
Melbourne Vic 3000 Australia 108,846 Direct 108,846 Direct
0 Vested Options 14.0% 0 Vested Options 9.4%
Duncan P.F Mount
Lot 8, 54 Lane Cove Road
Ingleside, NSW 2101 Australia 46,666 Direct 46,666 Direct
2,167 Vested Options 6.3% 2,167 Vested Options 4.2%
Alfred H. (John) Racine
11 Altamont Circle, #51 0 Direct 0 Direct
Charlottesville, VA. 22902 50,644 Options (4) 6.5% 50,644 Options (4) 4.4%
Michael Howe
62 Hampton Road 3,450 Direct 3,450 Direct
Grosse Pointe Shores, MI. 48230 21,267 Vested Options 3.1% 21,267 Vested Options 2.1%
Alexander S. Dawson
38 Macleay Street, NSW 2011 15,000 Direct 15,000 Direct
Australia 2,000 Vested Options 2.2% 2,000 Vested Options 1.5%
John H. Lowry
21972 Heatheridge 422 Direct 422 Direct
Northville, MI. 48167 8,333 Vested Options 1.1% 8,333 Vested Options *
Alan L. Gilman
4720 Morris Lake Circle West 267 Direct 267 Direct
Bloomfield, MI. 48223 2,000 Vested Options * 2,000 Vested Options *
Clifford W. Chapman
10 Warren Ave. 0 Direct 0 Direct
Spring Lake, NJ 07762 667 Vested Options * 667 Vested Options *
A&B Venture Fund Company Pty.
Ltd.
16-18 Bulletin Place, 0 Direct 304,992 Direct
Sydney, NSW 2000 Australia 0 Vested Options 0% 0 Vested Options 26.3%
All Catuity Directors and
Executive Officers as a group 62,355 Direct 62,355 Direct
(6 persons) 65,811 Vested Options 15.2% 65,811 Vested Options 11.1%
All current Loyalty Magic
shareholders as a group (12 0 Direct 380,000 Direct
persons) 0 Vested Options 0% 0 Vested Options 32.8%
</Table>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options, warrants or other rights to purchase which are
currently exercisable or are exercisable within 60 days after March 31,
2005 are deemed vested and outstanding for purposes of computing the
percentage ownership of any other person. Except as indicated by
footnotes and subject to community property laws, where applicable, the
persons named above have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them.
Share data does not include any Shares the beneficial ownership of
which has been disclaimed pursuant to SEC Rules.
(2) Percentage of Beneficial Ownership is calculated on the basis of the
amount of outstanding securities plus those securities of the named
person deemed to be outstanding under Rule 13d-3 (promulgated under the
Securities and Exchange Act of 1934, as amended) by virtue of such
securities being subject to rights to acquire beneficial ownership
within 60 days after March 31, 2005. An asterisk indicates beneficial
ownership of less than 1% of the common stock outstanding.
(3) Does not include the shares to be issued in our Australian registered
offering.
(4) 50,644 equals the number of options that have vested from the option
award of 77,914 shares of our common stock, which are subject to
shareholder approval pursuant to Proposal 10 of this proxy statement.
BUSINESS OF CATUITY
OUR BUSINESS
Catuity provides technology-based solutions to retailers that are designed
to increase the profit they receive from their customers at the Point of Sale
(POS). Today, the Company sells a hosted, ASP-based system(1) that enables the
processing of member-based loyalty programs and which can deliver customized
discounts, promotions, rewards and points-based programs which are designed to
help retailers find, keep and profit from their best customers. The Company also
enables gift card solutions. In late 2004, the Company introduced the first
version of its new platform, the Catuity Advanced Loyalty System (CALS). The
system enables robust and highly customizable programs which work on a
retailer's payments terminals, Electronic Cash Register and on their internal
store networks. Catuity also offers IT services to retailers to support their
POS systems maintenance and custom development needs for both the deployment of
our technology solution and those of third parties which also touch the point of
sale.
In 2004, Catuity underwent a significant change in its business strategy
following the decision of Target Corporation to stop issuing smart cards to its
customers that hold their Target-Visa co-branded credit card. This resulted in
the eventual shutdown of the Visa Smart Rewards Platform that Visa USA had been
developing for smart card usage in the United States and which utilized
Catuity's older smart loyalty software. This has significantly impacted the
near-term use of smart cards in the United States and resulted in Catuity
adopting a change in its business strategy. In 2004, Visa represented 75% of
Catuity's revenue while Target represented 11%. That revenue ended in the third
quarter of 2004. The Company has no expectation that either Visa USA or Target
will be a significant customer going forward.
- -------------------------
(1) An Application Service Provider is a third-party entity that manages and
distributes software-based services and solutions to customers across a wide
area network from a central data center.
39
To meet the changing conditions of its market, the Company's Board of
Directors adopted a strategy which:
- Drove the release of the new CALS system to meet the changing
technology requirements of the U.S. and Canadian markets;
- Refocused the sales efforts on tier two chain retailers, especially
pharmacies, home improvement stores and auto services, where the
capabilities of CALS have a demonstrable return on investment;
- Developed a sales channel through merchant services, acquirers and
processors who serve the more than two million smaller, individual
merchants which are too small to be serviced directly through
Catuity's sales model;
- Shifted the Company's technology team from pure research and
development to being largely focused on client deployments and
services around a hosted solution, rather than the traditional
installed software business where the Company had found its initial
success in the U.S.;
- Leverages the Company's experience with the aim of offering a
managed gift card solution in Australia by the second half of 2005
to meet the growing interest by retailers of all sizes; and
- Selectively explore projects and opportunities in which the Company
leverages its technology and operational understanding of loyalty
and gift card programs with partners who offer other strengths.
In the U.S. and Canada, the Company is targeting direct sales to retailers
with US$100 million to US$1 billion in annual sales. These retailers tend to
favor a hosted solution and, for competitive reasons, have a need to offer
loyalty and gift card solutions to compete against the national branded chains,
while differentiating themselves from their smaller, local rivals.
INDUSTRY
Catuity competes in the loyalty market within the retail industry at the
intersection of three significant and positive trends in retailing: upgrades of
POS systems; rising gift card usage; and the growing budgets of retailers to
enhance sales by driving loyalty among new and prospective customers.
POS SPENDING BY RETAILERS: The Catuity Advanced Loyalty System works by
installing a proprietary application at the point of sale inside a retailer or
merchant's stores. As might be expected, retailers are cautious about changes
which affect their ability to accept payment. As such, Catuity gives priority to
sales prospects, which have already decided to upgrade their POS systems, be it
in hardware, software or both. Catuity may benefit when a POS upgrade is already
anticipated because it has the potential to shorten the sales and deployment
cycles. Numerous surveys and industry experts have reported that chain retailers
are continuing to aggressively upgrade their point of sale systems, a trend
first triggered by Y2K compliance concerns. In the 23rd Annual Survey of Retail
Information Technology trends, Chain Store Age (www.chainstoreage.com) magazine
found that 25.2% of the IT budgets were allocated for POS hardware and software
in 2004. The survey, published in the November 2004 issue of the magazine, found
that the average retailers IT budget was $17.7 million last year. The survey
suggests that with an average expenditure of $4.46 million, that POS was the
single greatest priority for retailers who took part in the national survey. The
survey was based on interviews with leading executives at 121 North American
retailers whose combined sales were valued at nearly $250 billion. Equally
significant, Catuity's target market of tier two chain stores, those with sales
of $100 million to $1 billion a year spent the largest portion of their
technology budgets on POS needs, with 91.9% saying it was a top priority. That
compares to 86.2% of all participants in the survey. Generally speaking, the
lifecycle of POS upgrades continues to shorten. Except in extraordinary
circumstances, hardware is replaced in a 5-7 cycle at a typical chain store
retailer, while software applications are replaced more quickly based on
advancements and new functionality. In a separate study released in March 2005,
independent chain retailer research firm IHL Services (www.ihlservices.com)
reported that retailers spent $6.5 billion on POS hardware, software and
services last year for PC-based checkout systems. Catuity targets these types of
retailers through its direct sales effort.
40
GIFT CARD USAGE TRENDS: In the past decade, stored value cards have become
one of the most sought after SKUs (stock keeping units) at a retailer. Gift
cards are viewed as a key customer acquisition tool since they are typically
purchased by a friend or relative and given to a potential shopper in lieu of
cash. In fact, Deloitte & Touche (www.deloitte.com) found in a late 2004 study
that gift cards were now the No. 1 gift with 64% of shoppers choosing receiving
a gift card as their preferred gift. At the same time, Deloitte reported that
consumers now favor gift cards over cash by a two-to-one measure. For retailers,
gift cards have become vital to their success during the active Christmas
holiday season and throughout the year. In its annual year-end survey of 7,349
consumers, the National Retail Federation (www.nrf.org) found that consumers
would spend an average of $80.45 per card, representing $17.3 billion in value
during the 2004 holiday season. That accounts for 11.5% of total holiday
spending in the U.S. Gift cards are not just a seasonal business. They are a
year-round part of the strategy of retailers and a key profit center. Tower
Group (www.towergroup.com), a research firm specializing in payments and other
transaction driven industries, estimates that consumers put $45 billion in value
on stored value cards in 2003, the last year for which data was available. Tower
forecasts that the market size in the U.S. alone will reach $90 billion by 2007.
The Company currently delivers magnetic stripe gift cards, through an older
version of our loyalty software, to chain retailers through its direct sales
effort and small retailers with one to 25 locations, through re-sellers, such as
our clients KESM and EMS.
RETAILERS EMPHASIZE LOYALTY IN GROWTH STRATEGY: Since Catuity entered the
North American market in 2000, loyalty has evolved from an emerging strategy to
an established practice and budgeted expenditure for retailers. Estimates of the
size of the loyalty market vary widely and are often interchanged with estimates
of the customer relationship management (CRM) market in North America reaching
up to $85 billion. These estimates can include everything from direct marketing,
branding and call center support to technology spending. Catuity defines our
services to enable loyalty as the application, creation and management of the
individual profile created when a customer joins a membership or reward program;
and the transactional support necessary to make a loyalty program work
seamlessly at the point of sale. Today, this does not include full-service
database management, direct mail support, web-related services and full service
analytics. These are capabilities that the Company expects to add through new
development and acquisition. We would note that our pending acquisition of
Loyalty Magic Pty Ltd will increase our in-house ability to manage databases on
behalf of clients. Additionally, Loyalty Magic includes some key functional
capabilities, including, but not limited to, interfaces with kiosks and
e-commerce platforms. For more information on the announced merger, please see
the Subsequent Events section on page 36.
For the services that we offer today, merchants (those with one to 25
locations) spend an average of $625-850 annually per store on basic loyalty
programs. These fees are often charged in the form of a flat monthly
subscription service for a turnkey program. While Catuity targets this market
through resellers, such as merchant services providers, we believe there is a
potential market of at least 1.2 million small merchants - about one in four of
the total market - in North America who do not yet have a loyalty or gift card
solution. Using the lowest estimates for each, we believe that the small
merchant market will spend at least $750 million on loyalty and gift card
solutions annually. As Catuity expands our sales focus beyond our core market,
the size of our opportunity will increase.
By the same measure, chain store retailers, which Catuity targets through
direct sales, spend an average of $3,700 to $6,900 per store annually for the
services which we sell to support loyalty and gift card solutions. The 411
retailers in three market segments that we have targeted represent at least
55,000 locations in North America. Again, using the minimum numbers, Catuity
believes that our target market has a minimum potential value of $2.035 billion
annually. In total, our combined target markets for the products and services
that we sell today are valued at $2.785 billion.
41
BUSINESS SEGMENTS
Catuity conducts all of its business in a single business segment -
providing loyalty technology and related services to retailers and their
processor partners. During Catuity's last three fiscal years, its revenue by
type of product or service has been as shown below:
2004 2004 2003 2003 2002 2002
-------- ---- ---------- ---- ---------- ----
Revenue Type Amount % Amount % Amount %
- -------------------- -------- ---- ---------- ---- ---------- ----
Software Development $248,379 33% $2,323,441 47% $1,666,890 56%
Services 467,533 62% 902,222 18% 1,258,996 42%
License 43,200 5% 1,756,725 35% 45,788 2%
-------- --- ---------- --- ---------- ---
Total Revenue $759,112 100% $4,982,388 100% $2,971,674 100%
-------- --- ---------- --- ---------- ---
In 2004, Catuity underwent a major shift in business focus which directly
impacted our full year results. In the first quarter of 2004, the Company
learned that Target Corporation, was discontinuing its use of smart cards. As a
result, Visa USA determined that it would discontinue the development of its
Smart Visa Rewards Platform and phase out the platform's operations during 2004.
Catuity's loyalty software was a key component of the platform and Visa-Target
represented the vast majority of the Company's revenue. The Company then
embarked on an extensive effort to replace its existing technology with the new
Catuity Advanced Loyalty System, or CALS. That system was designed to be
architecturally flexible to meet the changing needs of clients and prospects.
The first version of that technology was announced in the third quarter of 2004
and consumed substantially all of the internal technology resources of the
Company. Late in the third quarter of 2004, the Board of Directors named a new
CEO, who embarked on an internal restructuring of the efforts and focus of the
sales team and a reduction in the size of the technology team. These changes
were implemented during the fourth quarter of 2004. During the Company's
refocusing efforts in 2004, the Company made limited progress in pursuing,
managing and closing new sales.
Complete financial information regarding our business may be found
beginning on page F-2 of this proxy statement.
PRODUCTS AND SERVICES
Most retailers are interested in achieving one or more of the following
from their loyalty and reward programs:
- Increasing basket lift (giving customers reasons to buy a higher
value of products)
- Improving gross margin (giving customers reasons to buy higher
margin products)
- Increasing customer purchase frequency (driving customers back to
the store more often)
- Increasing customer response rates
Our loyalty technology, CALS, provides the capabilities retailers need to
achieve these goals via:
- Launching and Managing Membership-Based Programs
- Managing Points-Based Programs
- Delivering More Targeted Discounts
- Offering Unique Gift Card Programs (June 2005)
Because CALS requires integration to a client's point of sale system,
Catuity offers traditional IT services to retailers. While our primary focus is
on serving the needs of clients in relation to a planned deployment of our
system in their chain of stores, Catuity will actively seek contract work to
manage projects for retailers. Industry research firm IHL Services reports that
maintenance and development of existing retail systems represents more than half
of the average chain retailer's IT budget for projects ranging from installation
of new POS software
42
systems to upgrades of hardware and the addition of new technologies. In 2005,
examples of leading types of projects, according to researchers, include the
installation of in-store kiosk systems which are linked to the POS; the addition
of RFID-reader systems and the addition of specialized check readers to comply
with the new U.S. check truncation laws. Catuity does not maintain a bench of
consultants or technologists to manage such projects. However, the Company has
established relationships with companies and teams of experienced technologists
which it can contract with to provide these services.
COMPETITION
Catuity Inc. is focused on enabling loyalty and gift card programs in the
U.S. and Canada where demand is high and customers consider loyalty to be an
established part of their growth strategies. In North America, as in other
predominantly English-speaking markets globally, budgets for loyalty are
established - not emerging - but are not considered mature. Catuity's prospects
do not lack options in how they choose to spend their budgets to acquire, retain
and upsell their customer relationships. We have found that they make one of
three financial and strategic choices in executing their loyalty strategy. These
are:
- IN-HOUSE SOLUTION: Retailers, especially the largest, often seek
competitive advantage by custom development of proprietary in-house
solutions. This is generally done in conjunction with loyalty
consultancies, database service firms and IT service firms. This is not a
primary market for Catuity due to the typically lengthy and complex sales
cycle and the strict financial requirements placed on the provider, which
tend to exclude smaller companies. While Catuity does not actively target
tier one retailers or custom installation projects, we will provide this
option at the request of our core customers.
- HOSTED SOLUTION: Retailers, especially the tier two chain retailers
targeted by Catuity, favor a turnkey hosted solution which enables them to
minimize capital investment; avoid the need for large, specialized IT ;
and reduce the risks associated with complex integration, deployment and
upgrades. This market typically prefers a hosted solution which allows
them to customize their programs - not their technology - to be aligned
with the retailers' merchandising and branding strategy. Many players,
including payments processors, gift card solutions providers and marketing
services firms are generally focused by vertical market.
- PROGRAM-BASED SOLUTION: Retailers actively participate in promotional
programs which are generally designed to drive a single type of customer
behavior, such as new account acquisition or customer retention, or target
the sale of specific products. These programs are generally attractive
because they have a defined cost; require little to no technology adoption
and require no complex back-end technology to manage beyond a specific
promotion. Catuity does not compete in this market.
Our ability to be successful depends on many factors, including:
- Our ability to establish a clear business case that is aligned with the
strategy of our client and which has a clearly defined return on
investment.
- Our ability to successfully market the features of our product and to
continually make it easier for our clients to use.
- Our ability to continually expand our reputation and credibility in our
markets and to differentiate Catuity from the many competitive
alternatives.
- Our ability to leverage marquee client relationships to establish a more
visible presence in the U.S. and Canada.
- Our ability to execute on schedule and on budget and to consistently
exceed our customers' ongoing service requirements.
While Catuity is focused on a new market in 2005, we believe that our
reputation for innovation and delivery on behalf of Visa USA and Target
Corporation, provide a foundation for our growth plans. CALS is a
43
robust and flexible platform which enables our customers to create, manage and
measure the success of their proprietary loyalty programs.
RESEARCH AND DEVELOPMENT
Catuity's product development efforts in 2004 were primarily focused on
completing the first release of its new generation loyalty platform - CALS. The
Company has enhanced existing functionality while constantly striving to make
the system easier to use. In 2005, the Company will enhance the management
reporting capabilities of the system; complete the build out of its new gift
card module and establish a series of new, embedded analytical features which
make it easier for clients to track the success of their loyalty programs. In
the North American market, CALS replaces the Company's older smart loyalty
platform which was used primarily for smart card-based loyalty. While the
Company continues to support existing customers who use the smart loyalty
platform, Catuity is not actively marketing the system because of its
limitations in the U.S. market. The smart loyalty platform is designed to meet
the Europay-MasterCard-Visa (EMV) requirements in Europe, Asia-Pacific, South
America and other regions. The Company has previously announced that it may sell
the smart loyalty system and/or the associated patent portfolio.
In 2004, Catuity devoted a substantial portion of its development team's
time to the development of CALS. The first release of the CALS software was
completed in late 2004. Internal development costs in 2004 were approximately
(USD) $1,280,000. During 2004, and particularly after the completion of release
1.0 of CALS, the Company significantly reduced the size of its development team
based in Sydney, Australia. The Company has retained the most experienced
developers on its staff to continue to enhance CALS and provide deployment and
technical support to customers.
INTELLECTUAL PROPERTY
Catuity respects the intellectual property rights of others and we expect
others to respect our rights. Patents protect the rights of innovators and allow
them to be rewarded for their innovation. Without protection for the reward from
innovation, far less research and development would be undertaken. We file
patent applications to protect our innovations and to protect the business from
legal action by others. Patents also provide recognition for our innovations,
demonstrate our capabilities, and reflect the expertise of our employees. We see
patents as part of our marketing strategy as they help convince others that we
are indeed specialists in our field. Catuity believes its patents are of
significant value and as part of its agreements with licensees, Catuity grants
rights to use the innovations described in its patents.
Catuity has been issued three patents related to the efficient storage and
management of multiple applications in offline consumer devices and the systems
to manage the applications, customer devices and terminals. This patent "family"
has a priority date of 1 April 1998 and includes:
Country Patent Number
- --------- -------------
United States 6,449,684
United States 6,532,518
Australia 755,388
Patent applications are pending in the European Union, Japan and Brazil.
Catuity has also been issued two patents, with a priority date of 22
February 1999, which relate to the use of the Catuity System over the Internet
and with traditional point of sale devices. It covers our system for managing
and updating data on customer devices that are supported and controlled by a
host system integrated to any number of offline and online terminals. The patent
covers the operation of interactive programs and transactions that use terminals
ranging from POS terminals to the Internet. This patent "family" includes:
Country Patent Number
- --------- -------------
Australia 746,867
New Zealand 513,678
44
In February 2005 we were notified that our patent application for use of
the Catuity System over the Internet and with traditional point of sale devices
has been allowed by the European Patent Office. This patent must be translated
into German and French before it is nationalized in many European countries. It
is expected to be issued in numerous European countries in the first half of
2005. This patent is also pending in Canada and Japan.
SALES BACKLOG AND PIPELINE
As of December 31, 2004, the Company had signed agreements with customers
that will result in committed revenue of approximately $100,000 in 2005. At
December 31, 2003, the Company had approximately $600,000 of revenue related to
signed agreements and projects in progress. As previously disclosed, the Company
is not currently forecasting revenue in 2005 from announced contracts with
Maritz, a leading loyalty solutions provider, Certegy, one of the largest credit
card and retailer payment service companies in North America, and EDS, a global
IT service firm. At the date of this filing, the Company has a defined prospect
base of approximately 411 chain retailers in its three designated markets. Our
business objective remains to identify the 25-40 true prospects from that
database which will make a buying decision in 2005. The Company has an executed
exclusive letter of intent with a new partner and is currently finalizing the
deployment plan and final contract terms. This partner provides customer
acquisition and retention programs to more than 50,000 small merchants through
more than 400 local coalition partners.
REVENUE AND ASSETS BY GEOGRAPHIC LOCATION
During the three years ended December 31, 2004, 2003 and 2002, 100% of our
revenues were derived in the United States. The Company's assets are located at
its headquarters in Detroit, Michigan and its product development facility in
Sydney, Australia.
EMPLOYEES AND FACILITIES
As of January 31, 2005, we had 10 full time employees, comprised of six in
the U.S. and four in Australia. We expect the number of full time employees in
the U.S. to increase in 2005 in the areas of sales & marketing and customer
service. None of our employees is represented by a collective bargaining
agreement. We consider our relations with our employees to be very good. Our
corporate headquarters is located in Detroit, Michigan. Our research and product
development facility is in Sydney, Australia. We have no other foreign
operations.
RECENT DEVELOPMENTS
On April 4, 2005, the NASDAQ staff (the "Staff") notified us that it had
determined that, for the period ended December 31, 2004 we were not in
compliance with NASDAQ Marketplace Rule 4310(c)(2)(B) (the "NASDAQ Rule") for
continuous listing on the NASDAQ SmallCap Market. The NASDAQ Rule requires
NASDAQ SmallCap Market companies to maintain a minimum of $2,500,000 in
stockholders' equity, or $35,000,000 market value of listed securities, or
$500,000 of net income from continuing operations for the most recently
completed fiscal year or two of the three most recently completed fiscal years
in order to maintain the listing of their securities on the NASDAQ SmallCap
Market. The Staff intends to review our eligibility for continued listing and
requested us provide a specific plan demonstrating our ability to achieve and
sustain compliance with all of the NASDAQ SmallCap Market continuous listing
requirements.
We are compliance with all of NASDAQ's seven continuous listing
requirements except the requirement to maintain either $2,500,000 in
stockholders' equity, or $35,000,000 market value of listed securities, or have
$500,000 of net income in 2004 or in two of its past three fiscal years. We have
submitted a definitive plan that will demonstrate the Company will both
initially achieve, and subsequently sustain, at least $2,500,000 in
stockholders' equity to regain compliance and will continue to sustain
compliance with each of the other NASDAQ SmallCap Market continuous listing
requirements.
Additionally, we retained Donohoe Advisory Associates LLC, who assisted us
in the preparation of our definitive plan, which we presented to NASDAQ. Donohoe
provides consulting and investment banking services to public and private
companies and specializes in advising on stock exchange regulatory matters.
Donohoe Advisory is led by David A. Donohoe, Jr., the former Chief Counsel for
the Listing Qualifications Department of The NASDAQ Stock Market, Inc. and is
located in Rockville, MD.
45
Management believes that completion of the acquisition and the related
offering of our common stock will achieve and sustain our stockholders' equity
at a level above the $2,500,000 NASDAQ SmallCap Market requirement for
continuous listing.
CATUITY FINANCIAL INFORMATION
Included in the proxy statement are Catuity's audited consolidated balance
sheets as of December 31, 2004 and 2003, and audited consolidated statements of
income and cash flows for each of the years ended December 31, 2004 and 2003.
Also included are Catuity's unaudited consolidated balance sheet, statement of
income, and cash flows for the three month period ended March 31, 2005 and 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CATUITY)
The following is a summary of the consolidated operating results of
Catuity Inc. and contains forward looking statements based upon current
expectations that involve risks and uncertainties. The Company's actual results
and the timing of certain events could differ materially from those anticipated
in these forward looking statements.
OVERVIEW OF SIGNIFICANT ACTIVITIES
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 tier two
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 tier two
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.
The Company also determined that it needed to become active in the mergers
and acquisitions market as a means to provide growth in as short a period of
time as possible. As a result, in the middle of 2004, the Company began an
active effort to identify companies that would represent an appropriate business
fit with Catuity's business, provide positive cash-flow, and profits from their
operations. On March 17, 2005, the Company announced an agreement to purchase
all of the outstanding shares of Loyalty Magic, an Australian company located in
Melbourne for A$5.5 million ($4.35 million USD based on the foreign exchange
rate in effect on the day before the announcement of the agreement). This
represents a significant step in the Company's turnaround plan toward
profitability. Loyalty Magic was both cashflow positive and profitable in its
fiscal year ended June 30, 2004 and expects continued growth in 2005 and beyond.
Of the A$5.5 million purchase price, which excludes acquisition related costs,
35% will be issued in new Catuity shares with the remainder to be paid in cash.
Loyalty Magic's management team and its largest shareholder, A&B Venture Fund
Company Pty Ltd, will hold the majority of the shares. Catuity will undertake a
capital raising, anticipated to be approximately A$6 million (or approximately
$4.74 million USD), in order to pay the cash portion of the transaction and to
provide increased working capital. The combined company will have a 40-person
team serving existing customers in Australia, New Zealand, and North
46
America. The acquisition of Loyalty Magic and associated capital raise, which is
subject to shareholder approval, is expected to close following Catuity's Annual
Shareholder Meeting in late May 2005.
In September 2004, the Board hired Alfred H. (John) Racine III, to become
its President and CEO. Mr. Racine had served as the consultant to Catuity in
developing the Company's revised business strategy. Mr. Racine was the founder
and managing principal of Altamont Partners, which specializes in the payments
industry, and was retained in March 2004 to advise the Company on its business
strategy and merger and 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 its 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 and 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 our annual report on
Form 10-K have been restated to reflect the reverse stock split.
The Company's total shareholders' equity at December 31, 2004, was below
NASDAQ's minimum continued listing requirement of $2.5M. While the Company will
follow NASDAQ's required steps to regain compliance, the issuance of new shares
related to the pending acquisition of Loyalty Magic Pty. Ltd. will bring the
Company into compliance with NASDAQ's continuous listing requirements.
Throughout 2004, Catuity developed its new Catuity Advanced Loyalty System
or CALS. Most significantly, the architecture of the platform is database and
operating system agnostic thereby reducing integration risks and hidden costs
that can deter a client from making a buying decision. The system is also
agnostic at the point of sale. CALS will work with any customer identifier
selected by the client. It works with leading and emerging POS media, including
magnetic stripe, bar code, account number, biometric access device, RFID signal
and even a smart card. Catuity announced its initial release of CALS in the
third quarter of 2004 and will continue to make enhancements to the system to
seek competitive advantage in the market. The system is maintained on an
internal hosting system in both Sydney, Australia and near the company's
headquarters in Detroit, Michigan. In the second quarter of 2005, the Company
expects to establish its first commercial host under an ASP model which is
commonly used in North America.
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 average monthly expenses. 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.
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
47
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
and the elimination of the use of outside contractors.
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 ($315,000), lower professional services costs ($73,000), and a
decrease in travel ($36,000).
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 included an accrual related to
severance pay for the Company's former CEO and in 2003 included an accrual
related to severance pay for the Company's former Chairman. The decrease in
on-going general & administrative expenses in 2004 primarily related to lower
insurance premiums and other professional services.
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 a non-cash expense/(credit). 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.
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
48
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.
LIQUIDITY AND CAPITAL RESOURCES (As of December 31, 2004)
Historically, we have funded our operations with proceeds from the private
placement of our common stock and cash collections from customers. As of
December 31, 2004, the Company had approximately $2,561,000 in cash and cash
equivalents, a decrease of $3,208,000 from December 31, 2003. Net cash used in
operating activities during 2004 was $3,161,000, compared with $2,138,000 during
2003. The decline in total revenue was the primary factor contributing to the
increase in net cash used in operating activities.
49
Net cash used in investing activities during 2004 totaled $67,000, which
was a $222,000 decrease from the cash used of $287,000 in 2003. The decrease was
primarily due to reductions in capital purchases in 2004 combined with higher
than normal purchases in 2003. Capital purchases in 2003 included software
licenses to facilitate automated testing of our system and updated computer
equipment for developers in Australia. Cash flows from investing activities was
also positively impacted in 2004 from the sale of excess computer equipment in
Australia resulting from the downsizing that occurred in the 4th quarter of
2004.
Net cash provided by financing activities during 2004 totaled $12,000 and
related to shares of common stock purchased at fair market value under the
Company's Executive Stock Purchase Plan, and payments to shareholders for
fractional shares related to the Company's reverse stock split. Net cash
provided by financing activities during 2003 was $4,172,000 and primarily
related to cash received from the private placement of approximately 200,000
shares of common stock to seven accredited investors.
The Company intends to raise equity capital in 2005, anticipated to be
approximately A$6 million (or approximately $4.74 million USD), in order to fund
the cash portion of the Loyalty Magic Pty Ltd. acquisition and to provide
increased working capital. In the event that the acquisition does not occur,
Catuity's Board of Directors will initiate a shareholder rights offering with
the objective of raising $2,000,000 USD. The completion of the acquisition is
dependent on factors including, but not limited to, the approval of shareholders
and the successful completion of a capital raise. In either instance, the five
individual members of the Board of Directors has committed at least $325,000 USD
toward the capital raise.
The Company has also significantly reduced operating expenses and believes
that the investment made in the new CALS platform in 2004, in combination with
the Board's new market strategy, will begin to reflect favorably on the cash
position of the Company. The Company's Board of Directors has adopted a strategy
which:
- Drove the release of the new CALS system to meet the changing
technology requirements of the U.S. and Canadian markets
- Refocused the sales efforts on tier two chain retailers, especially
pharmacies, home improvement stores and auto services, where the
capabilities of CALS have a demonstrable return on investment
- Developed a sales channel through merchant services, acquirers and
processors who serve the more than two million smaller, individual
merchants which are too small to be serviced directly through
Catuity's sales model.
- Shifted the Company's technology team from pure research and
development to being largely focused on client deployments and
services around a hosted solution, rather than the traditional
installed software business where the Company had found its initial
success in the U.S.
- Leverages the Company's experience with the aim of offering a
managed gift card solution in Australia by the second half of 2005
to meet the growing interest by retailers of all sizes.
- Selectively explore projects and opportunities in which the Company
leverages its technology and operational understanding of loyalty
and gift card programs with partners who offer other strengths.
The Company believes that the significant reductions made in the Company's
operating expenses, combined with its existing capital resources and revenue
opportunities, are adequate to meet its cash requirements for the next twelve
months.
As of December 31, 2004, the Company had net operating tax loss
carry-forwards of $20,000,000 expiring in various amounts from 2020 through 2024
in the United States and $15,900,000 of net operating tax loss carry-forwards 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 if the
Internal Revenue Service Code.
50
OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
REVENUE
Total revenues for the three month period ended March 31 ("first quarter")
decreased $446,000, to $32,000 in 2005 compared to $478,000 in 2004. First
quarter 2005 revenues consisted of approximately $20,000 in service revenue
related to consulting services for a client, and approximately $12,000 in
license revenue that consisted of software license fees and maintenance. First
quarter 2004 revenues consisted of approximately $218,000 in project revenue
related to software development for Visa; approximately $215,000 in service
revenue related to support services for Visa and Target; approximately $45,000
in software license fees and maintenance for a client; and maintenance fees for
Target.
COST OF PROJECT REVENUE
Cost of project revenue primarily consists of salaries, employee benefits,
related expenses and overhead for the portion of time spent by our technical
staff located in Sydney, Australia who work on software development activities
for customers. The Company did not engage in any software development activities
on behalf of customers in the first quarter of 2005 and therefore did not incur
any costs related to project revenue. Cost of project revenue was approximately
$82,000 for the first quarter of 2004.
COST OF SERVICE REVENUE
Cost of service revenue primarily consists of salaries, employee benefits,
related expenses and overhead for the client services and support staff, for the
portion of their time spent on service related activities. Cost of service
decreased $95,000, or 84%, in the first quarter of 2005 compared to the first
quarter of 2004, and service revenue decreased by $195,000, or 91%, over the
same period. The decrease in expenses for the three-month period was due to a
reduction in staff and also corresponded with the decrease in service revenue.
COST OF LICENSE REVENUE
Cost of license revenue primarily consists of salaries, employee benefits,
related expenses and overhead for the client support staff and the technical
staff's time spent on maintenance activities related to licensed Catuity
software. Cost of license decreased $43,000, or 98%, in the first quarter of
2005 compared to the first quarter of 2004, and license revenue decreased by
$32,000, or 71%, over the same period. The decrease in expenses for the
three-month period was due to a reduction in staff and also corresponded with
the decrease in license revenue.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, employee benefits,
travel, marketing, public relations and related overhead costs of the sales and
marketing team. Sales and marketing expenses decreased $90,000, or 38%, in the
first quarter of 2005 compared to the first quarter of 2004. The decrease was
principally due to reductions in staff size and lower overhead allocations.
RESEARCH AND DEVELOPMENT
Research and Development expenses consist primarily of salaries, employee
benefits and overhead cost, incurred primarily by the technical staff in Sydney
Australia. Research and development expenses decreased $174,000, or 57%, in the
first quarter of 2005 compared to the first quarter of 2004. The decrease was
due to the significant reduction in staffing that occurred in the 4th quarter of
2004 which lowered salary and related costs and overhead.
51
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries, employee
benefits, related overhead costs and professional services fees. General and
administrative expenses increased $21,000, or 6%, in the first quarter of 2005
compared to the first quarter of 2004. The increase was primarily due to higher
outside audit fees recorded in the first quarter of 2005 compared to the first
quarter 2004. This was due to a change in how the Company records audit fees,
resulting in a timing difference, rather than an increase in costs . Costs for
internal finance and administration and office overhead were approximately
$40,000 lower in the first quarter 2005 compared to the first quarter 2004.
LIQUIDITY AND CAPITAL RESOURCES (As of March 31, 2005)
Historically, we have funded our operations with proceeds from the issuance of
common stock and cash collections from customers. As of March 31, 2005, the
Company had approximately $1,755,000 in cash and cash equivalents, a decrease of
$806,000 from December 31, 2004. Net cash used in operating activities was
$786,000 for the three-month period ended March 31, 2005 compared with $496,000
for the three-month period ended March 31, 2004. The increase in net loss was
the primary factor contributing to the increase in net cash used in operating
activities.
There was no cash used in investing activities for the three-month period ended
March 31, 2005 compared with cash used of $37,000 for the three-month period
ended March 31, 2004. The $37,000 used during the three month period ended March
31, 2004 primarily related to the purchase of computer hardware in the U.S.
There were no capital purchases made during the three-month period ended March
31, 2005.
Net cash used by financing activities was $750 for the three-month period ended
March 31, 2005 and related to payments to shareholders for fractional shares
related to the Company's reverse stock split. Cash provided by financing for the
same period in 2004 was $5,000 and related to shares of the Company's common
stock purchased at fair market value under the Company's Executive Director
Stock Purchase Plan.
The Company intends to raise equity capital in 2005, anticipated to be
approximately A$6 million (or approximately $4.6 million USD), in order to fund
the cash portion of the Loyalty Magic Pty Ltd. acquisition and to provide
additional working capital. In the event the acquisition does not occur,
Catuity's Board of Directors intends to complete a smaller capital raising
effort with the objective of raising $2,000,000 USD. The acquisition is subject
to approval of shareholders and the successful completion of a capital raise
expected to be completed in the third quarter of this year. Under either capital
raising alternative, the five individual members of the Board of Directors have
indicated that their participation will amount to approximately $325,000 USD.
The Company believes that with its capital raising efforts, the significant
reductions made in the Company's operating expenses, combined with its existing
capital resources and revenue opportunities, are adequate to meet its cash
requirements for the next twelve months.
52
CRITICAL ACCOUNTING POLICIES AND ASSUMPTIONS
The accompanying consolidated financial statements were prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or the method of its application is
generally accepted, we select the principle or method that is appropriate in our
specific circumstances (see Note 2 of Notes to Consolidated Financial
Statements). Application of these accounting principles requires us to make
estimates about the future resolution of existing circumstances. As a result,
actual results could differ from these estimates. In preparing these financial
statements, we have made our best estimates and judgments of the amounts and
disclosures included in the consolidated financial statements, giving due regard
to materiality.
REVENUE RECOGNITION
We have three distinct revenue streams: software development revenue,
service revenue, and license revenue.
Software development revenue includes integration, customization and
development related to our software application and the customer's related
hardware and software. Software development revenue is generally billed on a
fixed price basis. The Company recognizes revenue on fixed price contracts on
the proportional performance method in accordance with SAB 101, Revenue
Recognition in Financial Statements, and SAB 104, Revenue Recognition, based on
actual hours incurred as a proportion of estimated total hours of the respective
project. Management's estimate of total project hours is based on actual hours
incurred to date combined with current hours estimated to complete remaining
project tasks. It is reasonable that the estimated number of total hours may
change, however this does not impact total project revenue recognized as the
sales price is typically fixed. The cumulative impact of any revisions in
estimated total revenues and direct 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.
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. Service
revenue in 2004 consisted of post-installation customer support, which was based
on a contracted number of monthly support hours, and maintenance.
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 and
acceptance of the software has occurred, no essential undelivered elements
remain on the Company's part that are essential to the functionality of the
delivered software, the fee is fixed and determinable, and collection has either
occurred or is probable. Billings in excess of revenue are recorded as deferred
revenue until revenue recognition criteria are met. 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. All of the license
revenue recognized in 2004 was related to a license agreement in which revenue
was recognized monthly, based on a minimum number of transactions. The Company
generally does not provide for a right of return in its license contracts.
DEFERRED TAX ASSETS
The Company records a full valuation allowance against net deferred tax
assets. Based on historical operating losses, it is difficult to determine the
amount or timing of future earnings, therefore, there is currently no tax
benefit recorded by the Company due to the full valuation allowance.
53
ACCOUNTING FOR EQUITY INSTRUMENTS
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 disclosure-only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Based on
the Company's election to become a small-business issuer beginning in fiscal
2005, we will adopt SFAS 123(R) beginning with the 1st quarter of 2006, as
required. SFAS 123(R) requires the measurement of all employee share-based
awards using a fair-value-based method. As a result, because SFAS 123(R)
requires the expensing of stock options, it will have an adverse effect on our
reported financial results. However, we have not yet assessed the level of
impact to be able to quantify the adverse effect.
The shareholder loan outstanding, which relates to loans issued to a
director in 1995 and 1996 to purchase stock, 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. If the Company's ending fair market price
per share is above the price per share at which the loan was made, we record
variable stock compensation expense, based on the difference in price per share,
on a cumulative basis.
BUSINESS OF LOYALTY MAGIC
GENERAL
Loyalty Magic provides technology solutions and services for clients in
the retail, gaming, entertainment and leisure industries in Australia and New
Zealand to improve their relationship marketing and relationship management
capabilities. Loyalty Magic provides end-to-end solutions for clients, including
first level consulting in relationship marketing and management programs,
program implementation, metrics, and reports analysis, all of which lead to
program improvement.
Loyalty Magic impacts areas of customer relationship management that
relate specifically to customer acquisition, customer retention, customer
loyalty and customer profitability. Loyalty Magic also offers consulting
services to clients regarding these applications. Loyalty Magic's products and
services positions its clients to better implement relationship marketing
programs in a step-by-step manner with clearly identified outcomes. Loyalty
Magic has the ability to implement a relationship marketing and communications
solution using common and open technology upon which many applications are
designed and delivered. Loyalty Magic's communication technology interfaces with
a diverse range of devices and databases without requiring any middleware, a
general term for any programming that serves to mediate between two separate and
often already existing programs, which allows it to provide more cost effective
solutions to clients.
INDUSTRY SUMMARY
Traditional mass marketing avenues such as advertising in print,
television and radio have come under significant pricing pressure. That,
combined with pressure on marketing departments to show measurable outcomes from
expenditures, has caused a shift in the way marketing dollars are spent.
Consequently, more companies are allocating additional funds to direct marketing
efforts. Included in these expenditures are programs aimed specifically at
encouraging consumers to visit the retailer's stores more frequently, increasing
consumer spending and enhancing consumer retention. Loyalty Magic's applications
and programs are designed to address those objectives. As a result, Loyalty
Magic expects growth in direct marketing spending even if overall spending on
marketing does not increase.
Loyalty Magic competes in the loyalty and relationship marketing segments
of the consumer retail industry. Relationship marketing is a subset of direct
marketing (traditional print and media advertising) and is designed to create
more personal relationships with prospective customers. This leads to more
efficient customer acquisition and higher customer retention rates.
54
Loyalty Magic competes in two broad industry types:
- The consumer retail industry. This industry is characterized by
three significant and positive trends: upgrades to POS systems,
rising gift card usage and the growing budgets of retailers to
enhance sales by driving loyalty among new and prospective
customers.
- The gaming, entertainment and leisure industries. The trends in
these industries are characterized by a need to capture more
information on customers so as to efficiently market to them, retain
them as customers against increased competition (especially from
internet-based businesses), and protect their margins in the face of
increased taxation on electronic gaming.
Within the consumer retail industry, Loyalty Magic has achieved
significant success in specialty markets, such as the pharmacy market. Within
these markets the discipline of direct marketing, and especially that of
relationship marketing, continues to grow, despite the presence of new
legislation regulating consumer privacy and spam.
EFTPOS AND POS SPENDING BY RETAILERS: Loyalty Magic's applications work by
installing a proprietary application at electronic funds point of sale (EFTPOS)
or the point of sale (POS) inside a retailer or merchant's stores. As might be
expected, retailers are cautious about changes which affect their ability to
accept payment. As such, Loyalty Magic gives priority to sales prospects which
have already decided to upgrade their POS systems, be it in hardware, software
or both. Therefore, Loyalty Magic may benefit when a POS upgrade has occurred
because it can provide relationship marketing services and other value from the
POS data. In situations where a retailer does not use a POS device, the
opportunity to implement a loyalty solution still remains. In this case, Loyalty
Magic is able to utilize its software on certain EFTPOS devices.
TRENDS IN EFTPOS AND POS: In Australia, the market for EFTPOS devices has
traditionally been dominated by a few firms, most notable of which is Ingenico.
These firms have, in the past, enjoyed up to 70% market share. Loyalty Magic's
solution works on the Ingenico platform in most of its customers' locations. In
the past several years Ingenico has lost market share to other industry
participants, such as Intellect, Keycorp, and Verifone. Loyalty Magic has the
ability to operate on the Intellect and Verifone platforms. The POS market in
Australia is a very diverse and fragmented. Loyalty Magic deals with some of the
POS manufacturers directly and also has a universal interface that works with
most POS vendors' software. This enables Loyalty Magic to transfer data directly
from a POS to its database.
Loyalty programs are paid for in a variety of ways. Credit card related
loyalty programs are often paid for by apportioning a certain percentage of the
interchange rate, the issuing percentage or the acquiring percentage toward the
loyalty program. Until the interchange rate was abolished, this was an
acceptable method of paying for such programs. This change has forced the banks
and the program operators to re-examine how the programs are funded. Non-credit
card programs, on the other hand, are typically included as a component cost of
sales or marketing. This has the effect of forcing the program operators, such
as Loyalty Magic, to justify the investment by showing the type of return that
could be achieved, plus how the business objectives such as increased
visitation, increased average spend, and decreased relationship marketing costs
could be attained.
The elimination of the bank interchange has not directly affected Loyalty
Magic. For credit card issuers it has been a problem because it has impinged on
the ability to pay for the rewards. This has led to a higher profile for loyalty
and relationship marketing firms, such as Loyalty Magic, because their value
proposition is predicated on payment of the program as a component of cost of
sales, which is a more defensible method.
GIFT CARD USAGE TRENDS: Australia is following the U.S. trend with respect
to gift card usage. In the U.S., gift cards are viewed as a key customer
acquisition tool since they are typically purchased by a friend or relative and
given to a potential shopper in lieu of cash. In fact, Deloitte & Touche
(www.deloitte.com) found in a late 2004 U.S. study that gift cards were now the
No. 1 gift with 64% of shoppers choosing receiving a gift card as their
preferred gift. Australia seems to be following this trend. Gift cards are a
year-round part of the strategy of retailers and a key profit center. Loyalty
Magic is able to deliver magnetic stripe gift cards to mid to large retailers
through its direct sales effort by using its gift card technology and loyalty
software.
RETAILERS EMPHASIZE LOYALTY IN GROWTH STRATEGY: Loyalty has evolved from
an emerging strategy to an established practice for retailers. Estimates of the
size of the loyalty market vary widely and are often interchanged
55
with estimates of the customer relationship management (CRM) market. These
estimates can include everything from direct marketing, branding and call center
support to technology spending. Loyalty Magic defines our services to enable
loyalty as the application, creation and management of the individual profile
created when a customer joins a membership or reward program; and the
transactional support necessary to make a loyalty program work seamlessly at the
point of sale. Loyalty Magic has the in-house ability to manage databases on
behalf of clients through its ASP center and can interface with kiosks and other
e-commerce platforms.
BUSINESS SEGMENTS
Loyalty Magic's revenue is derived from a combination of sources,
including ASP and license revenue. ASP revenue is typically generated following
the execution of an agreement with a client to provide hosting, consulting and
management services. License revenue is typically generated from the sale of a
license for one of Loyalty Magic's products accompanied by annual support and
maintenance fees. The support agreements are renewed annually.
Loyalty Magic's revenue per segment for the last three fiscal years ended
June 30 is set forth in the table below:
FY2004 2004 FY2003 2003 FY2002 2002
---------- ---- ---------- ---- ---------- -----
Revenue Type Amount % Amount % Amount %
- ----------------------- ---------- ---- ---------- ---- ---------- -----
ASP Revenue $1,901,456 68% $1,853,924 73% $1,028,414 75%
License Revenue, incl.
Support fees 809,053 29% 668,569 26% 356,387 25%
International Revenue -
ASP based 73,600 3% 12,400 1% 0 0%
---------- --- ---------- --- ---------- ---
Total Revenue $2,784,109 100% $2,534,893 100% $1,384,802 100%
---------- --- ---------- --- ---------- ---
OUR PRODUCTS AND SERVICES
Loyalty Magic's products and services address the following needs of
retailers and relationship marketing program operators:
a. How can I find out more about my existing customers?
b. How can I get them to buy more frequently from me?
c. How can I get them to spend more, on average, with me?
d. How can I get more customers cost efficiently?
e. How can I sell higher margin products more frequently?
f. How can I maximize my return on marketing dollars?
Loyalty Magic also provides customized solutions to clients to address
these needs.
PRODUCTS:
Each of Loyalty Magic's products performs various functions for clients.
For example, "LOYALTY MAGIC LMX" is a full function suite of application
programs that provide clubs, casinos and retailers with loyalty and reward
programs, membership management, promotions management, customer activity
reporting, and system maintenance.
Two other products, "LM INTERFACES" and "LM .NET INTERFACES" are specialty
software products that facilitate systems integration for our clients. Loyalty
Magic's "EFTPOS TERMINAL APPLICATIONS" allow consumers to use membership cards
to accrue points or earn discounts upon purchasing products and allows merchants
to conduct promotions. LM KIOSK and WEB(3) are products that allow a consumer to
check points balance, activity, obtain and download coupons/vouchers for use at
a particular location.
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In addition to the products described above, Loyalty Magic provides
various services for our clients, including data cleansing, data entry and mail
services.
COMPETITION
Loyalty Magic is focused on enabling loyalty and gift card programs in
Australia, New Zealand, and the United Kingdom where demand is consistent and
businesses consider loyalty as an important marketing technique and part of
their growth strategies. In these markets, loyalty and relationship marketing
programs are considered to be established marketing techniques. Loyalty Magic's
prospective customers do not lack options in how its clients choose to spend
their budgets to acquire, retain and reward their customers. Loyalty Magic has
found that clients make one of three financial and strategic choices in
executing their loyalty strategy. These are:
- IN-HOUSE SOLUTION: Retailers, especially those with information
technology experience, often seek competitive advantage by custom
development of proprietary in-house solutions. The same statement
applies to the gaming, entertainment and leisure industries. This is
not a primary market for Loyalty Magic due to the typically lengthy
and complex sales cycle and the strict financial requirements placed
on the provider, which tend to exclude smaller providers. While
Loyalty Magic does not actively target tier one retailers or custom
installation projects, it does provide this option at the request of
its core customers.
- HOSTED SOLUTION: Smaller chain retailers targeted by Loyalty Magic,
favor a turnkey, hosted solution which enables them to minimize
their capital investment, avoid the need for large, specialized IT
departments and reduce the risks associated with complex
integration, deployment and upgrades. This market typically prefers
a hosted solution, which allows for customization. Loyalty Magic's
hosted solution serves this market need.
- PROGRAM-BASED SOLUTION: Retailers in the gaming industry favor a
solution that allows them to retain customer data in-house. These
retailers prefer to operate the software directly from their
locations. Loyalty Magic actively competes in this market.
Loyalty Magic's ability to be successful depends on many factors,
including:
- Its ability to establish a clear business case that is aligned with
the strategy of its clients and which has a clearly defined return
on investment;
- Its ability to successfully market the features of our product and
to continually make it easier for clients to use;
- Its ability to continually expand our reputation and credibility in
our markets and to differentiate Loyalty Magic from the many
competitive alternatives;
- Its ability to leverage marquee client relationships to establish a
more visible presence in its markets; and
- Its ability to execute on time, within budget, and to consistently
exceed our customers' ongoing service requirements.
RESEARCH AND DEVELOPMENT
Loyalty Magic's product development is concentrated on unifying our
product set under Microsoft's .NET platform with Visual Studio and SQL Server.
Additionally, Loyalty Magic has produced, and is in the process of implementing,
a smart card based program for one of its clients, EFS, which provides fuel
solutions in Australia. EFS's differentiating factor, however, is that it
gathers data on customer buying habits and can communicate with them directly to
make special offers to them. Loyalty Magic is also in process of researching
ways to improve the speed of its database, upgrade its current applications, and
are also in the early stages of "Internationalizing" its products to cater to
different languages.
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INTELLECTUAL PROPERTY
Loyalty Magic's intellectual property rights exist mostly in copyright of
its product applications. Loyalty Magic has also registered the trade names of
Loyalty Magic, Community Advantage, Sports Advantage, and Embrace in Australia
and New Zealand. Loyalty Magic is in the process of seeking registration for the
trademark for R-evolution, its new brand of relationship marketing solutions, in
Australia, Europe, and the USA.
SALES
Loyalty Magic uses SalesForce.com as our sales force automation and
tracking software. Salesforce.com is a well-known international sales force
automation tracking software application. SalesForce.com has enabled Loyalty
Magic to build a significant prospects pipeline. A significant portion of
Loyalty Magic's existing revenue is recurring from its ASP client base and from
support services rendered to customers who license Loyalty Magic software.
Loyalty Magic's management expects this revenue to increase over time.
REVENUE AND ASSETS BY GEOGRAPHIC LOCATION
Loyalty Magic's revenues are derived mostly from sales and operations in
Australia, New Zealand and the United Kingdom. In 2004, Loyalty Magic derived
88.9% of its revenue from clients in Australia, 8.5% from clients in New Zealand
and the remaining 2.6% from clients in the United Kingdom.
EMPLOYEES AND FACILITIES
As of April 22, 2005, Loyalty Magic had 28 full-time employees, three of
which are located in Sydney and 25 of which are located in Melbourne. Of those
28, ten are in the ASP services and support department, seven are software
developers, three are full time in sales and marketing, four are in project
management, product management and testing, and the remaining five are
executives that oversee our ASP business, sales, and product development
divisions.
LOYALTY MAGIC FINANCIAL INFORMATION
Included in this proxy statement are Loyalty Magic's audited balance
sheets as of June 30, 2004 and June 30, 2003 and audited profit and loss
accounts and statements of cash flows for each of the fiscal years ended June
30, 2004 and June 30, 2003, and its unaudited profit and loss account for the
six-month period ended December 31, 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(LOYALTY MAGIC)
The following is a summary of the operating results of Loyalty Magic and
contains forward-looking statements based upon current expectations that involve
risks and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements.
OVERVIEW OF SIGNIFICANT ACTIVITIES
Calendar years 2003-2004 marked a transition for Loyalty Magic as we
upgraded our product capability to move more toward the recurring revenue model
that is enabled by the ASP-delivery method we deliver. At the same time, the
company restructured its outside sales force. We believe that both investments
position Loyalty Magic for continued growth in 2005 and beyond.
TECHNOLOGY STRATEGY
Loyalty Magic decided in 2002 to use its internal resources to upgrade its
technology by using a more universal product design. Loyalty Magic's Management
believes these upgrades will, over time, make it easier, less
58
expensive and faster to deploy solutions to customers and provide higher gross
operating margins. Loyalty Magic researched the technology options in 2003 and
chose the Microsoft .NET platform as its preferred technology. The overriding
factors in its decision were:
- Loyalty Magic was an existing Microsoft client with an established
understanding of their technology;
- .NET was a new technology platform that was well constructed for
distributed processing, and seemed to be well designed in that
regard;
- Separately, but importantly, Microsoft was committed to introducing
Net-based solutions to our primary vertical market, the retail
industry; and
- Cost of the technology was relatively affordable, and the cost of
human resources was reasonable and relatively easy to acquire.
By the end of May 2005 Loyalty Magic expects to install its .NET single
product solution suite for two of its licensing clients. Each of these clients
has a specific, customized solution operating according to its business and
technology rules. Additionally, the .NET technology has begun to be imported
onto Loyalty Magic's ASP platform located in Melbourne, for use in providing
additional services to ASP clients.
PRODUCT SUITE
Originally, the product design and management of Loyalty Magic's product
suite was disjointed and more suited to custom designed applications where each
customer's functional specification was treated as a distinctly separate
development. This was a result of Loyalty Magic's previous focus on selling
custom software solutions. The custom software business allowed for limited
scalability and required prolonged planning and decision making and had a
deployment process marked by frequent changes and interruptions which had a
negative effect on revenue growth. As a result, it was concluded that the
loyalty product suite must be:
- Easily customizable for the customer;
- Implemented from a single product suite that required minimal
programming, yet met most of our clients functional needs; and
- A demonstrably better application alternative for our customers and
prospects in the sense that they could choose from a core set of
modules and have each module customizable to their needs, instead of
developing applications from scratch.
To drive this strategy, we created a new position of Product Manager. The
first goal of this position was to consolidate various custom applications into
a single product suite in the gaming, entertainment and leisure sectors of the
Australian market. The second goal was to transfer this technology into Loyalty
Magic's ASP offering in the retail sector. An example of the benefits of .NET
technology transfer can be seen in the ability to more easily develop and
deliver marketing promotions at a local level for a retailer. Another example is
that development in .NET occurs in a shorter timeframe, resulting in quicker to
market applications. At the time Loyalty Magic began work on this strategy, it
was estimated that these goals would be achieved in two years. Approximately 90%
of the design of the single product suite has been completed, and the functional
specifications for certain of the new and upgraded modules (such as its new
marketing module) are in process. The marketing module is designed to enable
Loyalty Magic's customers to leverage the data that it collects so they can
manage and design CRM programs to meet their business objectives. Loyalty Magic
believes that a strategy of adding such functionality to its core ASP product
accomplishes three important business objectives. It makes Loyalty Magic's
platform more valuable to clients when they are considering renewal of our
contract, it makes its ASP solution more marketable to new customer prospects,
and it provides Loyalty Magic with a new revenue stream. Loyalty Magic is on
schedule to complete the marketing module in 2006.
SALES TEAM
As Loyalty Magic continually invested in and improved its technology
product, its sales management process has also been improved to be aligned with
sales opportunities. Since its inception, Loyalty Magic has been
59
very opportunistic in its sales efforts. By upgrading its product suite, Loyalty
Magic believes there is greater opportunity to sell its solution to a larger
market of potential buyers in Australia and New Zealand. In July 2004, one of
the co-founders of Loyalty Magic temporarily took on the role of sales manager.
Loyalty Magic also hired three full-time sales people, began using
Salesforce.com as a tool to manage and forecast sales activity and hired a
marketing services person to support its new approach to sales. As part of this
process, Loyalty Magic set objective criteria for sales personnel and
established performance quotas along with key performance indicators for its
sales team. Those standards have been strictly enforced. Loyalty Magic has, and
will continue to, replace under-performing sales team members with a focus on
delivering its forecasted sales plan. Earlier this year, as had been planned,
Loyalty Magic's managing director assumed day-to-day control of sales
management.
As Loyalty Magic evolved its sales management process, it has had the
intended effect of creating a measurable pipeline and closing process. Loyalty
Magic has built a significant prospects pipeline. Management estimates that
approximately A$400,000 in potential sales is waiting for the customer's final
decision. The prospective revenue is distributed across a wide-range of
potential sizes and types of clients in the Australian and New Zealand markets.
In the past, the sales pipeline has generally been weighted toward direct sales
to smaller merchants. As part of its evolving strategy, Loyalty Magic has, in
the most recent quarter, begun to specifically target multi-location merchants,
including chain retailers and franchisees where loyalty can improve their growth
and profitability.
This transition to targeting larger clients is not without risk. While
Loyalty Magic had past success in evolving its sales model, it continues to
assess its sales team and the resources that it has committed to achieving its
revenue goals. Among the benefits for Loyalty Magic from combining with Catuity,
is the addition of new product capabilities. Specifically, Loyalty Magic expects
to market Catuity's gift card solution to its existing retail customers and to
use it as an entry level or upgrade sales product for new prospects. As the
value of gift cards for retailers in Australia and New Zealand has become more
widely accepted, Loyalty Magic's customers are more open to the solution now
than in the past. Loyalty Magic's forecast includes what its management believes
are reasonable, but achievable revenue goals from the sale of gift cards.
Loyalty Magic's operating model allows flexibility in how it manages
staffing. Sales, operating costs and near-term staffing needs are closely
monitored. This practice has allowed Loyalty Magic to reduce costs where
necessary.
JULY 1 TO DECEMBER 31, 2004 INTERIM FINANCIAL RESULTS (UNAUDITED)
Revenue for the six month period ended December 31, 2004 increased
slightly to A$1,405,000 from A$1,373,000, representing an increase of 2.3%, from
the same period in 2003. Loyalty Magic's sources of revenue shifted considerably
between these periods. Project revenue decreased from A$199,000 in the six
months ended December 31, 2003 to A$76,000 in the same period in 2004. The
principal cause of the decrease was Loyalty Magic's decision to allocate
internal resources to product development.
Services revenue for the six months ended December 31, 2004, increased to
A$1,299,000 from A$1,062,000, representing an increase of 22.3%, from the same
period in 2003.The increase in services revenue was due to placing more emphasis
on ASP sales to make up for the decreased emphasis on license sales.
License revenue, which consists of revenue from the sale and customization
of Loyalty Magic's licensed software, decreased from A$112,000 in the six months
ended December 31, 2003 to A$30,000 in the same period in 2004. The principal
cause of the decrease, as explained above, was due to the shift in focus from
sales to internal product development.
Total direct cost of revenue increased from A$908,000 for the period ended
December 31, 2003 to A$1,042,000 for the same period in 2004, representing an
increase of 14.8%. Project revenue cost declined A$106,000, or 26%, while the
cost of services revenue increased A$241,000, or 48%, for the period ended
December 31, 2004 compared to the same period in 2003. The cost of project
revenue decrease was due to the decline in project revenue. The services cost
increase was principally due to the development and delivery of a major services
package for a significant new customer, consulting costs for external
information technology expertise, and use of Salesforce.com for sales force
automation and tracking software.
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Sales and marketing costs were flat between the periods, while general and
administrative expenses increased by A$122,000, or 39%. The principal areas of
general and administrative cost increases were due to an increase in bad debt
provision by A$50,000, sales department personnel recruitment fees of A$39,000,
audit fees of A$14,000, and A$12,000 for the use of an offsite co-location
facility to increase security for our host servers and our clients data. None of
these costs were incurred in the six month period ending December 31, 2003.
As a result of the above, for the six months ended December 31, 2004,
Loyalty Magic experienced a net loss of A$63,000 as compared to a net profit of
A$106,000 for the same period in 2003.
FISCAL YEAR JULY 1, 2003 - JUNE 30, 2004 COMPARED TO FISCAL YEAR JULY 1, 2002 -
JUNE 30, 2003
Total revenue for the fiscal year ended June 30, 2004, increased to
A$2,782,000 from A$2,523,000, or 10.3% from the fiscal year ended June 30, 2003.
The increase was made up of a 2.6% increase in ASP revenue, a 19.3% increase in
License Revenue (principally from a new, large sale), and a 517% increase in
international revenue. International revenue grew from A$12,000 for the fiscal
year ended June 30, 2003, to A$74,000 for the same period in 2004 due to a
client being under contract for the full year of 2004.
Direct costs of revenue were flat with between the fiscal years ended June
30, 2003 and June 30, 2004. This, combined with a 10.3% increase in revenue
resulted in an increase in gross profit from A$2,095,000 for the fiscal year
ended June 30, 2003 to A$2,349,000, or 12%, for the same period in 2004.
Purchases, which consist of costs from the purchase of cards for customers,
decreased by approximately A$44,000 for the fiscal year ended 2004 due to
Loyalty Magic's customers taking on the responsibility to order and a reduction
in postage costs. Contract data entry costs, which are incurred when Loyalty
Magic outsources the data entry requirements of its clients remained flat for
the fiscal year ended 2004 as compared to same period in 2003 because Loyalty
Magic performed more data entry in-house for clients during the fiscal year
ended June 30, 2004 . Terminal costs, which are incurred when Loyalty Magic
orders and installs terminals for clients, were A$41,000 for the fiscal year
ended June 30, 2004. This was the first year Loyalty Magic incurred terminal
costs as it began ordering them on behalf of clients in early 2004.
Expenditures for indirect, sales and marketing and overhead costs
increased by A$187,000 to A$2,132,000, representing an increase of 9.6%, for the
fiscal year ended June 30, 2004 from A$1,945,000 for the same period in 2003.
The principal areas of cost increase were: (i) additional sales and marketing
staff and consultants which increased by A$54,000; (ii) contracted consultants
in specialty areas to assist with sales, marketing and development on the
Loyalty Magic product, which increased by A$61,000; (iii) administration staff
cost which increased by A$14,500 due to the need for additional staffing related
to revenue growth; (iv) increased coverage and marketing at trade shows which
increased by A$12,500; (v) staff training which increased by A$8,500; and (vi)
travel and accommodation requirements of sales staff, which increased by
A$15,000.
As a result of the above, net profit for the fiscal year ended June 30,
2004 was A$237,000 versus A$154,000 for the previous year, representing an
increase of 58%. The improvement is attributable to tight cost control that
improved margins on Loyalty Magic's existing business and from higher margins on
new business.
CRITICAL Accounting POLICIES AND ASSUMPTIONS
Loyalty Magic's financial statements are prepared in conformity with
accounting principles generally accepted in Australia. When more than one
accounting principal might apply, Loyalty Magic selects the principle or method
that is appropriate in the specific circumstances. Application of these
accounting principles may require Loyalty Magic to make estimates about the
future resolution of existing circumstances. As a result, actual results could
differ from these estimates. In preparing its financial statements, Loyalty
Magic has made its best estimates and judgments of the amounts and disclosures
included in the consolidated financial statements, giving due regard to
materiality.
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REVENUE RECOGNITION
Loyalty Magic follows the revenue recognition principles contained in AASB
118 and IAS 18 which state that:
"Revenue is the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity when those
inflows result in increases in equity, other than increases relating to
contributions from equity participants."
Furthermore revenue is recognized in accordance with the following:
Revenue is recognized only when it is probable that the economic benefits
associated with the transaction will flow to the entity. In some cases, this may
not be probable until the consideration is received or until an uncertainty is
removed. Revenue and expenses that relate to the same transaction or other event
are recognized simultaneously; this process is commonly referred to as the
matching of revenues and expenses. Expenses, including warranties and other
costs to be incurred after the shipment of the goods can normally be measured
reliably when the other conditions for the recognition of revenue have been
satisfied. However, revenue cannot be recognized when the expenses cannot be
measured reliably; in such circumstances, any consideration already received for
the sale of the goods is recognized as a liability."
Loyalty Magic has three principal revenue streams: ASP services revenue
(including subscription services), license revenue (including international),
and support services revenue.
ASP SERVICES. This revenue includes fees for: monthly host management;
terminal licenses; server licenses; data entry; return mail processing; new
store set-up; terminal rental and support; welcome letters and label printing;
processing of incorrect or incomplete applications; database production for a
project; web site set-up and hosting; card design, production and delivery; data
files import/export; telephone support; and staff labor for the above. Depending
on individual client requirements, certain of the above fees may be included in
monthly management fees. Those services that are not included in the monthly fee
are quoted and invoiced separately. ASP services revenue is recognized on a
monthly basis for services delivered in the period.
LICENSE REVENUE. This revenue is derived from licensing the right to use
our software to customers who desire our software to be located on their
servers, on their premises. License revenue is further divided into two main
parts:
- License fees - which may include fees from the licensed use of our
software for membership management, promotions management, voting
module, kiosk, web services, and/or report writing; and
- Customization project work required by customers. Customization
services include functional specifications, business design, system
design, programming (development), reporting modifications, project
management and testing.
Revenue from license fees is recognized at the time the client begins
their use of the program. License revenue for customization work is recognized
as delivery stages are accomplished according to agreed upon deliverables
between Loyalty Magic and the client.
License Support revenue. This revenue is derived from license agreements
to support customers as they utilize Loyalty Magic software on their host
computers and apply it to their customer base. Support revenue includes
maintenance services, bug fixes, troubleshooting of technical issues and the
training of new client technology staff. License support revenue is recognized
in the month in which the support service is delivered. Maintenance revenue is
recognized on a pro-rata basis each month over the term of the Support
Agreement.
VOTING EXCLUSION STATEMENT
In accordance with Australian Stock Exchange Limited Listing Rules 11.1
and 14.11, any votes cast in favor of this proposal by Loyalty Magic, any
directors of Loyalty Magic and any associate of those persons, will be
62
disregarded. However, Catuity need not disregard the vote if it is cast by a
person as proxy for a person who is entitled to vote, in accordance with the
directions on the proxy form, or if it is cast by the person chairing the
meeting as proxy for a person who is entitled to vote, in accordance with a
direction on the proxy form to vote as the proxy decides.
RECOMMENDATION OF THE BOARD OF DIRECTORS
After careful consideration, our board of directors has determined that
the acquisition of Loyalty Magic is in the best interest of Catuity and its
shareholders and has unanimously approved the acquisition. Accordingly, our
board of directors unanimously recommends a vote "FOR" approval of the
acquisition of Loyalty Magic.
PROPOSAL 7
(TO APPROVE THE ISSUANCE OF SHARES OF CATUITY COMMON STOCK FOR THE PURPOSE OF
ACQUIRING LOYALTY MAGIC PTY LTD AND TO PROVIDE WORKING CAPITAL)
LISTING RULE REQUIREMENTS
Our common stock is traded on the NASDAQ SmallCap Stock Market under the
symbol "CTTY." Consequently, the Company is subject to the Marketplace Rules
promulgated by the National Association of Securities Dealers, Inc. (the
"Marketplace Rules"). Although the issuance of the shares of common stock
described above does not require shareholder approval under Delaware law, the
issuance of these shares does require shareholder approval under the Marketplace
Rules. Specifically, Marketplace Rule 4350(i)(1)(D) ("Rule 4350") requires
NASDAQ-listed issuers to obtain shareholder approval prior to any issuance or
potential issuance of securities representing 20% or more of the outstanding
common stock or voting power of the issuer (on an as-converted or as-exercised
basis) before such issuance for a price less than the greater of the book or
market value of the issuer's common stock. For purposes of Rule 4350, the (i)
outstanding common stock or voting power of the issuer is determined as of a
date the issuer enters into a binding agreement with respect to such issuance or
potential issuance, which in the case of the acquisition of Loyalty Magic is
March 17, 2005; and (ii) market value of the issuer's common stock is deemed to
be the closing bid price of the issuer's common stock immediately prior to
entering into such binding agreement, which in the case of the acquisition of
Loyalty Magic is $5.21 per share, the closing bid price of our common stock on
March 17, 2005.
Our stock is also traded on the ASX, under the symbol "CAT." This proposal
seeks your approval of the issuance of up to A$7,000,000 worth of shares of
Catuity's common stock, which exceeds 15% of Catuity's issued and outstanding
shares of common stock, for the purpose of acquiring Loyalty Magic and for the
purpose of an offering to raise the cash portion of the proceeds to be paid to
the Loyalty Magic shareholders and to provide working capital in accordance with
Australian Stock Exchange Limited Listing Rule 7.1.
The number of shares of Catuity common stock to be issued by Catuity will be
determined in accordance with the following formula:
Proceeds of Capital Raising/Issue Price
If the issue price is less than $5.10, additional shares will be issued to
Loyalty Magic shareholders pursuant to the anti-dilution provisions of the Share
Sale Agreement.
Existing Australian Shareholders of Catuity will receive a priority in our
offering of shares. If there is any remaining stock after the priority issue,
the shares will be offered to new investors. This issue will be made within 3
months from the date of the 2005 Annual Meeting of Shareholders.
GENERAL
In exchange for all of the outstanding shares of stock of Loyalty Magic,
we have agreed to issue to the Loyalty Magic shareholders an aggregate of
300,647 shares of our common stock, subject to adjustment as set forth in
Proposal 6 above. In addition, we are seeking your approval to issue
approximately 949,367 shares (based on our intention to raise approximately
A$6 million and based on the closing price of our common stock on NASDAQ on the
day prior to the filing of this proxy statement) for the purpose of selling such
shares in our offering in order raise the cash portion of the consideration to
be paid to the Loyalty Magic shareholders and for additional working capital.
Our board has authorized an offering of up to A$7 million if over-subscriptions
are received.
TERMS OF OFFERING
We plan to conduct a registered offering in Australian to raise
approximately A$6 million to fund the Loyalty Magic acquisition and to provide
additional working capital for the combined company. The Board has determined
that our existing Australian shareholders will be offered a priority entitlement
under the offering, which is permitted under Australian rules and regulations.
We plan to file a prospectus shortly after we file the definitive version of
this proxy statement. The offering period will remain open until after our 2005
Annual Meeting of
63
Shareholders. This offering structure will also allow us to target new
institutional and other investors in order to broaden our investor base in the
Australian market and improve the liquidity of trading on the ASX. The board has
committed to invest up to A$470,000 in our offering, and are seeking your
approval to allow them to participate, as required under the rules and
regulations of the ASX.
The offering will be conducted pursuant to an exemption from registration
found in Regulation S. Under the terms of Regulation S, U.S. investors cannot
participate in the offering. Accordingly, none of our U.S. based shareholders,
officers or directors may participate in the registered offering in Australia.
We must take certain precautionary measures to ensure that the restrictions
imposed by Regulation S are enforced.
We intend to issue the shares to the Loyalty Magic shareholders pursuant
to an exemption from registration found in Regulation D promulgated under the
Securities Act ("Regulation D"). In order to permit our U.S. based directors to
fulfill their commitment to invest, we intend to sell them shares pursuant to an
exemption from registration found in Regulation D.
USE OF PROCEEDS
The net proceeds to us from the offering are expected to be approximately
A$5,750,000. We intend to use A$3,600,000 of the proceeds to pay cash portion
of the consideration due to the Loyalty Magic shareholders. We intend to use the
remaining net proceeds for general corporate purposes, including capital
expenditures and working capital for the combined company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF PROPOSAL 7 INCLUDING THE APPROVAL OF THE DIRECTORS' PARTICIPATION IN THE
OFFERING DESCRIBED IN THIS PROPOSAL 7.
IF SHAREHOLDERS DO NOT APPROVE THIS PROPOSAL, WE WILL NOT BE ABLE TO
CONSUMMATE THE LOYALTY MAGIC ACQUISITION. THEREFORE, A VOTE AGAINST THIS
PROPOSAL 7 WOULD HAVE THE SAME EFFECT AS A VOTE AGAINST PROPOSAL 6.
VOTING EXCLUSION STATEMENT
In accordance with Australian Stock Exchange Limited Listing Rules 7.3.8
and 14.11, any votes cast in favor of this proposal by any person benefiting
from the acquisition, or any of their associates, will be disregarded. However,
the company need not disregard the vote if it is cast by a person as proxy for a
person who is entitled to vote, in accordance with the directions on the proxy
form, or if it is cast by the person chairing the meeting as proxy for a person
who is entitled to vote, in accordance with a direction on the proxy form to
vote as the proxy decides.
PROPOSAL 8
(TO APPROVE THE ISSUANCE OF SHARES OF CATUITY COMMON STOCK FOR THE PURPOSE OF
AN OFFERING IN THE EVENT THE LOYALTY MAGIC ACQUISITION IS NOT APPROVED)
GENERAL
If the Loyalty Magic acquisition is not approved, we intend to conduct a
registered offering in Australia to raise approximately A$2 million. We are
seeking your approval to issue approximately 444,500 shares of our common stock
in this smaller offering (based on the closing price of our common stock on
NASDAQ on the day prior to the filing of this proxy statement). As discussed in
Proposal 7 above, under the Marketplace Rules and under the rules and
regulations of the ASX we are required to seek your approval of the issuance of
the shares in the offering.
Existing Australian Shareholders of Catuity will receive a priority in our
offering of shares. If there is any remaining stock after the priority issue,
the shares will be offered to new investors. This offering will be made within 3
months of the date of the 2005 Annual Meeting of Shareholders.
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TERMS OF OFFERING
Except for the size of the offering, this offering will be conducted in
the same manner, and will be subject to the same restrictions, as described in
Proposal 7 above (See "Proposal 7 - Terms of Offering").
USE OF PROCEEDS
The net proceeds to us from the offering are expected to be
A$1,900,000. We intend to use all of the proceeds for general corporate
purposes, including capital expenditures and working capital.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF PROPOSAL 8, INCLUDING THE APPROVAL OF THE DIRECTORS' PARTICIPATION IN THE
OFFERING DESCRIBED IN THIS PROPOSAL 8.
EXECUTIVE AND DIRECTOR COMPENSATION PROPOSALS
Proposals 9 through 15 seek shareholder approval for various stock plans
and compensation proposals. This section contains background information
pertinent to your consideration of these proposals.
As of June 3, 2005, there were 778,184 shares of Common Stock issued and
outstanding, and the closing prices of a share of Common Stock on NASDAQ and the
Australian Stock Exchange on that date were US$4.04 and AUD$4.50, respectively.
The following table sets forth information as to the benefits or amounts
that will be received by or allocated to each of the following under the
respective plans being submitted for approval; to the extent such benefits or
amounts are determinable at present:
NEW PLAN BENEFITS
Units or $ of Benefits Under the Plan:
----------------------------------------------------------------------------
Racine Chapman Board Cash Director Director Stock
Name and Position Options Compensation Compensation Option Plan Plan
- ----------------------- ------------- ------------ ------------ ------------- --------------
Alfred H. Racine (CEO) 77,914 shares -0- -0- -0- -0-
John H. Lowry -0- -0- -0- -0- -0-
Michael V. Howe (former
CEO) -0- -0- -0- -0- -0-
Executive Group 77,914 shares -0- -0- -0- -0-
Non-Executive Director -0- $16,500 $89,250 10,500 $89,250
Group shares In restricted
shares
Non-Executive Officer
Employee Group -0- -0- -0- -0- -0-
We cannot determine at present what the benefits to the above named
individuals or groups will be under the proposal to increase the number of
shares authorized under the Employee Stock Option Plan or under the proposal to
adopt an Employee Restricted Stock Plan.
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PROPOSAL 9
(TO APPROVE AN INCREASE IN THE NUMBER OF SHARES AUTHORIZED UNDER THE EMPLOYEE
STOCK OPTION PLAN)
GENERAL
The ninth matter to be considered at the Annual Meeting will be the
approval of an amendment to the Catuity Inc. Stock Option Plan (the "Employee
Plan") to increase the number of shares for which options and other awards may
be granted from 63,333 shares to 300,000 shares.
The Board of Directors initially adopted the employee plan in December
1999 and the stockholders approved it on March 16, 2000. The employee plan was
amended in 2001 to increase the number of authorized option shares to its
current level. The employee plan terminates on the earlier of (i) the tenth
anniversary of its effective date, (ii) the date all of the shares authorized
under the employee plan have been issued, or (ii) the termination of the
employee plan by the Board of Directors. The maximum period during which an
option may be exercised under the employee plan is 10 years from the date of
grant, except in the case of an Incentive Stock Option (ISO) granted to a 10%
stockholder, in which case the maximum period is five years from the date of
grant.
The purposes of the employee plan are to attract and retain employees of
high ability and to motivate them to advance Catuity's and our stockholders'
interests. As of April 15, 2005, there remain only 17,824 shares available under
the plan for future awards to employees. However, 77,914 shares have been
awarded to Alfred H. (John) Racine, III subject to shareholder approval. As a
result, we need to increase the number of authorized shares under the plan in
order to honor the agreement with Mr. Racine and be able to make future option
award grants to eligible employees. With the pending acquisition of Loyalty
Magic, the number of employees eligible under the Plan will increase to
approximately 40. The proposed increase will allow the Company to award option
grants to the larger number of employees that will be eligible under the Plan.
Catuity's total number of shares outstanding will also increase substantially
with the acquisition of Loyalty Magic.
On March 22, 2005, the Board approved an amendment increasing the number
of authorized shares from 63,333 to 300,000 in order to ensure that a sufficient
number of shares would be available for grants to meet the overall goals and
objectives of the employee plan for the next few years. With the exception of
77,914 option shares to be awarded to Alfred H. (John) Racine that are subject
to shareholder approval pursuant to proposal 10 of this proxy statement and
14,500 option shares to be awarded to two new management level employees as an
inducement for them to join the Company, management has no other proposals or
arrangements for the use of the proposed authorized shares. The remaining
proposed authorized shares are intended for future employee awards.
SHARES AUTHORIZED
A maximum of 63,333 (as amended, 300,000) of the aggregate number of
shares of common stock outstanding may be issued under the employee plan to all
participants in the aggregate. The shares issued may be newly issued or
repurchased by us on the open market. If any award granted under the employee
plan is surrendered to us, terminates or expires before having been fully
exercised, or an award of stock appreciation rights is exercised for cash, then
all shares formerly subject to that award shall become available for any award
subsequently granted in accordance with the employee plan. The number of shares
authorized under the employee plan will be adjusted to reflect certain
recapitalizations, reorganizations, mergers or consolidations.
EMPLOYEE PLAN ADMINISTRATION
The employee plan is administered by the Board of Directors or by a
committee consisting of two or more members of the Board and is known as the
administrator. Currently, the Compensation Committee serves as administrator.
The administrator has full power and authority to prescribe, amend and rescind
rules and procedures governing administration of the employee plan and to make
all other determinations necessary or advisable for its administration and
interpretation.
EMPLOYEE PLAN PARTICIPANTS
The administrator may grant awards under the employee plan to Catuity's
and/or any of its subsidiaries' officers, employees, and persons who are
independent contractors, consultants or advisers of Catuity and/or its
subsidiaries at the time of the grant.
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STOCK OPTIONS
The administrator may grant options entitling the participant to purchase
shares of common stock from us in such quantity, at such price, and on such
terms and subject to such vesting periods, termination dates and other
conditions as may be established by the administrator on or prior to the date
such option is granted. Although the employee plan specifies certain "default"
provisions for option grants, the employee plan specifically authorizes the
administrator to vary from these default provisions, as it deems advisable for
individual grants. Notwithstanding the foregoing, the exercise price for all
options must be no less than 85% of the fair market value of the common stock on
the date of grant, except and unless you are a 10% stockholder, in which case
the option price will not be less than 110% of such fair market value.
The options shall contain such other terms and conditions as are deemed
necessary to prevent limitation of our compensation deduction in connection with
the exercise of the option. (See "U.S. Federal Income Tax Consequences Relating
to the Employee Plan," below.)
INCENTIVE STOCK OPTIONS
The administrator shall determine the price at which a share may be
purchased upon exercise of any option, except in the case of an option that has
been designated as an incentive stock option under Section 422 of the Internal
Revenue Code. No person may be granted incentive stock options under the
employee plan in any year entitling such person to purchase a number of shares
greater than the maximum number permitted by Section 422 of the Internal Revenue
Code as in effect on the date of grant. If a recipient is a 10% stockholder, the
term of an incentive stock option shall not exceed five years from the date of
grant, and the purchase price of an incentive stock option shall be greater than
the per share market value of the common stock on the date of grant. If the
recipient is not a 10% stockholder, the term of an incentive stock option shall
not exceed ten years from the date of grant and the purchase price shall be
equal or greater than the per share market value of the common stock on the date
of grant.
VESTING OF OPTIONS
Unless otherwise provided in the option agreement, options granted under
the employee plan will initially be deemed an entirely unvested option and will
vest according to the following schedule:
(a) twenty percent (20%) will become a vested option as of the first
anniversary of the vesting start date specified in the option agreement (which
may be earlier but not later than the grant date);
(b) ten percent (10%) of the option will become a vested option on the
last day of each six-month period thereafter, such that the option will become a
fully vested option as of the fifth anniversary of the vesting start date.
Catuity has generally granted options with shorter vesting periods.
Vesting will continue provided the recipient is not terminated prior to each
vesting date and provided that the recipient is not on a leave of absence from
Catuity Inc. or its subsidiaries.
EXERCISE OF OPTIONS
Unless extended by the administrator or as otherwise provided in the award
agreement, the recipient's right to exercise any award granted under the
employee plan shall terminate at a time determined by the administrator, but
shall not terminate less than: (i) six months after termination for death or
disability; or (ii) 30 days after termination for any other reason, except in
the event of a Termination for Cause, as defined under the employee plan; or
(iii) in the event of Termination for Cause, the option will terminate
immediately upon termination. The administrator has the right to permit the
recipient to exercise any award prior to the time such award would otherwise be
exercisable under the terms of the agreement granting the award. Similarly, the
administrator has the right to permit the recipient to exercise any award
granted under the employee plan (except for an incentive stock option) more than
six months after the recipient's employment terminates or after the award's
expiration date.
The recipient must pay the purchase price of shares purchased upon the
exercise of the award in full and in cash at the time of exercise. However, the
administrator may (but is not obligated to unless this is provided in the award
agreement) permit payment to be made by delivery to us of such other
consideration as is permitted by the
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administrator. Payment may also be made by delivering a copy of irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds sufficient to pay the purchase price and, if required, the
amount of any tax withholding liability for which the recipient is liable.
Unless provided otherwise in an award agreement, if the recipient dies
while an employee, the right to exercise all unexpired installments of his or
her awards shall be transferable by will or the laws of descent and
distribution.
Unless provided otherwise in the award agreement, upon the occurrence of a
change of control event, the recipient shall have the right to exercise in full
any award (excluding awards that have expired, terminated or been exercised),
whether or not exercisable immediately prior to the change of control event. A
change of control event means a business combination in which less than 50% of
the outstanding voting securities of the successor entity immediately following
the closing of the business combination are beneficially held by those persons
and entities in the same proportion as such persons and entities beneficially
held the voting securities of Catuity immediately prior to such transaction. The
term "business combination" means a transaction or series of transactions
consummated within any period of 90 days resulting in (A) the sale of all or
substantially all of Catuity's assets, (B) a merger or consolidation or other
reorganization of which Catuity or a subsidiary is a merging party, or (C) the
sale or other change of beneficial ownership of at least 33 1/3% of Catuity's
outstanding voting securities.
RIGHTS AS A SHAREHOLDER
Until the recipient exercises an award and actually receives shares, the
recipient has no rights as a Catuity shareholder pursuant to any shares of
common stock that underlie the award.
AMENDMENT
The Board may amend, suspend or discontinue the employee plan at any time.
However, the Board may not, without stockholder approval, materially increase
(except when the increase relates to adjustments upon changes in the stock, such
as stock splits) the maximum aggregate number of option shares in the option
pool, materially increase the benefits accruing to eligible participants or
materially modify the category or, eligibility requirements for persons who are
eligible participants. Except where a change of control exits, no action may
alter any option previously granted under the employee plan without the
recipient's consent, nor may the number of option shares in the option pool be
reduced to a number that is less than the aggregate number of option shares that
may be issued pursuant to the exercise of all outstanding and unexpired options
granted under the employee plan and that have been issued and are outstanding
pursuant to the exercise of options granted under the employee plan.
NEW EMPLOYEE PLAN BENEFITS
The grant of awards under the employee plan is subject to the discretion
of the administrator. Accordingly, we cannot currently determine the number of
shares of common stock that may be subject to awards under the employee plan in
the future.
U.S. INCOME TAX CONSEQUENCES RELATING TO THE EMPLOYEE PLAN
The following discussion of certain U.S. income tax considerations with
respect to employee awards is a summary for general purposes only. The employee
plan is not qualified under Section 401(a) of the Internal Revenue Code and is
not subject to the Employee Retirement Income Security Act of 1974.
OPTION AWARDS
Certain of the income tax consequences of the grant of an option award
depend upon whether the option qualifies as an incentive stock option.
Nonqualified Options and Performance Based Options. The grant of a
nonqualified stock option or a performance-based option will have no income tax
consequences for either the recipient or us (unless the option is freely
transferable and has a readily ascertainable market value). Upon the exercise of
a nonqualified stock option or a performance-based option, the recipient will
recognize ordinary income and we will be entitled to a deduction in
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an amount equal to the excess of the fair market value of the common stock
purchased over the exercise price. We are required to withhold tax from the
recipient's income in that transaction. The basis of the common stock received
upon exercise will equal the sum of the exercise price plus the amount included
in income by the participant. If the recipient pays the exercise price of a
nonqualified stock option or a performance based option with shares of common
stock, no additional gain or loss will be recognized by reason of that exchange,
and the basis for an equal number of shares of the common stock received will be
equal to the basis for the shares exchanged therefore. Any additional shares
that the recipient receives will have a basis equal to the amount of ordinary
income includible with respect to such purchase. The subsequent sale or exchange
of the common stock would generally give rise to capital gain or loss.
Incentive Stock Options. The grant of an incentive stock option will have
no income tax consequences for either the recipient or us. Subject to the
discussion below, there will be no regular income tax liability upon incentive
stock option exercise; however, upon the exercise of an incentive stock option,
the excess of the fair market value of the shares purchased over the exercise
price will be an item of tax preference of the recipient's for purposes of the
application of the alternative minimum tax. If payment of the purchase price of
an incentive stock option consists of shares of common stock, the recipient's
basis for an equal number of shares of the common stock received will be equal
to your basis for the shares exchanged therefore. Any additional shares the
recipient receives will have a basis of zero.
If the common stock acquired pursuant to an incentive stock option is
sold, exchanged (except in certain tax-free exchanges) or otherwise disposed of
(even if pursuant to the exercise of another incentive stock option) within
either one year of the exercise of such incentive stock option or two years of
the granting of such incentive stock option, the recipient will recognize
ordinary income at that time and we will be entitled to a deduction at that time
in an amount equal to the excess of the fair market value of such common stock
at the time of exercise over the purchase price. The recipient will also
recognize capital gain or loss to the extent the amount realized from a sale or
exchange differs from the fair market value of such common stock at the time of
exercise.
If the recipient sells or exchanges common stock acquired pursuant to an
incentive stock option after one year after the exercise of such incentive stock
option and two years after the granting of such incentive stock option, the
recipient will recognize long-term capital gain or loss measured by the
difference between the amount realized on such sale or exchange and the purchase
price, and we will not be entitled to any deduction.
LIMITATION ON COMPENSATION DEDUCTIONS
In general, we will be entitled to a compensation deduction equal to the
income the recipient recognized with respect to a nonqualified option,
performance based option, stock appreciation right or restricted share right at
the time of recognition. But, the Internal Revenue Code will limit the deduction
that a publicly held corporation, such as us, may take for compensation paid to
"covered employees" to $1 million. Generally, the Chief Executive Officer of a
company and its four highest compensated officers (excluding the Chief Executive
Officer) will be considered to be covered employees. However, this rule limiting
the deduction does not apply to performance-based compensation. In general,
compensation resulting from the exercise of a stock option is treated as
performance-based compensation provided that the option price was equal to or in
excess of the fair market value of stock underlying the option at the time of
the grant of the option and provided that certain other requirements are met. We
grant performance-based options with the intention to meet these rules so that
the compensation resulting from the exercise of performance-based options will
be treated as performance-based compensation. In addition, income resulting from
the exercise of nonqualified options and stock appreciation rights, where the
exercise price is equal to or in excess of the fair market value of the stock
underlying the award at the time of the grant, may also be treated as
performance-based compensation. Income resulting from restricted share rights
will probably not be treated as performance-based compensation and so the
deduction limitation described above may become applicable.
WITHHOLDING OF TAX
We are entitled to withhold, or secure payment from the recipient in lieu
of withholding, the amount of any tax required by law to be withheld or paid by
us with respect to any amount payable or shares issuable under the option. At
the recipient's election, with respect to the exercise of a nonqualified option,
performance based option or a stock appreciation right where shares of common
stock are to be delivered to the recipient; we may also withhold
69
shares of the common stock sufficient to meet those requirements. Unless
otherwise provided by the administrator, with respect to officers, we will
withhold shares sufficient to meet withholding requirements.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE EMPLOYEE STOCK OPTION PLAN.
PROPOSAL 10
(TO APPROVE THE GRANT OF OPTIONS TO ALFRED H. (JOHN) RACINE III)
GENERAL
The tenth matter to be considered at the annual meeting will be approval
for the grant of options to acquire 77,914 shares of common stock to our
President and Chief Executive Officer, Alfred H. (John) Racine III pursuant to
Australian Stock Exchange Ltd. Listing Rule 10.11. Mr. Racine is also a member
of the Board of Directors. These options will-be issued to Mr. Racine within 1
month of the date of the 2005 Annual Meeting of Shareholders.
We entered into a one-year employment agreement with Mr. Racine dated
September 23, 2004. The agreement may be renewed from year to year. Under the
agreement, Mr. Racine is entitled to receive a base salary of $250,000 USD,
which is subject to review from time to time for possible increase by the Board
in conjunction with performance. Mr. Racine is entitled to participate in all
bonus or incentive plans and stock purchase plans in such manner as such plans
apply to officers and senior executives of the Company generally, as well as
general employee fringe benefit programs. Mr. Racine does not have a specific or
special bonus arrangement.
Under the employment agreement, as an inducement to Mr. Racine to join us
and to compensate him for the cash fee he would have received had he remained a
consultant to the Company, we awarded to him an option to purchase 77,914
shares, which was a number of shares equal to ten percent (10%) of the total of
the issued and outstanding shares of our common stock on the date of his
agreement, at a exercise price equal to the average of the closing bid and asked
prices as reported on the NASDAQ Small Cap market of the stock on each of the
ten (10) trading days following the Effective Date of the agreement (the
"Options"). The Options were confirmed in an Option Agreement, a copy of which
is attached as Appendix B to the Proxy Statement. This grant was and is
expressly conditioned on obtaining stockholder approval of the grant, which the
Company agreed to seek as soon as reasonably practicable but not later than the
next occurring regular annual meeting of stockholders (i.e., this meeting). Mr.
Racine did not receive any anti-dilution protection on the Options. The Options
have a term of five (5) years from the date of the agreement (September 23,
2009), and are exercisable in the following manner. Twenty Five percent (25%) of
the Options vested six (6) months after the Effective Date of the agreement (on
March 23, 2005). Fifteen percent (15%) of the Options shall vest one (1) year
after the Effective Date of the agreement (on September 23, 2005). The balance
of the Options shall vest based upon the following formula for increases in
stock price. Twenty percent (20%) of the remaining stock Options shall vest when
the stock price increases ten percent (10%) above the exercise price and remains
10% above the exercise price for ten out of twenty trading days. Twenty percent
(20%) of the remaining stock Options shall vest when the stock price increases
twenty percent (20%) above the exercise price and remains 20% above the exercise
price for ten out of twenty trading days. The final twenty percent (20%) of the
stock Options shall vest when the stock price rises thirty percent (30%) above
the exercise price and remains 30% above the exercise price for ten out of
twenty trading days.
The Options shall continue to vest and be exercisable after Mr. Racine's
termination of employment for any reason, except for a "Termination for Cause"
as defined in the Option Agreement. The number of shares and the exercise price
subject to such Options shall be adjusted in the event of stock dividends, stock
splits, or other changes in the capitalization of the Company. Termination of
Mr. Racine's employment merely because of expiration of this Employment
Agreement or any other reason other than a "Termination for Cause" shall not
cause a forfeiture of such options.
Either we or Mr. Racine may terminate the agreement at any time on thirty
days notice, with or without cause. The Options continue after termination for
any reason other than a Termination for Cause (in which case the Options lapse).
70
Mr. Racine's base salary is less than the salary of our former President
and CEO, in large part because of the inclusion of the option award upon hiring.
The Board believes the use of the option award aligns Mr. Racine's interests
with those of our shareholders and reduces the amount of cash based compensation
the Company would otherwise have to pay. If the proposal to approve the option
award to Mr. Racine is not approved, the Company will be required to
re-negotiate Mr. Racine's compensation package and, in all likelihood, be
required to pay more in cash based compensation. It should be noted that if
Proposal 8 is not approved, this Proposal will automatically fail.
As this Proposal has been approved under Australian Stock Exchange Limited
Listing Rule 10.11, it is not required to be approved under Australian Stock
Exchange Limited Listing Rule 7.1.
VOTING EXCLUSION STATEMENT
In accordance with ASX Listing Rules 10.15.5 and 14.11, we will disregard
any votes cast on Proposal 10 by Mr. Racine or an affiliate of Mr. Racine.
However, we need not disregard the vote if it is cast by a person as proxy for a
person who is entitled to vote, in accordance with the directions on the proxy
form; or if it is cast by such person chairing the meeting as proxy for a person
who is entitled to vote, in accordance with a direction on the proxy form to
vote as the proxy decides.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE OPTIONS
GRANTED TO MR. RACINE.
PROPOSAL 11
(TO APPROVE THE 2005 EMPLOYEE RESTRICTED STOCK PLAN)
GENERAL
The Board of Directors approved the establishment of the Catuity Inc. 2005
Employee Restricted Stock Plan (the "Employee Stock Plan") on March 22, 2005,
subject to approval by the Company's shareholders. The Employee Stock Plan, if
approved by the Company's shareholders, will become effective on the date of
such approval.
The following summary of the Employee Stock Plan is qualified in its
entirety by reference to the full text of the Employee Stock Plan, which is
attached to this Proxy Statement as Appendix C. Any defined term used in this
section of the Proxy Statement has the meaning given to it in the Employee Stock
Plan.
PURPOSE
The Employee Stock Plan has two complementary purposes: (1) to promote the
success of the Company by providing incentives to the officers and other key
employees of the Company and its subsidiaries that will link their personal
interests to the Company's long-term financial success; and (2) to permit the
Company and its subsidiaries to attract, motivate and retain experienced and
knowledgeable employees upon whose judgment, interest and special efforts the
Company's success is largely dependent.
ADMINISTRATION
The Employee Stock Plan will be administered by the Compensation Committee
(the "Committee") of the Board of Directors. The Committee has full power and
discretionary authority to implement the Employee Stock Plan including, without
limitation, the authority to select Participants, grant Awards and determine the
terms and conditions of each such Award. The Committee has broad authority to
modify, adjust or waive any of the restrictions and/or limitations of the
Employee Stock Plan. The Committee's determinations and decisions made pursuant
to the provisions of the Employee Stock Plan are final, conclusive and binding.
71
ELIGIBILITY
The Committee may grant Restricted Share Awards to any full-time, exempt
employee of the Company or its subsidiaries or to such other key employees as
the Committee may determine. As of April 15, 2005, the Company and its
subsidiaries had approximately 11 Eligible Employees eligible to receive Awards
under the Employee Stock Plan. The number of Eligible Employees is expected to
increase over time based upon the Company's future growth.
STOCK SUBJECT TO THE PLAN; LIMITATIONS ON AWARDS
The number of shares of Common Stock available for Restricted Share Awards
under the Employee Stock Plan will be 267,000, subject to adjustment as set
forth below. Shares of Common Stock to be granted under the Employee Stock Plan
will come from the Company's authorized but unissued shares. If a Restricted
Share Award is forfeited or terminated for any reason, the Restricted Shares
subject to such Award will be available for regranting under the Employee Stock
Plan.
RESTRICTED SHARE AWARDS
The Committee has authority to determine the number of Restricted Shares
subject to an Award as well as the terms and conditions applicable to such
Award, including the term of the Restriction Period, which is the time period
during which such shares are restricted, and any conditions relating to the
lapse of the Restriction Period, including the attainment of one or more
Performance or Serviced Goals, if any, set by the Committee. With the exception
of 8,000 performance based restricted shares to be awarded to two new management
level employees as an inducement for them to join the Company, management has no
other proposals or arrangements for use of the proposed authorized shares. The
remaining proposed authorized shares are intended for future employee awards.
TERMINATION OF EMPLOYMENT
If a Participant is terminated or voluntarily terminates his or her
employment with the Company (other than by reason of death, Total and Permanent
Disability or Retirement) prior to the expiration of the applicable Restriction
Period, then he or she forfeits all of his or her Restricted Shares. In the
event of a Change in Control, all Restricted Shares automatically vest in full.
TRANSFER RESTRICTIONS
A Participant may not sell, transfer, assign or otherwise transfer his or
her Restricted Shares during the Restriction Period. During the applicable
Restriction Period, the Company (or its transfer agent) will hold all stock
certificates representing Restricted Shares.
PARTICIPANT RIGHTS
During the Restriction Period, the Participant has the right to vote his
or her Restricted Shares until vested or forfeited. During the Restriction
Period, any dividends or other distributions with respect to Restricted Shares
will be held by the Company (or its transfer agent) pending vesting or
forfeiture.
ADJUSTMENTS
In the event of a merger, reorganization, consolidation, recapitalization,
stock dividend, stock split or other comparable change in the Company's
corporate structure affecting the Common Stock, the Committee may adjust the
number and class of stock to be issued under the Employee Stock Plan, the
individual Participant Award limit and the number and class of shares subject to
outstanding Restricted Share Awards to prevent dilution or enlargement of the
rights intended to be granted under the Employee Stock Plan.
AMENDMENT AND TERMINATION
The Board may amend or terminate the Employee Stock Plan at any time,
subject to applicable law and the vested rights of Participants. The Employee
Stock Plan will terminate on April 30, 2015, unless earlier terminated by the
Board of Directors or when all shares of Common Stock available have been
issued.
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VOTING EXCLUSION STATEMENT
In accordance with Australian Stock Exchange Limited Listing Rule 14.11, any
votes cast in favor of this proposal by any employee who may benefit under the
Employee Stock Plan, and any associate of those persons, will be disregarded.
However, Catuity need not disregard the vote if it is cast by a person as proxy
for a person who is entitled to vote, in accordance with the directions on the
proxy form, or if it is cast by the person chairing the meeting as proxy for a
person who is entitled to vote, in accordance with a direction on the proxy form
to vote as the proxy decides.
TAX WITHHOLDING
The Company is entitled to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy all taxes required by law
to be withheld with respect to the issue of Restricted Shares under the Employee
Stock Plan or the lapse of the Restriction Period. The Company also has the
right to withhold Common Stock as to which the Restriction Period has lapsed and
which have a fair market value equal to a Participant's minimum tax withholding
liability.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
Generally, a Participant will not recognize income, and the Company will
not be entitled to a deduction, at the time a Restricted Share Award is made
under the Employee Stock Plan, unless the Participant makes the election
described below. A Participant who has not made such an election will recognize
ordinary income at the time the Restriction Period ends in an amount equal to
the fair market value of the Restricted Shares at that time. The Company will
generally be entitled to a corresponding deduction in the same amount and at the
same time as the Participant recognizes income. Under certain circumstances
involving a Change in Control, the Company may not be entitled to a deduction
with respect to Restricted Shares granted to certain executive officers. Any
otherwise taxable disposition of the Common Stock after the Restriction Period
ends will result in a capital gain or loss to the extent the amount realized
from the sale differs from the tax basis, i.e., the fair market value of the
Common Stock on the date the Restriction Period ends. Dividends, if any, paid in
cash and received by a Participant prior to the time the Restriction Period ends
will constitute ordinary income to the Participant in the year paid, and the
Company will generally be entitled to a corresponding deduction for such
payments. (The Employee Stock Plan currently contemplates that no dividends will
be paid on Restricted Shares until the Restriction Period ends, although the
Committee has authority to accelerate the payment of such dividends.) Any
dividends paid in Common Stock will be treated as an Award of additional
Restricted Shares subject to the tax treatment described herein. A Participant
may, within 30 days after the date of a Restricted Share Award, elect under
Section 83(b) of the Internal Revenue Code to recognize ordinary income as of
the date of the Award in an amount equal to the fair market value of such
Restricted Shares on the date of the Award (less the amount, if any, the
Participant paid for such Restricted Shares). If the Participant makes a proper
election, then the Company will generally be entitled to a corresponding
deduction in the same amount and at the same time as the Participant recognizes
income. If the Participant makes the election, then cash dividends, if any, that
the Participant receives with respect to the Restricted Shares will be treated
as dividend income to the Participant in the year of payment and will not be
deductible by the Company. Any otherwise taxable disposition of the Restricted
Shares (other than by forfeiture) or the Common Stock received upon the
termination of the Restriction Period will result in a capital gain or loss. If
the Participant who has made an election subsequently forfeits the Restricted
Shares, then the Participant will not be entitled to deduct any loss. In
addition, the Company would then be required to include in its ordinary income
the amount of any deduction the Company originally claimed with respect to such
shares.
NEW PLAN BENEFITS
The Company cannot currently determine the Awards that may be granted
under the Employee Stock Plan in the future to the executive officers named in
this Proxy Statement, other executive officers, directors (who are also Eligible
Employees) or other persons. The Committee will make such determinations from
time to time.
VOTE REQUIRED
The affirmative vote of a majority of the votes represented and voted at
the Meeting (assuming a quorum is present) is required to approve the Employee
Stock Plan. Any shares not voted at the Meeting (whether as a result of broker
non-votes, abstentions or otherwise) with respect to the Employee Stock Plan
will have no impact on the vote. Shares of Common Stock represented at the
Meeting by executed but unmarked proxies will be voted FOR the Employee Stock
Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE 2005
EMPLOYEE RESTRICTED STOCK PLAN.
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PROPOSAL 12
(TO APPROVE A PAYMENT OF $16,500 TO CLIFFORD W. CHAPMAN JR. FOR
SERVICE ON OUR BOARD OF DIRECTORS FROM OCTOBER 21, 2004 TO JUNE 30, 2005)
GENERAL
The twelfth matter to be considered at the annual meeting will be the
approval of a proposal to pay compensation to Clifford W. Chapman Jr., a
nonemployee director.
Mr. Chapman joined our Board on September 23, 2004. Since then, he has
fulfilled all his duties as a director, and is standing for re-election at this
meeting. However, at the time Mr. Chapman joined our Board, our annual allotment
of compensation set aside for our directors had been exhausted. As a result, Mr.
Chapman has been serving without compensation. The Board proposes to compensate
Mr. Chapman in the amount of $16,500 for his service during this period, which
is the same amount of compensation we pay our other nonemployee directors.
VOTING EXCLUSION STATEMENT
We will disregard any votes cast on Proposal 12 by Mr. Chapman or an
affiliate of Mr. Chapman. However, we need not disregard the vote if it is cast
by a person as proxy for a person who is entitled to vote, in accordance with
the directions on the proxy form; or if it is cast by such person chairing the
meeting as proxy for a person who is entitled to vote, in accordance with a
direction on the proxy form to vote as the proxy decides.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PAYMENT
TO MR. CHAPMAN'S FOR HIS SERVICE ON THE BOARD OF DIRECTORS.
PROPOSAL 13
(TO APPROVE AN INCREASE IN THE TOTAL ANNUAL COMPENSATION THAT MAY BE PAID TO
THE BOARD OF DIRECTORS)
GENERAL
The thirteenth matter to be considered at the Annual Meeting will be the
approval of an increase in the maximum amount payable to non-executive directors
in accordance with Australian Stock Exchange Limited Listing Rule 10.17. Under
this rule, shareholder approval is required in order to increase the total
annual compensation that may be paid to the Board of Directors from its current
level of $104,000 to $178,500. As part of the compensation, we seek approval
pursuant to Australian Stock Exchange Limited Listing Rule 10.14 for the issue
of Stock to Directors under the Director Restricted Stock Plan.
Under this Proposal, and subject to approval of Proposal 15, until such
time as the Company has been profitable and cash flow positive for two
consecutive quarters, all directors who hold less than 5% of the Company's
outstanding number of shares must take 50% of their otherwise cash based
compensation in the form of Restricted Stock, to be issued pursuant to the 2005
Non-employee Director Restricted Stock Plan ("Director Stock Plan"). The
Director Stock Plan is subject to approval by shareholders and is included in
this proxy statement as Proposal 15. Due to unfavorable tax consequences, any
director who holds more than 5% of the Company's outstanding shares may choose
to have 50% of his/her otherwise cash based compensation deferred and not paid
until the Company has been profitable and cash flow positive for two consecutive
quarters, rather than receive restricted stock. Any director may elect to take
up to 100% of his/her compensation in the form of restricted stock. While the
proposed plan represents an increase in total compensation for our directors, it
should be noted that this plan requires director's to take at least 50% of their
compensation in restricted stock until such time as the company demonstrates
consistent profitability. We believe this very closely aligns the director's
compensation with the company's primary business objective to become profitable
and generate positive cash flow.
Currently, the maximum amount that may be paid to all non-executive
directors annually is $104,000. Of that total, we pay each director a $10,000
annual retainer fee, paid in quarterly payments of $2,500 following each
calendar quarter. The Chairman of the Board also receives a $10,000 per year
Chairman fee. In addition, each director receives $12,000 in fees for attendance
at Board meetings so long as the Director attends at least 75% of the
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meetings held during the year. Fees of $7,500 per year are paid to the
Chairperson of the Audit Committee and $5,000 per year to Board members serving
as audit committee members. The Chairperson of the Compensation Committee
receives $5,000 per year and members receive $2,000 per year. Under the Director
Stock Option Plan, upon the date a person first becomes a member of the Board,
the director automatically receives a stock option to acquire 667 Catuity
shares. In addition, on the last business day of September of every year, the
Chairman receives 417 options and each director then in office will receive a
stock option to acquire 333 Catuity shares. The exercise price per share of any
option is the fair market value on the date of grant. The Company believes that
its Director Stock Option Plan, as approved by shareholders, is beneficial
because it helps to align the independent director's interests with those of its
shareholders.
In recent years, the demands of our business have required our
non-executive directors to spend time substantially above that normally expected
of directors, to provide requisite service. In addition, changes in SEC
regulations, corporate governance regulations and best practices have increased
the amount of time Directors must spend on Company matters. Further, our recent
addition of Mr. Chapman to the Board left us with insufficient available annual
fees to pay him any cash compensation, let alone fair compensation for his
labors. In order to promote involvement, and adequately compensate non-executive
directors for the time spent in Company business matters, we propose increasing
the total amount of compensation that may be paid to our directors from its
current level of $104,000 plus options, to $178,500 in cash or restricted stock
plus options, as described below:
Under this Proposal, each director will receive an annual retainer of
$25,000, paid in quarterly payments of $6,250 following each calendar quarter,
so long as the director attends at least 75% of the board meetings held during
the year. If a director attends less than 75% of all board meetings held in the
year, he/she will receive the same percentage of $25,000 as the percentage of
meetings attended. The Chairman will receive an additional $20,000 for serving
as Chairman. The Chairperson of the Audit Committee will receive $12,500 and
committee members will receive $7,500 per year for serving as audit committee
members. The Chairperson of the Compensation Committee will receive $7,500 and
committee members will receive $4,000 per year for serving as compensation
committee members. A new Committee will be established to oversee all corporate
governance matters and the nomination process for future directors. The
Chairperson of the Governance and Nominating Committee will receive $7,500 and
committee members will receive $4,000 per year for serving as governance and
nominating committee members.
If Proposal 14 is approved, under the Director Stock Option Plan, upon the
date a person first becomes a member of the Board, the director will
automatically receive stock options to acquire 2,500 Catuity shares. In
addition, on the last business day of September of every year, the Chairman will
receive options to acquire 3,000 Catuity shares of common stock and each
director then in office will receive options to acquire 2,500 Catuity shares.
The exercise price per share of any option will be the fair market value on the
date of grant.
VOTING EXCLUSION STATEMENT
In accordance with Australian Stock Exchange Limited Listing Rules 10.14,
10.17 and 14.11, any votes cast in favor of this proposal by any directors of
Catuity who may participate under the plan and any associate of those persons,
will be disregarded. However, the company need not disregard the vote if it is
cast by a person as proxy for a person who is entitled to vote, in accordance
the directions on the proxy form, or if it is cast by the person chairing the
meeting as proxy for a person who is entitled to vote, in accordance with a
direction on the proxy form to vote as the proxy decides.
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RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE INCREASE
IN DIRECTORS' COMPENSATION.
PROPOSAL 14
(TO APPROVE AN INCREASE IN THE NUMBER OF STOCK OPTIONS AUTHORIZED UNDER THE
DIRECTOR STOCK OPTION PLAN)
GENERAL
The fourteenth matter to be considered at the Annual Meeting will be the
approval pursuant to Australian Stock Exchange Limited Listing Rule 10.14 of an
amendment to the Catuity Inc. Director Option Plan (the "Director Option Plan")
to increase the number of shares for which options and other awards may be
granted from 8,667 shares to 58,667 shares.
The Board of Directors initially adopted the nonemployee director plan in
October 2000 and the stockholders approved it in May 2001. The purpose of the
Director Option Plan is to attract and retain the services of experienced and
knowledgeable non-employee directors and to provide an additional incentive for
the non-employee directors to continue to work for the best interests of Catuity
and our shareholders. Initially the Director Option Plan had 130,000 authorized
shares. That number was reduced to 8,667 in November 2004 when shareholders
approved a reverse stock split and the Directors enacted a 1 for 15 shares
reverse split. The reverse split reduced the number of shares in the Director
Option Plan to a level that is insufficient to make future grants. Employee
directors are not eligible for option awards under the Director Option Plan.
As of March 22, 2005, there were 6,834 options outstanding under the
Director Option Plan. On that date, the Board approved an amendment increasing
the number of authorized shares from 8,667 to 58,667 in order to ensure that a
sufficient number of shares would be available for grants to meet the overall
goals and objectives of the Director Option Plan for the next few years.
Since the last approval given by stockholders to the issue of options under the
Director Option Plan, the following Stock Options have been issued:
DATE STOCK NUMBER OF STOCK EXERCISE PRICE FOR
PERSON OPTIONS RECEIVED OPTIONS RECEIVED EACH STOCK OPTION
Duncan Mount September 30, 2004 417 $5.70 AUD
Sandy Dawson September 30, 2004 333 $5.70 AUD
Alan Gilman September 30, 2004 333 $4.35 USD
Clifford Chapman September 23, 2004 667 $4.05 USD
SHARES AUTHORIZED
The Director Option Plan currently permits us to grant non-qualified stock
options to acquire an aggregate of up to 8,667 shares of common stock. The
shares may be newly issued or repurchased on the open market. If any option
granted under the Director Option Plan is surrendered, terminates or expires
before having been fully exercised, then all shares formerly subject to that
option shall become available for any option subsequently granted in accordance
with the Director Option Plan. The number of shares authorized is subject to
adjustment to reflect certain recapitalizations, reorganizations, mergers or
consolidations.
ELIGIBLE DIRECTORS
Only the non-employee members of the Catuity Board of Directors are
eligible for options. The non-employee members of the Catuity Board are Duncan
P. F. Mount, Alexander S. Dawson, Alan L. Gilman and Clifford Chapman.
Directors who are employees of Catuity are not eligible for options under the
Director Option Plan.
STOCK OPTIONS
Under the existing Director Option Plan, upon the date a person first
becomes a member of the Board, the director automatically receives a
non-qualified stock option to acquire 667 shares. In addition, on the last
business day of September of every year, the Chairman will receive 417 options
and each director then in office will receive a non-qualified stock option to
acquire 333 shares. The exercise price per share of any option is the fair
market value on the date of grant.
Approval is required pursuant to Australian Stock Exchange Limited Listing
Rule 10.14 for the issue of the following stock options in the next 12 months.
Under the amended Director Option Plan, upon the date a person first becomes a
member of the Board, the director will automatically receive a non-qualified
stock option to acquire 2,500 shares. In addition, on the last business day of
September of every year, the Chairman will receive 3,000 options and each
director then in office
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will receive a non-qualified stock option to acquire 2,500 shares. The exercise
price per share of any option will be the fair market value on the date of
grant. The Company has no other plans, proposals, or arrangements for use of the
proposed authorized shares.
EXERCISE OF OPTIONS
Options vest and are exercisable immediately on grant.
A director's right to exercise any option granted under the Director
Option Plan terminates at whichever of the following times first occurs: (i)
eight years from the date of grant; (ii) three months after he or she ceases to
be a director, except if the director retires from the Board when he or she
reaches 60 years of age or dies; and (iii) if a director dies, one year from the
date of death. If a director dies within the 90 day period following the date he
or she ceases to be a director, then the beneficiary may, until one year after
the director's death, exercise the option to the extent it would have been
exercisable if the director had exercised the option immediately prior to his or
her death.
A director must pay the purchase price of shares purchased upon the
exercise of an option in full and in cash at the time of exercise. However, the
Board may (but is not obligated to unless this is provided in the particular
option agreement) permit the director to make payment by delivery to us of such
other consideration as is permitted by the Board. Payment may also be made by
delivering a copy of irrevocable instructions to a broker to deliver promptly an
amount sufficient to pay the purchase price and, if required, the amount of any
tax withholding liability for which the director is liable.
RIGHTS AS A SHAREHOLDER
Until a director exercises his or her award and actually receives the
shares, he or she has no rights as a Catuity shareholder pursuant to any shares
of common stock that underlie the option.
AMENDMENT
We may amend the Director Option Plan at any time. However, an amendment
cannot modify the terms of an existing option unless the recipient agrees to the
change.
U.S. INCOME TAX CONSEQUENCES RELATING TO THE DIRECTOR OPTION PLAN
The following discussion of certain U.S. income tax considerations is a
summary for general purposes only. Because Catuity is a U.S. Corporation, based
in the U.S., we have restricted our tax discussion to United States tax law
considerations. The Director Option Plan is not qualified under Section 401(a)
of the Internal Revenue Code and is not subject to the Employee Retirement
Income Security Act of 1974.
GRANT OF OPTIONS
Ordinarily, the grant of an option will have no income tax consequences
for either the director or us. When a director exercises an option, he or she
will recognize ordinary income and we will be entitled to a deduction in an
amount equal to the excess of the fair market value of the common stock
purchased over the purchase price. We are required to withhold tax from the
director's income in that transaction. The director's tax "basis" of the common
stock received upon exercise will equal the sum of the exercise price plus the
amount included in the director's income. If the director pays the purchase
price with shares of common stock, he or she will not recognize additional gain
or loss by reason of that exchange, and the tax basis for an equal number of
shares of the common stock received will be equal to the tax basis for the
shares exchanged. Any additional shares received will have a basis equal to the
amount of ordinary income includible with respect to such purchase. The
subsequent sale or exchange of the common stock would generally give rise to
capital gain or loss.
WITHHOLDING OF TAX
Generally, we will be obligated to withhold, or secure payment in lieu of
withholding, taxes the director may owe resulting from the exercise of an
option. That amount will depend on many factors existing at the time the
director exercises an option, particularly IRS regulations then in effect. If
the director is paying the exercise price with shares of common stock, he or she
may elect to have us withhold shares of the common stock sufficient to meet
77
those requirements. Unless otherwise provided by the administrator, with respect
to directors, we will withhold shares sufficient to meet withholding
requirements.
VOTING EXCLUSION STATEMENT
In accordance with ASX Listing Rules 10.14 and 14.11, we will disregard
any votes cast on Proposal 14 by a director who may participate in the Plan or
an affiliate of any director. However, we need not disregard the vote if it is
cast by a person as proxy for a person who is entitled to vote, in accordance
with the directions on the proxy form; or if it is cast by such person chairing
the meeting as proxy for a person who is entitled to vote, in accordance with a
direction on the proxy form to vote as the proxy decides.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE DIRECTOR STOCK OPTION PLAN.
PROPOSAL 15
(TO APPROVE THE 2005 NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN)
The Board of Directors approved the Catuity Inc. 2005 Non-employee
Director Restricted Stock Plan (the "Director Stock Plan") on March 22, 2005,
subject to approval by the Company's shareholders. The Director Stock Plan, if
approved by the Company's shareholders, will become effective on the date of
such approval.
The following summary of the Director Stock Plan is qualified in its
entirety by reference to the full text of the Director Stock Plan, which is
attached to this Proxy Statement as Appendix D. Any defined term used in this
section of the Proxy Statement has the meaning given it in the Director Stock
Plan.
PURPOSE
The Director Stock Plan has three complementary purposes: (1) to promote
the success of the Company by providing incentives to the non-employee directors
of the Company and its subsidiaries that will link their personal interests to
the Company's long-term financial success; (2) to permit the Company and its
subsidiaries to attract, motivate and retain experienced and knowledgeable
non-employee directors upon whose judgment, interest and special efforts the
Company's success is largely dependent; and (3) to conserve cash until such time
as the Company has established that it is profitable and has positive cash flow.
ADMINISTRATION
The Director Stock Plan will be administered by the Compensation Committee
(the "Committee") of the Board of Directors. The Committee has full power and
discretionary authority to implement the Director Stock Plan including, without
limitation, the broad authority to interpret and implement the Director Stock
Plan. The Committee's determinations and decisions made pursuant to the
provisions of the Director Stock Plan are final, conclusive and binding.
ELIGIBILITY
Only those persons who are "non-employee directors" as defined in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended are
eligible to participate in the Director Stock Plan. As of April 15, 2005, the
Company and its subsidiaries had 4 Eligible Non-employee Directors eligible to
receive Awards under the Director Stock Plan. The number of Eligible
Non-employee Directors may change from time to time.
STOCK SUBJECT TO THE PLAN; LIMITATIONS ON AWARDS
The number of shares of Common Stock available for Restricted Share Awards
under the Director Stock Plan will be 50,000, subject to adjustment as set forth
below. Shares of Common Stock to be granted under the Director Stock Plan will
come from the Company's authorized but un-issued shares or from treasury shares.
If a
78
Restricted Share Award is forfeited or terminated for any reason, the Restricted
Shares subject to such Award will be available for re-granting under the
Director Stock Plan.
RESTRICTED SHARE AWARDS
Awards of restricted stock will be made on a quarterly basis beginning on
the last day of the third quarter of 2005 and will continue until such time as
the Company has achieved profitability and positive cash flow for two
consecutive quarters or until the number of shares authorized under the Director
Stock Plan have all been awarded. The number of shares to be awarded to each
non-employee director will be based on 50% of the director's otherwise cash
based compensation for the quarter and the fair market value of Catuity's common
stock on NASDAQ (U.S. directors) or ASX (Australian directors) on the last
trading day of each calendar quarter. The fair market value of each share is
defined as the closing price on the last trading day of the quarter. Any
director may elect to receive restricted shares for up to 100% of his/her
otherwise cash based compensation. The Company has no other plans, proposals, or
arrangements for use of the proposed authorized shares.
TRANSFER RESTRICTIONS
A Participant may not sell, transfer, assign or otherwise transfer his or
her Restricted Shares during the Restriction Period. During the applicable
Restriction Period, the Company (or its transfer agent) will hold all stock
certificates representing Restricted Shares.
If a Participant leaves the Board by reason of death or Total and
Permanent Disability prior to the expiration of the applicable Restriction
Period, then vesting is immediate and full. If a Participant Retires, vesting
continues according to schedule - although the Award is subject to forfeiture
for Inimical Conduct. If a Participant is removed from the Board or is not
nominated to stand for re-election due to Cause, then he or she forfeits all of
his or her Restricted Shares. In the event of a Change in Control, all
Restricted Shares automatically vest in full.
PARTICIPANT RIGHTS
During the Restriction Period, the Participant has the right to vote his
or her Restricted Shares until vested or forfeited. During the Restriction
Period, any dividends or other distributions with respect to Restricted Shares
will be held by the Company (or its transfer agent) pending vesting or
forfeiture.
ADJUSTMENTS
In the event of a merger, reorganization, consolidation, recapitalization,
stock dividend, stock split or other comparable change in the Company's
corporate structure affecting the Common Stock, the Committee may adjust the
number and class of stock to be issued under the Director Stock Plan, the
individual Participant Award limit and the number and class of shares subject to
outstanding Restricted Share Awards to prevent dilution or enlargement of the
rights intended to be granted under the Director Stock Plan.
AMENDMENT AND TERMINATION
The Board may amend or terminate the Director Stock Plan at any time,
subject to applicable law and the vested rights of Participants. The Director
Stock Plan will terminate on May 31, 2015, unless earlier terminated by the
Board of Directors or when all shares of Common Stock available have been
issued.
TAX WITHHOLDING
The Company is entitled to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy all taxes required by law
to be withheld with respect to the issue of Restricted Shares under the Director
Stock Plan or the lapse of the Restriction Period. The Company also has the
right to withhold Common Stock as to which the Restriction Period has lapsed and
which have a fair market value equal to a Participant's minimum tax withholding
liability.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
Generally, a Participant will not recognize income, and the Company will
not be entitled to a deduction, at the time a Restricted Share Award is made
under the Director Stock Plan, unless the Participant makes the election
described below. A Participant who has not made such an election will recognize
ordinary income at the time the Restriction Period ends in an amount equal to
the fair market value of the Restricted Shares at that time. The Company will
generally be entitled to a corresponding deduction in the same amount and at the
same time as the Participant recognizes income. Any otherwise taxable
disposition of the Common Stock after the Restriction Period ends will result in
a capital gain or loss to the extent the amount realized from the sale differs
from the tax basis, i.e., the fair market value of the Common Stock on the date
the Restriction Period ends. Dividends, if any, paid in cash and received by a
Participant prior to the time the Restriction Period ends will constitute
ordinary income to the Participant in the year paid, and the Company will
generally be entitled to a corresponding deduction for such payments. (The
Director Stock Plan currently contemplates that no dividends will be paid on
Restricted Shares until the Restriction Period ends, although the Committee has
authority to accelerate the payment of such dividends.) Any dividends paid in
Common Stock will be treated as an Award of additional Restricted Shares subject
to the tax treatment described herein. A Participant may, within 30 days after
the date of a Restricted Share Award, elect under Section 83(b) of the Internal
Revenue Code to recognize ordinary income as of the date of the Award in an
amount equal to the fair market value of such Restricted Shares on the date of
the Award (less the amount, if any, the Participant paid for such Restricted
Shares). If the Participant makes a proper election, then the Company will
generally be entitled to a corresponding deduction in the same amount and at the
same time as the Participant recognizes income. If the Participant makes the
election, then cash dividends, if any, that the Participant receives with
respect to the Restricted Shares will be treated as dividend income to the
Participant in the year of payment and will not be deductible by the Company.
Any otherwise taxable disposition of the Restricted Shares (other than by
forfeiture) or the Common Stock received upon the termination of the Restriction
Period will result in a capital gain or loss. If the Participant who has made an
election subsequently forfeits the Restricted Shares, then the Participant will
not be entitled to deduct any loss. In addition, the Company would then be
required to include in its ordinary income the amount of any deduction the
Company originally claimed with respect to such shares.
NEW PLAN BENEFITS
If the Director Stock Plan is approved, then each current Eligible
Non-employee Director, other than a Director who holds more than 5% of the
Company's outstanding shares, will begin to receive Awards for the number of
shares representing 50% of the director's cash based compensation at each
quarter end following July 01, 2005 using the closing price of each share at the
quarter ending date.
VOTE REQUIRED
The affirmative vote of a majority of the votes represented and voted at
the Meeting (assuming a quorum is present) is required to approve the Director
Stock Plan. Any shares not voted at the Meeting (whether as a result of broker
non-votes, abstentions or otherwise) with respect to the Director Stock Plan
will have no impact on the vote. Shares of Common Stock represented at the
Meeting by executed but unmarked proxies will be voted FOR the Director Stock
Plan.
VOTING EXCLUSION STATEMENT
We will disregard any votes cast on Proposal 15 by a non-employee director
or an affiliate of any non-employee director who may participate in the Plan.
However, we need not disregard the vote if it is cast by a person as proxy for a
person who is entitled to vote, in accordance with the directions on the proxy
form; or if it is cast by such person chairing the meeting as proxy for a person
who is entitled to vote, in accordance with a direction on the proxy form to
vote as the proxy decides.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE 2005
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN.
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PROPOSAL 16
(TO APPROVE THE ISSUANCE OF SECURITIES TO MEMBERS OF OUR BOARD OF DIRECTORS)
GENERAL
Under Australian Stock Exchange Listing Rule 10.11.1, our shareholders are
required to approve any issuance of securities to members of the Board of
Directors. The people eligible for these securities are Duncan P.F. Mount,
Alfred H. (John) Racine III, Alexander S. Dawson, Alan L. Gilman and Clifford W.
Chapman Jr. As described in Proposals 6, 7 and 8, our Board of Directors has
committed to purchase shares in our offering. As this Proposal has been approved
under Australian Stock Exchange Limited Listing Rule 10.11, it is not required
to be approved under Australian Stock Exchange Limited Listing Rule 7.1.
The securities that will be issued to Directors will be issued at the same
price as the other shares of our common stock that are issued to other persons
in the offering. The number of securities that will be issued to Directors will
depend on the price at which the shares will be issued but will be no more than
125,000 shares. This issue will be made within one month of the 2005 Annual
Meeting of Shareholders.
VOTING EXCLUSION STATEMENT
In accordance with Australian Stock Exchange Limited Listing Rules 10.13.6
and 14.11, any votes cast in favor of this proposal by our directors or any of
their respective associates, will be disregarded. However, we need not disregard
the vote if it is cast by a person as proxy for a person who is entitled to
vote, in accordance with the directions on the proxy form; or if it is cast by
such person chairing the meeting as proxy for a person who is entitled to vote,
in accordance with a direction on the proxy form to vote as the proxy decides.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ISSUANCE OF SECURITIES
TO MEMBERS OF OUR BOARD OF DIRECTORS IN OUR OFFERING.
CORPORATE GOVERNANCE
BOARD COMMITTEES AND MEETINGS
During the year that ended on December 31, 2004, the Board of Directors
held fifteen meetings. All of the directors attended or participated in more
than 75% of (i) the fifteen meetings of the Board of Directors and (ii) the
total number of meetings held by all Committees of the Board on which each such
director served.
SUMMARY OF MEETING ATTENDANCE BY BOARD MEMBER
BOARD COMPENSATION
MEETINGS AUDIT COMMITTEE COMMITTEE
ATTENDED/ MEETINGS MEETINGS
BOARD MEMBER HELD (#) ATTENDED/HELD (#) ATTENDED/HELD (#)
------------ -------- ----------------- -----------------
Duncan P.F. Mount-Chairman 15/15 3/4 3/3
Alfred H. (John) Racine, III
- -President/CEO (1) 3/15 N/A N/A
Alexander S. Dawson-Director 14/15 4/4 3/3
Alan L. Gilman-Director 14/15 4/4 3/3
Clifford W. Chapman Jr. (1) 3/15 N/A N/A
Mike Howe 10/15 N/A N/A
(1) Appointed to the board of directors on September 23, 2004.
81
Each of our directors holds office until the next annual meeting of
shareholders or until his successor has been duly elected or qualified or until
his earlier death, resignation or removal. Executive officers are appointed by,
and serve at the discretion of, our Board of Directors.
During 2004, the Board had two standing Committees: the Audit Committee
and the Compensation Committee.
The Audit Committee assists the Board in monitoring the integrity of the
Company's financial statements, the independent accountant's qualifications and
independence, the performance of the independent accountants and compliance by
the Company with legal and regulatory requirements. It appoints the independent
auditor and is also responsible for oversight of the annual report required by
the rules of the Securities and Exchange Commission. The Audit Committee is
composed of three individuals, Messrs. Gilman (the Chairman), Mount and Dawson,
each of whom is independent as that term is defined in section 10A(m)(3) of the
Exchange Act and Nasdaq Marketplace rule 4200(a)(15). The Board of Directors has
determined that Mr. Gilman, formerly a partner with Arthur Andersen LLP is an
audit committee financial expert as defined in Item 401(h) of Regulation S-K and
Section 407 of the Sarbanes-Oxley Act of 2002. In addition, the Board of
Directors has determined that both Mr. Dawson and Mr. Mount have significant
experience in reviewing, understanding and evaluating financial statements and
are financially literate. The Audit Committee held four meetings during 2004.
The members of the Audit Committee have reviewed the Audit Committee Charter and
adopted changes in April 2004 to ensure compliance with new corporate governance
rules. A copy of the revised Audit Committee charter is available at
www.catuity.com.
The Compensation Committee is responsible for establishing the
compensation levels of the Company's executive officers. Executive officers do
not participate in discussions or decisions about their own compensation level
or changes in it. In recommending and determining compensation, the committee
considers independent studies of comparable remuneration packages. This
Committee currently consists of Messrs. Gilman, Mount and Dawson with Mr. Gilman
serving as Chairman. The Compensation Committee held three meetings during 2004.
A copy of the Compensation Committee charter is available at www.catuity.com.
REPORT OF INDEPENDENT DIRECTORS
The Board of Directors has determined that Messrs. Mount, Dawson, Gilman
and Chapman are independent as that term is defined in section 10A(m)(3) of the
Exchange Act and Nasdaq Marketplace Rule 4200(a)(15). The Board considers Mr.
Mount to be independent under the ASX Corporate Governance Council's best
practices recommendations despite being a substantial shareholder as defined by
section 9 of the Australian Corporations Act of 2001. The Board believes that
Mr. Mount's shareholdings do not interfere in the exercise of his unfettered and
independent judgment. The independent members of the Board meet in regularly
scheduled "executive sessions" at which only independent directors are present.
On March 22, 2005, the Board approved the establishment of a Nomination
and Governance Committee effective July 1, 2005, subject to shareholder approval
as described in this proxy statement. The Nomination and Governance functions,
which include selecting qualified individuals for approval by shareholders to
serve as members of the Board and developing a set of corporate governance
principles applicable to the Company, have been carried out by the three
independent members of the Board as part of their Board responsibilities. In
lieu of establishing a Nomination and Governance Committee in 2004, the
independent directors passed a resolution adopting the following policy in order
to meet the nomination and governance requirements of Nasdaq, the SEC, and the
ASX:
The independent directors of the Board shall identify and evaluate
qualified candidates for Board membership and recommend them to the full Board
as needed. The independent directors shall determine the appropriate size and
composition of the Board and its Committees, shall annually review the
performance of the Board as a whole, its Committees, individual directors and
the CEO, and make recommendations to the full Board for the improvement of such
performance. The independent directors shall consider and evaluate all director
candidates equally regardless of who recommends them. The independent directors
shall utilize the following criteria in evaluating any candidate's capabilities
to serve as a member of the Board: attendance, independence, time commitments,
conflicts of interest, ability to contribute to the oversight and governance of
the Company and experience with businesses of similar size and scope as Catuity.
Further, the independent directors shall review the qualifications of candidates
considering those of current directors to determine coverage and gaps in
experience in
82
related industries and in functional expertise. The independent directors may
identify candidates from persons known to them, from shareholder
recommendations, and, if deemed appropriate, may engage third party recruiting
professionals to identify potential candidates. The Company shall disclose the
name of the source that recommended each new nominee and shall disclose if a
third party received compensation related to identifying and evaluating
candidates.
To recommend a prospective nominee for consideration as a director,
shareholders should submit the candidate's name and qualifications in writing to
Catuity's Secretary at the following address: Catuity Inc., Attention:
Secretary, 2711 E. Jefferson Avenue, Detroit, Michigan 48207. Nominee
recommendations must be received, in writing, at least 120 calendar days before
the date of the Company's proxy statement released to shareholders in connection
with the previous year's annual meeting (December XX, 2005 for the 2006 annual
shareholder meeting).
The independent directors considered whether or not to consider candidates
for an additional Board seat during 2004 in accordance with the criteria above
and determined that given the Merger and Acquisition strategy adopted by the
Company in May 2004, it was in the best interests of the Company to add a fourth
independent director with M&A experience to assist in the Company's turnaround.
As a result, Mr. Clifford W. Chapman Jr. was appointed to the Board on September
23, 2004.
The Board of Directors welcomes communications from all shareholders.
Shareholders may address individual Board members or the Board in its entirety
by writing to: Catuity Inc. Attention: Board of Directors (or an individual
board member's name), c/o Secretary, 2711 E. Jefferson Avenue, Detroit, Michigan
48207 or Catuity Inc. Attention: Board of Directors (or an individual board
member's name), c/o Secretary, Suite 37 (Level 2) 89-97 Jones St., Ultimo NSW
2007. The Secretary of the Company has been instructed by the Board to forward
all such communications that are received directly to the appropriate Board
member without delay.
The Company expects that all of its board members will attend its annual
meeting of Shareholders on July 18, 2005. Messrs. Mount and Dawson attended the
last annual shareholders meeting held on May 13, 2004. Mr. Gilman attended the
meeting telephonically.
This report respectfully submitted by:
Duncan Mount, Chairman
Alexander S. Dawson
Alan Gilman
Clifford W. Chapman Jr.
Independent members of the Board of Directors
PERFORMANCE ENHANCEMENT
As a routine practice, Board members are provided with a meeting agenda
and briefing materials prior to each meeting. In addition, individual members
have access to both the Company Secretary and independent professional advice at
the Company's expense. In order to encourage enhanced performance, the Board is
in the process of forming a policy and procedure for evaluating the performance,
on an annual basis of the Board as a whole, its committees, and each Board
member.
ETHICS AND CODES OF CONDUCT
To ensure that the highest level of shareholder confidence could be placed
on its financial reporting, Catuity adopted a Code of Ethics for senior
financial personnel in 2002. The content of this Code was expanded in April 2004
to ensure compliance with new corporate governance rules and requirements. In
addition, the Company expanded its business and employee code of conduct,
applicable to all directors, officers and employees, in April 2004. The Company
has also expanded its Insider Trading Policy, which restricts the circumstances
under which all directors, officers and employees may trade in the company's
stock or that of its trading partners. The Code of
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Ethics for Senior Financial Personnel, Business and Employee Code of Conduct and
the Company's Insider Trading Policy are available at www.catuity.com.
RISK MANAGEMENT
Due to the small size of the Company, it does not have a separate internal
audit function. The Audit Committee oversees the accounting and reporting
processes of the Company and the audits of the Company's financial statements.
The annual financial reports are audited, and each of the quarterly financial
reports are reviewed, by the Company's independent accountants. The Company's
CEO and CFO review, assess, and certify the Company's internal controls on a
quarterly basis. In addition, the Company requires each of its senior financial
personnel and each of its executives to certify, based on their knowledge, the
integrity of the financial reports.
CONTINUOUS DISCLOSURE
The Company's CEO and CFO are knowledgeable in the continuous and periodic
disclosure requirements of the SEC, Nasdaq and the ASX. The Company has adopted
the practice that the CEO and CFO are directly involved in preparing all press
releases and announcements, including those required to comply with continuous
disclosure requirements. In addition, the independent directors have an
opportunity to review and approve the content of all Company press releases and
announcements before they are issued.
Advice may be sought from outside, independent securities legal counsel
where matters of judgment may be involved. The CEO and CFO are the only
personnel in the Company authorized to discuss information with the media,
analysts, and investors.
84
OWNERSHIP OF SECURITIES
The following tables provide certain information regarding beneficial
ownership of our capital stock as of March 31, 2005 by: (i) each person who is
known by us to beneficially own more than five percent of our common stock; (ii)
our Chief Executive Officer and the four most highly compensated executive
officers that earned more than US$100,000 (salary and bonus) for all services
rendered in all capacities to Catuity during the year ended December 31, 2004,
plus one individual who would have been included in this table but for the fact
that he was not an executive officer on the last day of our fiscal year; (iii)
each of our Directors; and (iv) all of our Directors and executive officers as a
group.
PERCENT
AMOUNT AND NATURE OF COMMON STOCK OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) (2)
- ----------------------------------------- --------------------------------- -------
Acorn Capital Limited 108,846 Direct
Level 12, 90 Collins Street 0 Vested Options
-------
Melbourne Vic 3000 Australia 108,846 14.0
Duncan P.F. Mount 46,666 Direct
Lot 8, 54 Lane Cove Road 2,167 Vested Options
-------
Ingleside, NSW 2101 Australia 48,833 6.3
Alfred H. Racine III 0 Direct
11 Altamont Circle, #51 50,644 Vested 6.5
-------
Charlottesville, VA 22902 50,644
Michael V. Howe 3,450 Direct
62 Hampton Road 21,267 Vested Options
-------
Grosse Pointe Shores, MI 48230 24,717 3.1
Alexander S. Dawson 15,000 Direct
38 Macleay Street 2,000 Vested Options 2.2
-------
Potts Point, NSW 2011 Australia 17,000
John H. Lowry III 422 Direct
21972 Heatheridge 8,333 Vested Options
-------
Northville, MI 48167 8,755 1.1
Anthony B. Garton 277 Direct
65 Wilson St. 0 Vested Options
-------
Newtown, NSW 2042 277 *
Alan L. Gilman 267 Direct
4720 Morris Lake Circle 2,000 Vested Options
-------
West Bloomfield, MI 48323 2,267 *
Clifford W. Chapman Jr. 0 Direct
10 Warren Ave. 667 Vested Options
-------
Spring Lake, NJ 07762 667 *
All directors and executive officers as a 62,355 Direct
group (6 persons) 65,811 Vested Options
-------
128,166 15.2%
- -----------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options, warrants or other rights to purchase which are
currently exercisable or are exercisable within 60 days after March 31,
2005 are deemed vested and outstanding for purposes of computing the
percentage ownership of any other person.
85
Except as indicated by footnotes and subject to community property laws,
where applicable, the persons named above have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them. Share data does not include any Shares the beneficial
ownership of which has been disclaimed pursuant to SEC Rules.
(2) Percentage of Beneficial Ownership is calculated on the basis of the
amount of outstanding securities plus those securities of the named person
deemed to be outstanding under Rule 13d-3 (promulgated under the
Securities and Exchange Act of 1934, as amended) by virtue of such
securities being subject to rights to acquire beneficial ownership within
60 days after March 31, 2005. An asterisk indicates beneficial ownership
of less than 1% of the common stock outstanding.
COMPLIANCE WITH SEC REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act, as amended, requires the
Company's directors, executive officers and beneficial owners of greater than
10% of a registered class of the Company's equity securities (the "Reporting
Persons") to file reports of ownership and changes in ownership of such equity
securities with the Securities and Exchange Commission. Officers, directors, and
greater than 10% shareholders are required by Security Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) reports they
file. Based solely on a review of the copies of such reports and certain
representations that may have been furnished to the Company during or with
respect to the Company's fiscal year ended December 31, 2004, the Company
believes that, during such fiscal year, with three exceptions, all applicable
Section 16(a) filing requirements were met by the Reporting Persons. The
following Reporting Persons were late in filing one Form 4 report; Duncan P.F.
Mount, Alexander S. Dawson and Alan L. Gilman.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") of the Board of Directors was
established in early 2001. This report describes the compensation-related
activities of the Committee and the Board as a whole taken during 2004. The
Committee sets the compensation of the Chief Executive Officer, reviews the
design, administration and effectiveness of compensation programs for other key
executives, and approves stock option grants for all executive officers. The
Committee is composed of only independent directors. In April 2004 the Committee
adopted a Compensation Committee Charter in order to comply with the new
corporate governance requirements for Compensation Committees. The Compensation
Committee Charter is available at www.catuity.com.
In 2004, the independent Directors determined it would be in the best
interests of the Company and its shareholders to make a change in the President
& CEO position. As a result, following discussions and an evaluation of the
skills and experience the President needed to have given Catuity's
circumstances, Mr. Alfred H. (John) Racine was hired to be Catuity's new
President & CEO on September 23, 2004. During this time the Compensation
Committee met to determine the compensation package that would be competitive
and appropriate for the President and CEO position at Catuity.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Company operates in the competitive and rapidly changing high
technology industry. The Committee believes that the compensation programs for
the executive officers should be designed to attract, motivate and retain
talented executives responsible for the success of the Company, should be
determined within a competitive framework and be based on individual
contribution, customer satisfaction and financial performance relative to that
of the technology industry. Within this philosophy, the Committee's objectives
are to:
- Offer a total compensation program that takes into consideration the
compensation practices of companies in the markets that the Company
competes for executive talent.
- Provide annual variable incentive awards that take into account the
Company's overall financial performance in terms of designated
corporate objectives.
86
- Align the financial interests of executive officers with those of
shareholders by providing equity-based, long-term incentives.
COMPENSATION COMPONENTS AND PROCESS
The three major components of the Company's executive officer compensation
in 2004 was: (i) base salary, (ii) variable incentive awards, and (iii)
long-term, equity-based incentive awards.
Base Salary. The base salary of each executive officer is determined at
levels considered appropriate, given available information for comparable
positions at other companies. The Company's objective is to provide base salary
levels that are competitive with salaries offered at other companies in the
markets where the Company competes for talent.
Variable Incentive Awards. The Company has adopted an incentive award
program to provide a portion of the annual compensation of each executive
officer in variable incentive awards. Performance based bonuses may be awarded,
at the discretion of the Board, to an executive officer when his/her
performance, as measured against specific objectives, is meritorious.
Long-Term, Equity-Based Incentive Awards. The goal of the Company's
long-term, equity-based incentive awards is to align the interests of the
executive officers with shareholders and to provide each executive officer with
a significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business through the award of options. The Committee
determines the size of long-term, equity based incentives according to each
executive's position within the Company and sets a level it considers
appropriate to create a meaningful opportunity for stock ownership. In addition,
the Committee takes into consideration an individual's recent performance, his
or her potential for future responsibility and promotion, and the number of
vested options held by each individual at the time of the new grant. The
relevant weight given to each of these factors varies among individuals at the
Committee's discretion.
CEO Compensation. Mr. Racine's employment agreement to serve as President
and CEO is for one year and may be extended by mutual written agreement between
Mr. Racine and the Board of Director's. The agreement may be terminated by
either Mr. Racine or the Company upon 30 days written notice, with no further
obligations. Pursuant to the agreement, Mr. Racine's salary is $250,000 per year
and he was granted 77,914 option shares of Catuity common stock subject to
shareholder approval. See Appendix B to this proxy statement for details on Mr.
Racine's Stock Option Agreement
Mr. Racine does not participate in the discussions or determination of his
own compensation.
Submitted by the Compensation Committee
Alan L. Gilman -- Chairman
Alexander S. Dawson
Duncan P.F. Mount
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors for
the 2004 fiscal year are:
Alan L. Gilman- Chairman
Duncan P.F. Mount
Alexander S. Dawson
All of the Compensation Committee members are independent as that term is
defined in section 10A(m)(3) of the Exchange Act and Nasdaq Marketplace Rule
4200(a)(15).
No executive officer of Catuity has served on the Board of Directors or
compensation committee of any other entity that has, or has had, one or more
executive officers serving as a member of the Board of Directors of Catuity.
87
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
EXECUTIVE COMPENSATION
The following tables provide certain summary information concerning
compensation and stock options for our Chief Executive Officer and the named
executive officers that earned more than $100,000 (salary and bonus) for all
services rendered in all capacities to Catuity during the year ended December
31, 2004.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($)(2) OPTIONS(#) ($)
- ------------------------- ---- --------- ------- ------------ ------------ ------------
Alfred H. Racine (1) 2004 66,667 0 0 77,914 0
President and CEO
Michael V. Howe(4) 2004 230,769 0 0 0 300,000(3)
Former President and CEO 2003 308,000 0 0 6,667 0
2002 232,000 60,000 0 0 0
John H. Lowry III (4) 2004 160,000 0 0 0 0
Vice President - CFO, 2003 160,000 30,000 0 1,667 0
Secretary and Treasurer 2002 150,000 20,000 0 0 0
Anthony B. Garton (4) (5) 2004 102,708 0 4,928 0 0
Former Vice President- 2003 170,000 12,100 7,048 667 0
Product Development & 2002 124,250 3,039 5,163 0 0
Implementation
The above named executives are the only employees considered to be officers of
the Company.
(1) Mr. Racine was named President and CEO on September 23, 2004. Options
granted are per his employment agreement are pending shareholder approval
(2) Includes Australian Superannuation Guarantee Contribution, a compulsory
payment that funds retirement benefits.
(3) Represents a severance amount both accrued and paid to Michael V. Howe our
former President and CEO. Mr. Howe's employment with the Company
terminated on September 23, 2004.
(4) A portion of the executive officers' 2003 and 2002 salary was used to
purchase the Company's stock under an executive stock purchase plan. The
shares were purchased at market price, therefore, no additional
compensation resulted.
(5) Salary amounts have been translated from Australian dollars at the average
exchange rate for each year. The exchange rates were .737, .655 and .544
for the years 2004, 2003 and 2002 respectively.
88
OPTION GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
PERCENT OF TOTAL SHARE PRICE
NUMBER OF SECURITIES OPTIONS GRANTED TO APPRECIATION FOR
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE PRICE EXPIRATION OPTION TERM
NAME AND PRINCIPAL POSITION GRANTED YEAR ($/SHARE) DATE 5%/10%(2)
- --------------------------------- -------------------- ------------------- -------------- ---------- ----------------
Alfred H. (John) Racine III (1)
President and CEO 77,914 49.0% $4.20 09/23/2009 $72,305/$199,460
Michael V. Howe
Former President and CEO -- -- -- --
John H. Lowry III
Vice President - CFO, Secretary &
Treasurer -- -- -- --
Anthony B. Garton
Former Vice President - Product
Development and Implementation -- -- -- --
- ---------------
(1) Options granted are pending Shareholder approval.
(2) The potential realizable value is reported net of the option price, but
before the income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5% and 10% from the
date of grant to the expiration of the options.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
SHARES
ACQUIRED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
NAME AND PRINCIPAL ON OPTIONS AT FY-END MONEY OPTIONS AT FY-END(1)
POSITION EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISEABLE EXERCISABLE/UNEXERCISEABLE
- ----------------------------- -------- -------------- -------------------------- ----------------------------
Alfred H. (John) Racine III
President and CEO 0 0 0/77,914 $0/$0
Michael V. Howe
Former President and CEO 0 0 21,267/0 $0/$0
John H. Lowry III
Vice President - CFO,
Secretary & Treasurer 0 0 8,333/0 $0/$0
Anthony B. Garton
Former Vice President Product
Development & Implementation 0 0 0/0 $0/$0
- --------------------
(1) Based on the closing price per share of common stock on the Nasdaq small
cap market on the last day of 2004, less the option exercise price payable
per share.
89
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects information about the securities authorized
for issuance under our equity compensation plans as of December 31, 2004.
NUMBER OF NUMBER OF SECURITIES
SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OUTSTANDING (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY OPTIONS OPTIONS IN COLUMN (a)
- ------------------------------------ ----------------- ----------------- -------------------------------
(a) (b) (c)
- ------------------------------------ ----------------- ----------------- -------------------------------
Equity compensation plans
approved by security holders 53,630 $ 91.02 18,370
Equity compensation plans
not approved by security holders (1) 77,914 $ 4.20 0
- ---------------
(1) The options granted to Mr. Racine are conditional and pending approval by
the Company's shareholders at the 2005 Annual Meeting.
90
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE IN CONTROL AGREEMENTS
Alfred H. (John) Racine III. We entered into a one year agreement with our
President and Chief Executive Officer, Alfred Henry (John) Racine III on
September 23, 2004. Pursuant to the agreement, Mr. Racine's salary is $250,000
per year and he was granted 77,914 option shares of Catuity common stock subject
to shareholder approval. See Appendix B to this proxy statement for details on
Mr. Racine's Stock Option Agreement. Mr. Racine's agreement may be extended by
mutual written agreement between Mr. Racine and the Board of Director's. The
agreement may be terminated by either Mr. Racine or the Company upon 30 days
written notice, with no further obligations.
Michael V. Howe. We entered into a five-year employment agreement with our
former President and Chief Executive Officer, Michael Howe, dated December 5,
1999, as amended effective January 1, 2003. Under the agreement, Mr. Howe
received a base salary of $300,000. Mr. Howe was also entitled to receive a
performance-based, target cash bonus. The Compensation Committee had the right
to amend salary and bonus amounts in Mr. Howe's Employment Agreement pursuant to
an annual review. Mr. Howe was eligible to receive a performance bonus if
Catuity achieved certain Compensation Committee established goals for Net
Revenue as defined in the Agreement and Net Income Before Extraordinary Items
and Non-Cash Stock Compensation Expense ).
In September 2004, Mr. Howe resigned as President and Chief Executive
Officer. Under the terms of his agreement, Mr. Howe received one year of
compensation in severance payments.
John H. Lowry III. We entered into a five-year employment agreement with
our Chief Financial Officer, John Lowry, dated April 18, 2000, as amended
effective January 1, 2003. Under the agreement, Mr. Lowry is entitled to receive
a base salary of US$160,000, which is subject to annual review for possible
increase by the President and CEO, subject to Compensation Committee approval.
We will pay Mr. Lowry a performance bonus on Catuity achieving certain
Compensation Committee established goals for Net Revenue (NR) as defined in the
Agreement and Net Income Before Extraordinary Items and Non-Cash Stock
Compensation Expense (NI). The basis for the bonus is described below:
- If NR is below the established goal and NI is less than 90% of the
goal, no bonus is earned.
- If NR is at least equal to the established goal and NI is between
90% and 99.9% of the goal, 50% of the targeted bonus is earned.
- If NR and NI are between 100% and 110% of the established goal, 100%
of the targeted bonus is earned.
- If NR and NI are between 110.1% and 120% of the established, 125% of
the targeted bonus is earned.
- If NR and NI are greater than 120% of the established goal, 150% of
the targeted bonus is earned.
Mr. Lowry received options to purchase up to 10,000 shares of common
stock, at an exercise price of $115.20, which vested 3,333 on commencement of
employment and 333 at the end of each calendar quarter through the quarter
ending June 30, 2005 contingent upon his continued employment at the quarter
end. Effective January 1, 2003, Mr. Lowry surrendered the 3,333 then-unvested
options he held under the grant of options included in his original contract.
These options were replaced with 1,667 options that expire December 31, 2005, at
an option exercise price of $57,60 (50% of the exercise price of the surrendered
options). These options vested immediately. In the event Mr. Lowry voluntarily
resigns, retires, or his employment with Catuity is terminated by the Company
all vested options he holds as of the termination date will expire six months
following the date of termination. If his employment terminates due to death or
incapacity due to disability during the term of this amended agreement, his
vested options will expire one (1) year from the date of termination. Any
unvested options held as of the date of termination expire immediately without
regard to the reason for termination.
If we terminate the agreement without cause, Mr. Lowry is entitled to nine
months' written notice. We have the right to pay nine months' salary to effect
immediate termination. Mr. Lowry may voluntarily terminate the agreement at any
time provided we are given 4 months' advance written notice.
91
CERTAIN TRANSACTIONS
On August 31, 2003 the employment of the Company's former executive
chairman, Mr. David Mac Smith was terminated. Pursuant to the terms and
conditions of Mr. Mac Smith's employment agreement, Mr. Mac Smith was entitled
to receive one year of salary as severance. During the period of September 2003
through August 2004, Mr. Mac Smith received monthly payments in full
satisfaction of the Company's severance obligation. Mr. MacSmith received his
final payment in August of 2004.
At the time of his termination, Mr. Mac Smith was in possession of shares
of Catuity stock subject to loans the Company made to Mr. Mac Smith to enable
him to acquire the shares pursuant to a 1995 Executive Share Plan Agreement (the
Plan) and Mr. Mac Smith's employment agreement. Under the terms of the Plan, the
Company has the right to buy-back all of the shares subject to the loans within
one year of Mr. Mac Smith's termination. As previously disclosed, on August 24,
2004 the Company advised Mr. Mac Smith that it was exercising its right to
buy-back all of his shares subject to loans from the Company. In April 2005, the
Company and Mr. Mac Smith received the valuation report of the independent
valuation expert nominated by the President of the Australian Institute of
Chartered Accountants to establish the fair value of each share subject to the
Company loans. The Company intends to complete the steps necessary to complete
the buy-back of the loan shares in the near term. Mr. Mac Smith has indicated he
objects to the Company's actions and has advised the Company that he may seek
legal remedy if the Company takes action. The Company has been advised by legal
counsel that it has a right, under the agreement with Mr. Mac Smith, to complete
the buy-back. It is management's view that any claim brought by Mr. Mac Smith
would not be material and it is the Company's intention to vigorously defend its
rights and the interest of all shareholders.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors consists of three directors,
all of whom are independent. The Audit Committee reviewed the written charter
under which it had been operating and adopted changes in April 2004, to ensure
compliance with new corporate governance requirements and best practice
recommendations.
The Audit Committee of the Board of Directors serves as the representative
of the Board for general oversight of Catuity's financial accounting and
reporting process, system of internal control, audit process, and process for
monitoring compliance with laws and regulations. Catuity's management has
primary responsibility for preparing Catuity's financial statements and
Catuity's financial reporting process. Catuity's independent accountants, BDO
Seidman , LLP are responsible for expressing an opinion on the conformity of
Catuity's audited financial statements to generally accepted accounting
principles.
In this context, the Audit Committee hereby reports as follows:
- The Audit Committee has reviewed and discussed the audited financial
statements with Catuity's management.
- The Audit Committee has discussed with the independent accountants
the matters required to be discussed by SAS 61 (Codification of
Statements on Auditing Standard, AU 380).
- The Audit Committee has received the written disclosures and the
independence letter from BDO Seidman LLP required by Independence
Standards Board Standards No. 1 Independence Discussions with Audit
Committees and has discussed independence with BDO Seidman LLP.
- Based on the review and discussion referred to above, the Audit
Committee recommended to the Board of Directors, and the Board has
approved, that the audited financial statements be included in
Catuity's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, for filing with the Securities and Exchange
Commission. The undersigned members of the Audit Committee have
submitted this Report to the Board of Directors:
92
Alan L. Gilman, Chairman
Alexander S. Dawson
Duncan P.F. Mount
REGISTERED PUBLIC ACCOUNTING FIRMS
The registered public accounting firm of BDO Seidman LLP audited the
Company's consolidated financial statements for fiscal 2004. The registered
public accounting firm of Ernst & Young LLP audited the Company's financial
statements in 2003 and performed the first and second quarter's financial
reviews in 2004. BDO Seidman LLP was named the Company's auditors on
November 04, 2004 and performed the third quarter financial review. Additional
information on the Company's registered public accounting firms is available in
the Company's current report on Form 8-K, which is incorporated herein by
reference. Representatives from BDO Seidman LLP are expected to be present, via
telephone, at the Annual Meeting of Shareholders and will be given an
opportunity to make a statement if they so desire and are expected to be
available to respond to appropriate questions.
AUDIT FEES
The aggregate fees billed by BDO Seidman LLP for the audit of the
Company's annual consolidated financial statements for the fiscal year ended
December 31, 2004, and the review of the consolidated financial statements
included in the Company's Form 10-Q for the third quarter of 2004 were $63,000.
The aggregate fees billed by Ernst & Young LLP for audit of the Company's annual
consolidated financial statements for the fiscal year 2003 and the review of the
consolidated financial statements included in the Company's Form 10-Q for the
first and second quarters of 2004 were $97,000 and $21,000 respectively. Audit
fees are presented on an accrual basis. All other fees are presented for
services provided during the period January 1 to December 31 for the respective
year.
AUDIT RELATED FEES
There were no fees billed to the Company for audit related services
rendered by BDO Seidman LLP for the fiscal year ended December 31, 2004. Ernst &
Young billed a total of $1,000 for fees associated with the preparation of a
letter provided to the ASX for the second quarter of 2004 review.
For the fiscal year ended December 31, 2003, there were no fees billed to
the Company for audit related services rendered by Ernst & Young LLP
TAX FEES
The aggregate fees billed to the Company for the preparation of the
Company's Australian tax returns by Ernst & Young, for the fiscal years ended
December 31, 2004 and 2003, were $16,000 and $41,500, respectively.
ALL OTHER FEES
For the fiscal year ended December 31, 2004, the aggregate fees for other
services billed to the Company by BDO Seidman LLP were $18,000 and related to
consulting services and audit assistance with the Loyalty Magic acquisition. In
addition, there were also $7,500 in fees billed by McInnes, Graham & Gibbs for
the audit of Loyalty Magic's financial statements for the year ended June 30,
2003. There were no fees billed to the Company for any other services rendered
by Ernst & Young for the fiscal years ended December 31, 2004 and 2003.
93
STOCK PERFORMANCE GRAPH
The graph depicted below shows the Company's stock price as an index
assuming US$100 invested on May 24, 2000 (the date on which Catuity's shares
became registered under Section 12 of the Exchange Act), along with the
composite prices of companies listed on Nasdaq and Catuity's SIC Code Index.
[LINE GRAPH]
COMPANY/INDEX 5/24/2000 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004
------------- --------- ---------- ---------- ---------- ---------- ----------
Catuity Inc. 100.00 105.76 17.82 17.64 16.11 3.87
SIC Code Index 100.00 66.66 36.05 23.47 36.96 46.94
NASDAQ Market Index 100.00 72.57 57.85 40.35 60.67 65.78
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act or the Exchange Act that might
incorporate future filings made by the Company under those statutes, the
preceding Compensation Committee Report and the Company Stock Performance Graph
will not be incorporated by reference into any of those prior filings, nor will
such report or graph be incorporated by reference into any future filings made
by the Company under those statutes.
94
SHAREHOLDER PROPOSALS FOR 2006 PROXY STATEMENT
Shareholder proposals that are intended to be presented at the Company's
Annual Meeting of Shareholders to be held in 2006 must be received by the
Company no later than February 1, 2006 in order to be included in the proxy
statement and related proxy materials. The Company's Bylaws do not place any
particular time limits or procedural requirements on a shareholder who does not
seek inclusion of the proposal in the proxy material and submits a proposal
outside of the process described in Rule 14a-8 of the Securities Exchange Act of
1934, as amended. Please send any such proposals to Catuity Inc., 2711 E.
Jefferson Ave, Detroit, Michigan 48207, Attn: Investor Relations.
In addition, the proxy solicited by the Board of Directors for the 2006
Annual Meeting of Shareholders will confer discretionary authority to vote on
any Shareholder proposal presented at that meeting, unless the Company is
provided with notice of such proposal no later than February 22, 2006.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
2004, AS AMENDED, INCLUDING THE FINANCIAL STATEMENTS, SCHEDULES AND LIST OF
EXHIBITS. REQUESTS SHOULD BE SENT TO CATUITY INC., 2711 E. JEFFERSON AVE,
DETROIT, MICHIGAN 48207, ATTN: INVESTOR RELATIONS.
OTHER MATTERS
The Board knows of no other matters to be presented for Shareholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in accordance
with their best judgment.
By Order of the Board of Directors
/s/ John H. Lowry
JOHN H. LOWRY III
Secretary
Dated: June 6, 2005
95
INDEX TO FINANCIAL STATEMENTS
CATUITY INC.
Report of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets- December 31, 2004 and December 31, 2003 F-4
Consolidated Statements of Operations-twelve months ended December 31, 2004,2003 and 2002 F-5
Consolidated Statements of Cash Flows- twelve months ended December 31, 2004,2003 and 2002 F-6
Consolidated Statements of Shareholders Equity-December 31, 2004, 2003 and 2002 F-7
Notes to Consolidated Financial Statements-December 31, 2004 F-8
Consolidated Balance Sheets-March 31, 2005 and March 31, 2004 F-19
Consolidated Statements of Operations-three months ended March 31, 2005 and 2004 F-20
Consolidated Statements of Cash Flows-three months ended March 31, 2005 and 2004 F-21
Notes to Consolidated Financial Statements - March 31, 2005 F-22
LOYALTY MAGIC PTY LTD
Declaration by Directors F-26
Consolidated Financial Statements:
Balance Sheets as of June 30, 2003 and 2002 F-27
Profit and Loss Account as of June 30, 2003 and 2002 F-28
Notes to Financial Statements F-29
Statement of Cashflows as of June 30, 2003 and 2002 F-30
Independent Auditors Report F-36
Declaration by Directors F-38
Balance Sheets as of June 30, 2004 and 2003 F-39
Profit and Loss Account as of June 30, 2004 and 2003 F-40
Notes to Financial Statements F-42
Statement of Cashflows as of June 30, 2004 and 2003 F-48
Independent Auditors Report F-49
Unaudited Interim Consolidated Financial Statements:
Unaudited Statement of Operations for the Six Months Ended F-51
December 31, 2004 and 2003
Unaudited Balance Sheet for the Six Months Ended F-52
December 31, 2004 and 2003
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Catuity, Inc.
Detroit, Michigan
We have audited the accompanying consolidated balance sheet of Catuity, Inc. and
subsidiaries as of December 31, 2004 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
2004. We have also audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Catuity, Inc. and
subsidiaries at December 31, 2004, and the results of its operations and its
cash flows for the year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
March 17, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Catuity, Inc.
We have audited the accompanying consolidated balance sheet of Catuity, Inc. and
subsidiaries as of December 31, 2003, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the two years in
the period ended December 31, 2003. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Catuity, Inc. and
subsidiaries at December 31, 2003, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
February 26, 2004
F-3
CATUITY, INC.
CONSOLIDATED BALANCE SHEETS
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 -- 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 317,433 345,476
Other accrued expenses 87,208 116,742
Trust liability 91,722 95,586
------------ ------------
Total current liabilities 647,213 769,700
Accrued compensation -- 59,752
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 to consolidated financial statements
F-4
CATUITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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) $ (0.92) $ (5.12)
=============== =============== ===============
Weighted average shares
outstanding-basic & diluted 777,226 645,452 540,613
=============== =============== ===============
See accompanying notes to consolidated financial statements
F-5
CATUITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 to consolidated financial statements
F-6
CATUITY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK FOREIGN TOTAL
(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 stock split
Adjust shareholder loan to
current fair market value (388,633) 388,633
Net loss
Foreign currency translation (3,607,451) (3,607,451)
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 to consolidated financial statements
F-7
NOTE 1. DESCRIPTION OF BUSINESS
Catuity provides technology-based solutions to retailers that are designed to
increase the profit they receive from their customers at the Point of Sale
(POS). Today, the Company sells a hosted, ASP-based system(1) that enables the
processing of member-based loyalty programs and which can deliver customized
discounts, promotions, rewards and points-based programs which are designed to
help retailers find, keep and profit from their best customers. The Company also
enables gift card solutions. In late 2004, the Company introduced the first
version of its new platform, the Catuity Advanced Loyalty System (CALS). The
system enables robust and highly customizable programs which work on a
retailer's payments terminals, Electronic Cash Register and on their internal
store networks. Catuity also offers IT services to retailers to support their
POS systems maintenance and custom development needs for both the deployment of
our technology solution and those of third parties which also touch the point of
sale.
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.
- ----------
(1) Application Service Provider- a third-party entity that manages and
distributes software-based services and solutions to customers across a wide
area network from a central data center.
F-8
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results may
differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform 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 AND CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The credit risk associated
with trade receivables is limited due to the size and creditworthiness of the
Company's customers. The Company generally does not require collateral for its
trade receivables.
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.
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). The Company reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Impairment
is estimated in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".
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).
F-9
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.
RESEARCH & DEVELOPMENT
Research and Development costs are expensed as incurred.
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 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)
============ ============ ============
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards 47,224 318,404 700,604
----------- ----------- -----------
Pro forma net loss $(3,654,675) $ (913,734) $(3,469,759)
----------- --------- -----------
Loss per share:
basic & diluted - as reported $ (4.64) $ (0.92) $ (5.12)
=========== =========== ===========
Pro forma basic & diluted
loss per share $ (4.70) $ (1.42) $ (6.42)
=========== =========== ===========
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% 3.00%
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") which requires the
measurement of all employee share-based
F-10
payments to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in the consolidated
statement of operations. The accounting provisions of SFAS 123(R) are effective
for reporting periods beginning after December 15, 2005. We will adopt SFAS
123(R) effective as of the first quarter of 2006. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. As a result, because SFAS 123(R) requires the
expensing of stock options, it will have an adverse effect on our reported
financial results. However, we have not yet assessed the level of impact to be
able to quantify the adverse effect.
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 and no legal proceedings have been
instituted, 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, in
the future a claim is filed, and a legal determination is subsequently 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 severance payment equal to 30% of
annual salary or approximately $80,000 in total.
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 other appropriate data have been restated to reflect the
reverse split.
SHAREHOLDER 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
F-11
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. The Plan authorizes a maximum of 63,333 shares to be issued. At December
31, 2004, there were 16,537 shares available for issuance under the Plan.
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 option-pricing model. Expense,
relating to these options, amounted to $8,550 and was charged to operations in
the year they were granted as they vested immediately.
F-12
SUMMARY OF STOCK OPTIONS/WARRANTS
The following is a summary of stock and warrant activity:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE 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
F-13
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 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.
F-14
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 $ -- $ -- $ --
=========== =========== ===========
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 from 2020 through 2024 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
F-15
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 PLANS
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. SUBSEQUENT EVENTS
On March 17, 2005, the Company announced an agreement to purchase all of the
outstanding shares of Loyalty Magic Pty. Ltd., an Australian company located in
Melbourne for A$5.5 million ($4.35 million USD based on the foreign exchange
rate in effect on the day before the signing of the agreement). This represents
a significant step in the Company's turnaround plan toward profitability.
Loyalty Magic was both cashflow positive and profitable in its fiscal year ended
June 30, 2004 and expects continued growth in 2005 and beyond. Of the A$5.5
million purchase price, which excludes acquisition related costs, 35% will be
issued in new Catuity shares with the remainder to be paid in cash. Loyalty
Magic's management team and A&B Venture Fund Company Pty Ltd. will hold the
majority of the shares. Catuity will undertake a capital raising, anticipated to
be approximately A$6 million, in order to pay the cash portion of the
transaction and to provide increased working capital. The combined company will
have a 40-person team serving existing customers in Australia, New Zealand, and
North America. The acquisition of Loyalty Magic and associated capital raise,
which is subject to shareholder approval, is expected to close following
Catuity's Annual Shareholder Meeting in late May 2005.
NOTE 10. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
As of December 31, 2004, the Company conducts all of its business in a single
segment, providing loyalty technology and related services to retailers and
their processor partners. 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.
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.
F-16
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 11. 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
NOTE 12. MANAGEMENT'S PLANS (UNAUDITED)
In early 2004, 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. Prior to the Target Corporation decision to discontinue issuing
smart cards, 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 tier two 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 tier two 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.
F-17
The Company also determined that it needed to become active in the mergers and
acquisitions market as a means to provide growth in as short a period of time as
possible. As a result, in the middle of 2004, the Company began an active effort
to identify companies that would represent an appropriate business fit with
Catuity's business, provide positive cash-flow, and profits from their
operations. (See Note 9 on page 36 for more information on current acquisition
activity.)
F-18
CATUITY INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
---------------------------------------------------
MARCH 31, 2005 DECEMBER 31, 2004
ASSETS (Unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $1,755,238 $2,560,683
Accounts receivable, less allowance of $5,000 at 24,852 36,211
March 31, 2005 and December 31, 2004
Restricted cash 113,423 116,012
Prepaid expenses and other 116,891 127,429
-------------------------- -----------------------
Total current assets 2,010,404 2,840,335
Property and equipment, net 142,526 162,780
Other assets 80,870 --
-------------------------- -----------------------
Total assets $2,233,800 $3,003,115
========================== =======================
LIABILITIES AND SHAREHOLDERS'
----------------------------
EQUITY
------
CURRENT LIABILITIES:
Accounts payable $171,296 $150,584
Accrued compensation 78,806 317,433
Other accrued expenses 152,190 87,474
Trust liability 89,208 91,722
-------------------------- -----------------------
Total current liabilities 491,500 647,213
SHAREHOLDERS' EQUITY:
Common stock - $.001 par value; Authorized - 778 778
6,666,667 shares: issued and outstanding -
778,184 at March 31, 2005 and December 31, 2004
Preferred stock - $.001 par value; Authorized - -- --
666,667 shares
Additional paid-in capital 36,589,586 36,603,127
Shareholder loans (66,745) (79,533)
Foreign currency translation adjustment 77,950 96,656
Accumulated deficit (34,859,269) (34,265,126)
-------------------------- -----------------------
Total shareholders' equity 1,742,300 2,355,902
-------------------------- -----------------------
Total liabilities and shareholders' equity $2,233,800 $3,003,115
========================== =======================
</Table>
See accompanying notes.
F-19
CATUITY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2005 2004
-------------------------------------
REVENUES:
Project related $0 $218,454
Service 19,660 215,139
License 12,600 44,943
------------------- -----------------
Total revenues 32,260 478,536
COST OF REVENUE AND OTHER OPERATING EXPENSES:
Cost of project related 0 81,673
Cost of service 18,266 112,917
Cost of license 1,189 44,231
Sales and marketing 144,359 234,348
Research and development 131,916 306,424
General and administrative 354,927 333,498
------------------- -----------------
Total costs and expenses 650,657 1,113,091
------------------- -----------------
Operating loss (618,397) (634,555)
Interest income 24,256 30,914
------------------- -----------------
Net loss ($594,141) ($603,641)
=================== =================
Net loss per share - basic and diluted ($0.76) ($0.78)
=================== =================
Weighted average shares outstanding-basic & diluted 778,184 776,425
=================== =================
</Table>
See accompanying notes.
F-20
CATUITY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(594,141) $(603,641)
Adjustments used to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 20,254 34,472
Changes in assets and liabilities:
Accounts receivable 11,359 283,111
Other assets, net 13,125 (145,676)
Deferred revenue 0 16,944
Accounts payable 20,712 7,663
Accrued expenses and other liabilities (176,425) (88,908)
----------------- ---------------
Net cash used in operating activities (705,116) (496,035)
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (36,710)
Acquisition Related (80,870) --
----------------- ---------------
Net cash/(used) in investing activities (80,870) (36,710)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of fractional shares related to reverse (753) 0
stock split
Issuance of common stock, net of expenses 0 5,206
----------------- ---------------
Net cash provided/(used) by financing activities (753) 5,206
----------------- ---------------
Foreign exchange effect on cash and cash equivalents (18,706) 17,522
----------------- ---------------
Net decrease in cash and cash equivalents (805,445) (510,017)
Cash and cash equivalents, beginning of period 2,560,683 5,768,828
----------------- ---------------
Cash and cash equivalents, end of period $1,755,238 $5,258,811
================= ===============
</Table>
See accompanying notes.
F-21
CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
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-QSB 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 annual
financial statements and notes. The balance sheet at December 31, 2004 has been
derived from the consolidated 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. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have been
included. Operating results, for the three month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for any
subsequent quarter or for the entire year ended December 31, 2005. The
accompanying interim, consolidated financial statements should be read in
conjunction the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2004.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") which requires the
measurement of all employee share-based payments to employees, including grants
of employee stock options, using a fair-value-based method and the recording of
such expense in the consolidated statement of operations. The accounting
provisions of SFAS 123(R) are effective for reporting periods beginning after
December 15, 2005. We will adopt SFAS 123(R) effective as of the first quarter
of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. As a result, because
SFAS 123(R) requires the expensing of stock options, it will have an adverse
effect on our reported financial results. However, we have not yet assessed the
level of impact to be able to quantify the adverse effect.
3. COMPREHENSIVE INCOME/ (LOSS)
Comprehensive income/(loss) is summarized as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2005 2004
Net loss $(594,141) $(603,641)
Foreign currency translation (18,706) 17,522
---------- ---------
Total comprehensive loss $(612,847) $(586,119)
========== ==========
</Table>
F-22
4. 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 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:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2005 2004
---- ----
Net loss as reported ($594,141) $(603,641)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
(2,644) (16,957)
---------------- ---------------
Pro forma net loss ($596,795) $(620,598)
================ ===============
Net loss per share: basic and diluted- as reported ($0.76) $(0.78)
================ ===============
Pro forma basic and diluted loss per share ($0.77) $(0.80)
================ ===============
</Table>
5. 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 and no legal proceedings have been
instituted, 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, in
the future a claim is filed, and a legal determination is subsequently 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.
In December 2004, the Company 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 severance payment equal to 30% of
annual salary or approximately $80,000 in total.
6. ACQUISITION
On March 17, 2005, the Company announced an agreement to purchase all of the
outstanding shares of Loyalty Magic Pty. Ltd., an Australian company located in
Melbourne for A$5.5 million ($4.35 million USD based on the foreign exchange
rate in effect on the day before the signing of the agreement). This represents
a significant step in the Company's turnaround plan toward profitability.
Loyalty Magic was both cash flow positive and profitable in its fiscal year
ended June 30, 2004 and expects continued growth in 2005 and beyond. Of the
A$5.5 million purchase price, which excludes acquisition related costs,
approximately 35% will be issued in new Catuity shares with the remainder to be
paid in cash. Loyalty Magic's management team and A&B Venture Fund Company Pty
Ltd. will hold the majority of the shares. Catuity will undertake a capital
raising, anticipated to be approximately A$6 million ($4.6 million USD based on
the exchange rate at March 31, 2005), in order to pay the cash portion of the
transaction and to provide additional working capital. The combined company will
have approximately a 40-person team serving existing customers in Australia, New
Zealand, and North America. The acquisition of Loyalty Magic and associated
capital raise, which is subject to shareholder approval, is expected to close
following Catuity's Annual Shareholder Meeting.
F-23
7. MANAGEMENT PLANS
In early 2004, 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. Prior to the Target Corporation decision to discontinue issuing
smart cards, 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 tier two 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 tier two 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.
The Company also determined that it needed to become active in the mergers and
acquisitions market as a means to provide growth in as short a period of time as
possible. As a result, in the middle of 2004, the Company began an active effort
to identify companies that would represent an appropriate business fit with
Catuity's business, provide positive cash-flow, and profits from their
operations. (See Note 6 for information on the acquisition that is currently
pending.)
8. SUBSEQUENT EVENT
On April 4, 2005, the Nasdaq staff (the "Staff") notified Catuity Inc. (the
"Company") that it had determined that, for the period ended December 31, 2004
the Company was out of compliance with Nasdaq Marketplace Rule 4310(c)(2)(B)
(the "Nasdaq Rule") for continuous listing on the Nasdaq Small Cap Market. That
Nasdaq Rule requires Nasdaq Small Cap Market companies to maintain a minimum of
$2,500,000 in stockholders' equity, or $35,000,000 market value of listed
securities, or $500,000 of net income from continuing operations for the most
recently completed fiscal year or two of the three most recently completed
fiscal years in order to maintain the listing of their securities on the Nasdaq
Small Cap Market. On April 19, 2005, Catuity submitted a plan to Nasdaq staff
describing how the Company will achieve and sustain compliance with the
$2,500,000 shareholder equity minimum and all other continuous listing
requirements. The Staff is in the process of reviewing the Company's plan.
As of March 31, 2005 Catuity is in compliance with all of Nasdaq's seven
continuous listing requirements except the requirement to maintain either
$2,500,000 in stockholders' equity, or $35,000,000 market value of listed
securities, or have $500,000 of net income in 2004 or in two of its past three
fiscal years. The Company expects to achieve compliance with the one Nasdaq
continuous listing requirement it is not in compliance with by maintaining a
minimum of $2,500,000 in stockholder's equity upon completion of the acquisition
of Loyalty Magic and the capital raise.
F-24
LOYALTY MAGIC PTY LIMITED
SPECIAL PURPOSE FINANCIAL REPORT
FOR THE YEAR ENDED
30TH JUNE 2003
F-25
LOYALTY MAGIC PTY LIMITED
A.C.N. 075 350 239
DECLARATION BY DIRECTORS
The directors have determined that the company is not a reporting entity, but
that this special purpose financial report should be prepared in accordance with
the accounting policies described in Note 1 to the financial statements.
The directors of the company declare that the financial statements and notes as
set out in the attached accounts:
(a) comply with Accounting Standards as described in Note 1 to the
financial statements and the Corporations Regulations 2001; and
(b) give a true and fair view of the company's financial position as at
30 June 2003 and of its performance for the year ended on that date
in accordance with the accounting policies described in Note 1 to
the financial statements.
In the directors' opinion:
(a) the financial statements and notes, as set out in the attached
accounts are in accordance with the Corporations Act 2001; and
(b) there are reasonable grounds to believe that the company will be
able to pay its debts as and when they become due and payable.
Made in accordance with a resolution of the directors.
DIRECTOR .....................................
DIRECTOR .....................................
F-26
LOYALTY MAGIC PTY LIMITED
BALANCE SHEET
AS AT 30TH JUNE 2003
2003 2002
NOTE A$ A$
---- ---------- ----------
CURRENT ASSETS
Cash 2 102,065 30,020
Receivables 3 501,958 512,086
Investments 4 4 4
Other 5 8,810 -
---------- ----------
TOTAL CURRENT ASSETS 612,837 542,110
---------- ----------
NON-CURRENT ASSETS
Property, plant and equipment 6 137,027 132,729
---------- ----------
TOTAL NON-CURRENT ASSETS 137,027 132,729
---------- ----------
TOTAL ASSETS 749,864 674,839
========== ==========
CURRENT LIABILITIES
Accounts Payable 7 108,981 287,323
Borrowings 8 79,190 37,799
Provisions 9 (66,702) 48,357
Other 10 130,583 122,181
---------- ----------
TOTAL CURRENT LIABILITIES 252,052 495,660
---------- ----------
TOTAL LIABILITIES 252,052 495,660
========== ==========
NET ASSETS (LIABILITIES) 497,812 179,179
========== ==========
EQUITY
Issued capital 11 2,698,491 2,694,730
Retained profits (2,200,679) (2,515,551)
---------- ----------
TOTAL EQUITY 497,812 179,179
========== ==========
F-27
LOYALTY MAGIC PTY LIMITED
PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
NOTE A$ A$
---- ---------- ----------
NET PROFIT(LOSS) BEFORE INCOME TAX 153,555 (517,535)
Income Tax Expense (161,317) (216,789)
---------- ----------
NET PROFIT (LOSS) AFTER INCOME TAX 314,872 (300,746)
Retained Profits (Accumulated Losses) at
the beginning of the Financial Year (2,515,551) (2,214,805)
---------- ----------
TOTAL AVAILABLE FOR APPROPRIATION (2,200,679) (2,515,551)
---------- ----------
RETAINED PROFITS (ACCUMULATED LOSSES)
AT END OF FINANCIAL YEAR (2,200,679) (2,515,551)
========== ==========
F-28
LOYALTY MAGIC PTY LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
A$ A$
--------- ---------
SALES
ASP Sales 1,852,563 1,064,073
License Income 668,871 1,187,903
International Sales 12,400 -
--------- ---------
2,533,834 2,251,976
LESS: DIRECT COSTS
Purchases 193,072 213,760
Contract Data Entry 245,706 108,977
--------- ---------
438,778 322,737
--------- ---------
GROSS PROFIT FROM TRADING 2,095,056 1,929,239
EXPENDITURE 1,944,845 2,459,980
--------- ---------
150,211 (530,741)
OTHER INCOME
Interest Received 3,344 12,986
Commissions Received - 220
--------- ---------
3,344 13,206
--------- ---------
NET PROFIT 153,555 (517,535)
========= =========
F-29
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2003
1 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
This financial report is a special purpose financial report prepared for
the use by the members and directors of the company. Although the
directors have determined that the company is not a reporting entity, the
report has been prepared in accordance with the requirements of the
Corporations Law and Generally Accepted Australian Accounting Principles
and Standards.
The report is also prepared on an accruals basis and is based on historic
cost and does not take into account changing money values or, except where
specifically stated, current valuations of non-current assets.
The following material accounting policies, which are consistent with the
previous period unless otherwise stated, have been adopted in the
preparation of this report:-
(a) INCOME TAX
The company adopts the liability method of tax effect accounting whereby
the income tax expense is based on the operating profit adjusted for any
permanent differences.
Future income tax benefits are not brought to account unless realisation
of the asset is assured beyond any reasonable doubt. Future income tax
benefits in relation to tax losses are not brought to account unless there
is virtual certainty of realisation of the benefit.
(b) PROPERTY, PLANT AND EQUIPMENT
Each class of property, plant and equipment is accounted for at cost less
accumulated depreciation, and is depreciated on a diminishing value basis
over the expected useful lives to the company.
(c) EMPLOYEE ENTITLEMENTS
Provision is made for employee entitlements arising from services rendered
by employees to balance date.
(d) REVENUE RECOGNITION
Main Areas of Income
(i) Application Service Provision Income
Fixed Charge Management fees - Invoiced monthly and brought to account
monthly.
Variable Fees - Invoiced monthly based on volume of transactions
processed.
(ii) Licensed Income
Customisation of Software - Taken up as unearned income and brought to
account as revenue, on completion of agreed milestones.
Support Fees - Invoiced in advance, taken up as unearned income and
transferred to revenue depending on the contract terms.
Upgrade rights - Invoiced annually in advance, taken up as unearned income
and transferred to revenue monthly on a straight line basis.
F-30
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
A$ A$
------- -------
2 CASH
Deposits 2,937 2,937
Petty Cash 200 224
Cash at Bank 98,928 26,859
------- -------
102,065 30,020
======= =======
3 RECEIVABLES
CURRENT
Trade Debtors 486,387 492,271
Sundry Debtors 571 -
Rental Bond 15,000 19,815
------- -------
501,958 512,086
======= =======
4 INVESTMENTS
CURRENT
Shares in Associated Companies 4 4
======= =======
5 OTHER ASSETS
CURRENT
Prepayments 8,810 -
======= =======
6 PROPERTY, PLANT & EQUIPMENT
Office Furniture & Equipment at Cost 354,330 313,062
Less: Accumulated Depreciation 217,303 180,333
------- -------
137,027 132,729
------- -------
TOTAL PROPERTY, PLANT & EQUIPMENT 137,027 132,729
======= =======
F-31
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
A$ A$
--------- ---------
7 ACCOUNTS PAYABLE
CURRENT
Sundry Creditors 20,802 7,989
Trade Creditors 88,179 279,334
--------- ---------
108,981 287,323
========= =========
8 BORROWINGS
CURRENT
Hire Purchase Liability - 850
Loans - Related Parties 42,000 -
GST Payable 37,190 36,949
--------- ---------
79,190 37,799
========= =========
9 PROVISIONS
CURRENT
Provision for Annual Leave 103,936 91,926
Provision for Income Tax (384,130) (222,813)
Provision for Bonuses 213,492 179,244
--------- ---------
(66,702) 48,357
========= =========
Aggregate employee entitlement liability 317,428 271,170
========= =========
10 OTHER LIABILITIES
CURRENT
Accrued Expenses - 2,641
Income in Advance 130,583 119,540
--------- ---------
130,583 122,181
========= =========
11 ISSUED CAPITAL
PAID UP CAPITAL:
Issued Capital 2,698,491 2,694,730
========= =========
F-32
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
A$ A$
--------- ---------
12 EXPENDITURE
Salaries 1,048,952 1,606,861
General and Administrative 895,893 853,119
--------- ---------
Total Expenditure 1,944,845 2,459,980
========= =========
13 INCOME TAX EXPENSE
No income tax is payable on the net profit for the year as the company has
accumulated losses available as an income tax deduction from prior years.
Future income tax benefits not brought to account, the benefits of which
will only be realised if the relevant conditions for deductibility occur:
- timing differences 31,181 27,578
- tax losses 359,509 512,520
--------- ---------
Total 390,690 540,098
========= =========
Further, the company is entitled to receive a grant of $161,317 (2002 -
$216,789) from the Australian Taxation Office in respect of research and
development expenditure for the year ended 30 June 2003.
F-33
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
A$ A$
-------- ----------
14 STATEMENT OF CASH FLOWS
RECONCILIATION OF OPERATING PROFIT TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
Operating profit/(loss) after income tax 314,872 (300,746)
Depreciation expense 36,970 46,918
CHANGE IN OPERATING ASSETS AND LIABILITIES
(Increase)/Decrease in trade and other receivables 10,128 (289,322)
(Increase)/Decrease in prepayments (8,810) -
Increase/(Decrease) in trade and other creditors (172,097) (210,732)
Increase/(Decrease) in borrowings 42,241 (125,649)
Increase/(Decrease) in provisions 40,013 49,997
Increase/(Decrease) in unearned income 8,402 32,456
Increase/(Decrease) in provision for income tax (161,317) (222,813)
-------- --------
Net cash flow from operating activities 110,402 (1,019,891)
======== ==========
15 NET PROFIT
Net profit before income tax expense has been determined after including as
expenses:
- depreciation of plant and equipment 36,970 46,918
- bad and doubtful debts - 21,103
F-34
LOYALTY MAGIC PTY LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30TH JUNE 2003
2003 2002
NOTE A$ A$
---- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers 2,547,549 2,000,145
Payments to suppliers and employees (2,374,847) (2,987,717)
Interest Received 3,344 12,986
Interest Paid (65,644) (45,305)
---------- ----------
NET CASH INFLOW FROM OPERATING ACTIVITIES 110,402 (1,019,891)
CASH FLOWS FROM INVESTING ACTIVIES
Payments for property, plant and equipment (41,268) (15,066)
Proceeds from sale of property, plant and equipment - -
---------- ----------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (41,268) (15,066)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of Ordinary Shares 3,761 451,018
Repayment of lease liabilities (850) (13,036)
---------- ----------
Net cash inflow/(outflow) from financing activities 2,911 437,982
Net increase/(decrease) in cash held 72,045 (596,975)
Cash at the beginning of the financial year 2 30,020 626,995
---------- ----------
CASH AT THE END OF THE FINANCIAL YEAR 2 102,065 30,020
========== ==========
F-35
INDEPENDENT AUDITOR'S REPORT
The Directors
Loyalty Magic Pty Ltd
5th Floor, 140 Bourke Street
MELBOURNE VIC 3000
We have audited the accompanying balance sheet of Loyalty Magic Pty Ltd as of 30
June, 2003 and 30 June, 2002, and the related statements of profit and loss and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Loyalty Magic Pty Ltd at 30
June, 2003 and 2002, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
McInnes Graham & Gibbs
Jeffrey E Graham
Partner
29 December, 2004
F-36
LOYALTY MAGIC PTY LIMITED
SPECIAL PURPOSE FINANCIAL REPORT
FOR THE YEAR ENDED
30TH JUNE 2004
F-37
LOYALTY MAGIC PTY LIMITED
A.C.N. 075 350 239
DECLARATION BY DIRECTORS
The directors have determined that the company is not a reporting entity, but
that this special purpose financial report should be prepared in accordance with
the accounting policies described in Note 1 to the financial statements.
The directors of the company declare that the financial statements and notes as
set out in the attached accounts:
(a) comply with Accounting Standards as described in Note 1 to the
financial statements and the Corporations Regulations 2001; and
(b) give a true and fair view of the company's financial position as at 30
June 2004 and of its performance for the year ended on that date in
accordance with the accounting policies described in Note 1 to the
financial statements.
In the directors' opinion:
(a) the financial statements and notes, as set out in the attached
accounts are in accordance with the Corporations Act 2001; and
(b) there are reasonable grounds to believe that the company will be able
to pay its debts as and when they become due and payable.
Made in accordance with a resolution of the directors.
DIRECTOR ------------------------------
DIRECTOR ------------------------------
F-38
LOYALTY MAGIC PTY LIMITED
BALANCE SHEET
AS AT 30TH JUNE 2004
2004 2003
NOTE A$ A$
---- ---------- ----------
CURRENT ASSETS
Cash 2 659,991 102,065
Receivables 3 392,520 501,958
Investments 4 4 4
Other 5 30,795 8,810
---------- ----------
TOTAL CURRENT ASSETS 1,083,310 612,837
---------- ----------
NON-CURRENT ASSETS
Property, plant and equipment 6 157,816 137,027
Intangibles 7 54,391 -
---------- ----------
TOTAL NON-CURRENT ASSETS 212,207 137,027
---------- ----------
TOTAL ASSETS 1,295,517 749,864
========== ==========
CURRENT LIABILITIES
Accounts Payable 8 149,461 108,981
Borrowings 9 34,242 79,190
Provisions 10 185,573 (66,702)
Other 11 133,470 130,583
---------- ----------
TOTAL CURRENT LIABILITIES 502,746 252,052
---------- ----------
TOTAL LIABILITIES 502,746 252,052
========== ==========
NET ASSETS (LIABILITIES) 792,771 497,812
========== ==========
EQUITY
Issued capital 12 2,699,029 2,698,491
Retained profits (1,906,258) (2,200,679)
---------- ----------
TOTAL EQUITY 792,771 497,812
========== ==========
F-39
LOYALTY MAGIC PTY LIMITED
PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
NOTE A$ A$
---- ---------- ----------
NET PROFIT(LOSS) BEFORE INCOME TAX 236,693 153,555
Income Tax Expense (57,728) (161,317)
---------- ----------
NET PROFIT (LOSS) AFTER INCOME TAX 294,421 314,872
Retained Profits (Accumulated Losses) at
the beginning of the Financial Year (2,200,679) (2,515,551)
---------- ----------
TOTAL AVAILABLE FOR APPROPRIATION (1,906,258) (2,200,679)
---------- ----------
RETAINED PROFITS (ACCUMULATED LOSSES)
AT END OF FINANCIAL YEAR (1,906,258) (2,200,679)
========== ==========
F-40
LOYALTY MAGIC PTY LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
A$ A$
--------- ---------
SALES
ASP Sales 1,899,456 1,852,563
Subscription Services 11,475 -
License Income 617,259 668,871
Support Services 180,319 -
International Sales 73,600 12,400
--------- ---------
2,782,109 2,533,834
LESS: DIRECT COSTS
Purchases 149,061 193,072
Contract Data Entry 243,106 245,706
Terminal Costs 40,616 -
--------- ---------
432,783 438,778
--------- ---------
GROSS PROFIT FROM TRADING 2,349,326 2,095,056
EXPENDITURE 2,131,849 1,944,845
--------- ---------
217,477 150,211
OTHER INCOME
Interest Received 14,266 3,344
Government Subsidies 4,950 -
--------- ---------
19,216 3,344
--------- ---------
NET PROFIT 236,693 153,555
========= =========
F-41
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2004
1 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
This financial report is a special purpose financial report prepared for
the use by the members and directors of the company. Although the
directors have determined that the company is not a reporting entity, the
report has been prepared in accordance with the requirements of the
Corporations Law and Generally Accepted Australian Accounting Principles
and Standards.
The report is also prepared on an accruals basis and is based on historic
cost and does not take into account changing money values or, except where
specifically stated, current valuations of non-current assets.
The following material accounting policies, which are consistent with the
previous period unless otherwise stated, have been adopted in the
preparation of this report:-
(a) INCOME TAX
The company adopts the liability method of tax effect accounting whereby
the income tax expense is based on the operating profit adjusted for any
permanent differences.
Future income tax benefits are not brought to account unless realization
of the asset is assured beyond any reasonable doubt. Future income tax
benefits in relation to tax losses are not brought to account unless there
is virtual certainty of realisation of the benefit.
(b) PROPERTY, PLANT AND EQUIPMENT
Each class of property, plant and equipment is accounted for at cost less
accumulated depreciation, and is depreciated on a diminishing value basis
over the expected useful lives to the company.
(c) INTANGIBLES
Web Site development costs are capitalised until completion of the
relevant platform, then amortised on a straight line basis over the period
during which the site is expected to benefit the company.
(d) EMPLOYEE ENTITLEMENTS
Provision is made for employee entitlements arising from services rendered
by employees to balance date.
(e) REVENUE RECOGNITION
Main Areas of Income
(i) Application Service Provision Income
Fixed Charge Management fees - Invoiced monthly and brought to account
monthly.
Variable Fees - Invoiced monthly based on volume of transactions
processed.
F-42
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2004
(e) REVENUE RECOGNITION (CONT'D)
(ii) Licensed Income
Customisation of Software - Taken up as unearned income and brought to
account as revenue, on completion of agreed milestones.
Support Fees - Invoiced in advance, taken up as unearned income and
transferred to revenue depending on the contract terms.
Upgrade rights - Invoiced annually in advance, taken up as unearned income
and transferred to revenue monthly on a straight line basis.
CONFORMITY WITH UNITED STATES OF AMERICA (US) GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) - In order to comply with the provisions of
US GAAP, capitalised Web Development costs, A$54,391 (refer to note 7),
should be written off as expenses in the year ended 30th June 2004. This
adjustment would reduce the company's net profit for the year by A$54,391
and reduce net assets at 30th June, 2004 by A$54,391.
F-43
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
A$ A$
------- -------
2 CASH
Deposits - 2,937
Petty Cash 200 200
Cash at Bank 659,791 98,928
------- -------
659,991 102,065
======= =======
3 RECEIVABLES
CURRENT
Trade Debtors 407,520 486,387
Less: Provision for Doubtful Debts 30,000 -
------- -------
377,520 486,387
------- -------
Sundry Debtors - 571
Rental Bond 15,000 15,000
------- -------
392,520 501,958
======= =======
4 INVESTMENTS
CURRENT
Shares in Associated Companies 4 4
======= =======
5 OTHER ASSETS
CURRENT
Prepayments 30,795 8,810
======= =======
6 PROPERTY, PLANT & EQUIPMENT
Office Furniture & Equipment at Cost 416,163 354,330
Less: Accumulated Depreciation 258,347 217,303
------- -------
157,816 137,027
------- -------
TOTAL PROPERTY, PLANT & EQUIPMENT 157,816 137,027
======= =======
F-44
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
A$ A$
--------- ---------
7 INTANGIBLES
Web Development 54,391 -
========= =========
8 ACCOUNTS PAYABLE
CURRENT
Sundry Creditors 27,198 20,802
Trade Creditors 122,263 88,179
--------- ---------
149,461 108,981
========= =========
9 BORROWINGS
CURRENT
Loans - Related Parties - 42,000
GST Payable 34,242 37,190
--------- ---------
34,242 79,190
========= =========
10 PROVISIONS
CURRENT
Provision for Annual Leave 81,654 103,936
Provision for Income Tax (57,728) (384,130)
Provision for Bonuses 161,647 213,492
--------- ---------
185,573 (66,702)
========= =========
Aggregate employee entitlement liability 243,301 317,428
========= =========
11 OTHER LIABILITIES
CURRENT
Income in Advance 133,470 130,583
========= =========
12 ISSUED CAPITAL
PAID UP CAPITAL:
Issued Capital 2,699,029 2,698,491
========= =========
F-45
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
A$ A$
--------- ---------
13 EXPENDITURE
Salaries 1,156,712 1,048,952
General and Administrative 975,137 895,893
--------- ---------
Total Expenditure 2,131,849 1,944,845
========= =========
14 INCOME TAX EXPENSE
No income tax is payable on the net profit for the year as
the company has accumulated losses available as an income
tax deduction from prior years.
Future income tax benefits not brought to account, the
benefits of which will only be realised if the relevant
conditions for deductibility occur:
- timing differences 24,496 31,181
- tax losses 243,053 359,509
--------- ---------
Total 267,549 390,690
========= =========
Further, the company is entitled to receive a grant of $57,728 (2003 - $161,317)
from the Australian Taxation Office in respect of research and development
expenditure for the year ended 30 June 2004.
F-46
LOYALTY MAGIC PTY LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
A$ A$
------- --------
15 STATEMENT OF CASH FLOWS
RECONCILIATION OF OPERATING PROFIT TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
Operating profit/(loss) after income tax 294,421 314,872
Depreciation expense 41,044 36,970
CHANGE IN OPERATING ASSETS AND LIABILITIES
(Increase)/Decrease in trade and other receivables 109,438 10,128
(Increase)/Decrease in prepayments (21,985) (8,810)
Increase/(Decrease) in trade and other creditors 42,224 (172,097)
Increase/(Decrease) in borrowings (44,948) 42,241
Increase/(Decrease) in provisions (75,871) 40,013
Increase/(Decrease) in unearned income 2,887 8,402
Increase/(Decrease) in provision for income tax 326,402 (161,317)
------- --------
Net cash flow from operating activities 673,612 110,402
======= ========
16 NET PROFIT
Net profit before income tax expense has been determined after
including as expenses:
- depreciation of plant and equipment 41,044 36,970
- bad and doubtful debts 36,591 -
F-47
LOYALTY MAGIC PTY LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30TH JUNE 2004
2004 2003
NOTE A$ A$
---- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers 2,899,384 2,547,549
Payments to suppliers and employees (2,621,208) (2,374,847)
Interest Received 14,266 3,344
Interest Paid (2,960) (65,644)
Income Tax Refund 384,130 -
---------- ----------
NET CASH INFLOW FROM OPERATING ACTIVITIES 673,612 110,402
CASH FLOWS FROM INVESTING ACTIVIES
Payments for property, plant and equipment (61,833) (41,268)
Proceeds from sale of property, plant and equipment - -
Payments for Web Development (54,391) -
---------- ----------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (116,224) (41,268)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of Ordinary Shares 538 3,761
Repayment of lease liabilities - (850)
---------- ----------
Net cash inflow/(outflow) from financing activities 538 2,911
Net increase/(decrease) in cash held 557,926 72,045
Cash at the beginning of the financial year 2 102,065 30,020
---------- ----------
CASH AT THE END OF THE FINANCIAL YEAR 2 659,991 102,065
========== ==========
F-48
INDEPENDENT AUDITOR'S REPORT
The Directors
Loyalty Magic Pty Ltd
5th Floor, 140 Bourke Street
MELBOURNE VIC 3000
We have audited the accompanying balance sheet of Loyalty Magic Pty Ltd as of 30
June, 2004 and 30 June, 2003, and the related statements of profit and loss and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Loyalty Magic Pty Ltd at 30
June, 2004 and 2003, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America, except for the following matter which is
referred to at Note 1 to the Financial Statements -
CONFORMITY WITH UNITED STATES OF AMERICA (US) GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) -
In order to comply with the provisions of US GAAP, capitalised Web Development
Costs, A$54,391 (refer to Note 7), should be written off as expenses in the year
ended 30th June, 2004. This adjustment would reduce the company's net profit for
the year by A$54,391 and reduce net assets at 30th June, 2004 by A$54,391.
McInnes Graham & Gibbs
Jeffrey E Graham
Partner
29 December, 2004
F-49
LOYALTY MAGIC PTY LTD.
INTERIM FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
F-50
LOYALTY MAGIC PTY LTD.
STATEMENT OF OPERATIONS
(in Australian Dollars)
(Unaudited)
Six months ended December 31,
2004 2003
----------- -----------
Revenue:
Project revenue $ 76,344 $ 199,369
Service revenue 1,298,732 1,061,554
License revenue 29,622 111,996
----------- -----------
Total revenue 1,404,698 1,372,919
Cost of revenue and other operating expenses:
Cost of project revenue $ 301,814 $ 407,707
Cost of service revenue 740,501 500,543
Cost of license revenue -- --
Research and development 7,383 --
Sales and marketing 55,967 59,904
General and administrative 428,574 307,522
----------- -----------
Total costs and expenses 1,534,239 1,275,676
Operating profit/(loss) ($ 129,541) $ 97,243
Interest income 7,648 9,248
Income tax (expense)/benefit 58,601 --
----------- -----------
Net profit/(loss) ($ 63,292) $ 106,491
----------- -----------
F-51
LOYALTY MAGIC PTY LTD.
BALANCE SHEET
(in Australian Dollars)
(Unaudited)
DECEMBER 31, DECEMBER 31,
------------ ------------
2004 2003
------------ ------------
Assets
Current Assets:
Cash and cash equivalents $ 125,317 $ 288,557
Accounts receivable-trade, less 695,886 503,469
allowance
Investments 413 --
Prepaid expenses and other 31,165 55,001
----------- -----------
Total current assets 852,781 847,027
Non-Current Assets:
Property and equipment, net 173,323 171,383
Capital leasing, net 89,985 --
Web development 107,669 --
New platform 102,991 --
----------- -----------
Total non-current assets 473,968 171,383
Total Assets $ 1,326,749 $ 1,018,410
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 162,846 101,920
Deferred revenue 112,615 160,187
Accrued compensation 210,216 226,689
Other accrued expenses 27,666 83,003
----------- -----------
Total current liabilities 513,343 571,799
Capital leasing liability 83,528 --
Shareholder loan 12,000
Shareholders' equity:
Common stock - 2,699,429 2,699,030
Additional paid-in capital -- --
Accumulated deficit (1,969,551) (2,264,419)
----------- -----------
Total shareholders' equity 729,878 434,611
Total Liabilities and
Shareholders' Equity $ 1,326,749 $ 1,018,410
F-52
APPENDIX A
CATUITY INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Alfred Henry (John) Racine, III
Catuity Inc., a corporation organized under the laws of the State of
Delaware ("Company"), in consideration of the services to be rendered to Company
or its subsidiaries by ALFRED HENRY "JOHN" RACINE, III ("EXECUTIVE"), hereby
grants, as of September 23, 2004 (the "DATE OF GRANT"), Executive the option to
purchase 77,914 shares (the "Option") of Company's Common Stock (the "Shares"),
at a price of US $4.20 US DOLLARS per share (the "Option Price"), on the terms
and conditions contained in this Nonqualified Stock Option Agreement (the
"Agreement").
ARTICLE I. EXERCISE OF OPTION
This Option shall vest and become exercisable in accordance with the
following schedule:
1. 19,478 Shares [Note: i.e., 25%] shall vest on March 23, 2005 [Note: i.e.,
six (6) months after the Effective Date of the Employment Agreement].
2. 11,687 Shares [Note: i.e., 15%] shall vest on September 23, 2005 [Note:
i.e., one (1) year after the Effective Date of the Employment Agreement].
3. 46,749 Shares [Note: i.e., the balance of the Options] shall vest based
upon the following formula for increases in stock price:
a. 15,583 Shares [Twenty percent (20%) of the remaining stock Options]
shall vest when the stock price increases by $0.42, to at least
$4.62 [i.e., ten percent (10%) above the exercise price].
b. 15,583 Shares [Twenty percent (20%) of the remaining stock Options]
shall vest when the stock price increases by $0.84, to at least
$5.04 [i.e., twenty percent (20%) above the exercise price].
c. 15,583 Shares [the final twenty percent (20%) of the stock Options]
shall vest when the stock price rises by $1.26, to at least $5.46
[i.e., thirty percent (30%) above the exercise price].
For purposes of the foregoing schedule (a) prices and amounts are subject to
appropriate adjustment in the event of a stock split, stock dividend or similar
action (as provided in Article VII, and (b) the "stock price" shall be deemed to
have risen to the indicated mark if the average "Fair Market Value" of the
Company's Shares for a period of ten trading days (which need not be
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consecutive) out of twenty consecutive trading days is at least the indicated
amount. "FAIR MARKET VALUE" means, with respect to the Shares and as of the date
that is relevant to such a determination, the market price per share of such
shares determined by the Company's Board, consistent with the requirements of
Section 422 of the Code and to the extent consistent therewith, as follows: (a)
if the Shares are traded on a stock exchange on the date in question, then the
Fair Market Value will be equal to the closing price reported by the applicable
composite-transactions report for such date; (b) if the Shares are traded
over-the-counter on the date in question and are classified as a national market
issue, then the Fair Market Value will be equal to the last-transaction price
quoted by the NASDAQ system for such date; (c) if the Shares are traded
over-the-counter on the date in question but are not classified as a national
market issue, then the Fair Market Value will be equal to the mean between the
last reported representative bid and asked prices quoted by the NASDAQ system
for such date; and (d) if none of the foregoing provisions are applicable, then
the Fair Market Value will be determined by the Board in good faith on such
basis as it deems appropriate. This Option will accelerate and be fully vested
and exercisable upon a "Change in Control Transaction" as defined below.
In the event of a "Change of Control Transaction" (as defined below), the
Company shall endeavor to cause the successor entity (or its parent or its
subsidiary) in such transaction either to assume all of the Options which have
been granted hereunder and which are outstanding as of the consummation of such
transaction ("CHANGE OF CONTROL CLOSING"), or to issue (or cause to be issued)
in substitution thereof comparable options of such successor entity (or of its
parent or its subsidiary). The Company will notify Executive of the proposed
Change of Control Transaction a reasonable amount of time prior to the Change of
Control Closing so that Executive will be given the opportunity to exercise all
vested Options prior to the Change of Control Closing. For purposes of this
section, the term "CHANGE OF CONTROL TRANSACTION" means a Business Combination
in which less than (50%) of the outstanding voting securities of the successor
entity immediately following the Closing of the Business Combination are
beneficially held by those persons and entities in the same proportion as such
persons and entities beneficially held the voting securities of the Company
immediately prior to such transaction; the term "BUSINESS COMBINATION" means a
transaction or series of transactions consummated within any period of 90 days
resulting in (A) the sale of all or substantially all of the assets of the
Company, (B) a merger or consolidation or other reorganization of which the
Company or a Subsidiary is a merging party, or (C) the sale or other change of
beneficial ownership of at least Thirty Three and One Third Percent of the
outstanding voting securities of the Company.
Notwithstanding the foregoing, this Option shall not be exercisable unless
and until it has been approved by the Company's stockholders.
ARTICLE II. TRANSFERABILITY
This Option may not be transferred by Executive, except by will or the
laws of descent and distribution or pursuant to the terms of a domestic
relations order, as defined in Section 414(p)(1)(B) of the Internal Revenue Code
of 1986, which satisfies the requirements of Section 414(p)(1)(A) of the
Internal Revenue Code of 1986 (a "Qualified Domestic Relations Order"). During
Executive's life, this Option shall be exercisable only by Executive (or
Executive's
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personal representative or attorney-in-fact) or the alternate payee named in a
Qualified Domestic Relations Order pursuant to and in accordance with the terms
and conditions contained in this Agreement. Executive's estate or beneficiary
may exercise this Option to the extent exercisable following the death of
Executive. The Option shall not otherwise be transferred, assigned, pledged or
hypothecated for any purpose whatsoever, and is not subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge or
hypothecation or other disposition of the Option, other than in accordance with
the terms of this Agreement, shall be void and of no effect.
ARTICLE III. MARKET STANDOFF
If in connection with any public offering of securities of the Company (or
any successor entity), the underwriter or underwriters managing such offering so
requests, then during such period in which Executive is an officer, director or
beneficial holder of 10% or more of the Company's Shares, Executive will agree
to not sell or otherwise transfer any such Shares (other than Shares included in
such underwriting) without the prior written consent of such underwriter, for
such period of time as may be requested by the underwriter commencing on the
effective date of the registration statement filed with the Securities and
Exchange Commission in connection with such offering but in no event longer than
the period of time that the officers and directors of the Company are generally
prohibited from Transferring their Shares in connection with such public
offering.
ARTICLE IV. MANNER OF EXERCISE
This Option may be exercised, in accordance with Article I above, by
delivery (personally or by certified or registered mail in accordance with
Article VIII below) of a written notice to Company specifying the number of
Shares to be purchased and accompanied by payment of the purchase price for
those Shares. The purchase price may be paid (a) by payment in cash or by check,
money order or wire transfer, (b) by the delivery of shares of Common Stock
already owned by the Executive for at least six months, (c) by using shares of
Common Stock that would otherwise have been received by the Executive upon
exercise of the option (which method may be restricted to a cashless exercise
procedure involving a broker or dealer) or (d) by a combination of any of the
foregoing. The Company may also permit payment to be made in such other manner
as the Company deems appropriate and in compliance with applicable law. Any
shares delivered to Company in payment of the aggregate Option Price shall be
valued at the Fair Market Value of Company's shares, determined in accordance
with the provisions set forth above as of the date of Executive's exercise of
the Option or any part thereof. The Option shall be exercised in accordance with
such administrative regulations as the Company may from time to time adopt.
ARTICLE V. EXPIRATION
All unexercised rights under the Option shall terminate after the first to
occur of the following events:
i. Five years from the date of this Option.
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ii. Upon the "Termination for Cause" (as defined below) of Executive's
employment with Company or its subsidiaries, this Option, to the extent
not exercised, shall lapse and be of no further force or effect
whatsoever. Upon such lapse, Executive shall not be entitled nor have the
right to purchase any additional Shares under this Agreement.
This Option shall not expire due to termination of Executive's employment
for any reason other than a Termination for Cause. "TERMINATION FOR CAUSE" means
a termination by the Company due specifically to a good faith determination of
the Board of Directors (or of the Company's or Subsidiary's stockholders if so
required, but in either case excluding the vote of Executive if he is a director
or a stockholder) that Executive has engaged in any willful acts which
materially breach any significant fiduciary duty to the Company, any of its
subsidiaries or their stockholders, or in any willful acts involving dishonesty
or moral turpitude or in any willful acts that materially and adversely affect
the business, affairs or reputation of the Company or any of its subsidiaries.
The parties intend that Termination for Cause shall be strictly interpreted so
as to afford Executive the maximum protection afforded by applicable law and as
to not result in a Termination for Cause except in serious and egregious
circumstances, and shall not be lightly invoked by Company. For clarity of this
intent, but without limitation, the types of events that will constitute Cause
hereunder shall include conviction of, or a judgment in a civil action of,
misappropriation, fraud, violation of securities and exchange regulations or
laws, or any other similar laws which materially and adversely affect the
business, affairs or reputation of the Company. For purposes of this paragraph,
no act, or failure to act, on Executive's part shall be considered willful
unless done, or omitted to be done, by him not in good faith and without
reasonable belief that his action or omission was in the best interest of
Company. Notwithstanding the foregoing, prior to terminating Executive for
Cause, the Board shall: (i) deliver to Executive a copy of a notice specifying
the particular detailed reasons why in the opinion of the Board Executive is
guilty of conduct constituting Cause; and (ii) provide Executive an opportunity,
together with counsel, to be heard before the Board. Executive shall be deemed
to have been terminated only after both (i) and (ii) in the immediately
preceding sentence have been met and Executive receives a written notice from
the Board officially terminating his employment (the "Final Notice"). The
foregoing notice and hearing procedure shall not in any way create any
presumption for purposes of interpreting this Agreement with regard to the
legality or validity of the actions taken by the Board, or otherwise. Moreover,
if after receiving the Final Notice after (i) and (ii) have been met, Executive
disagrees with the Board's action, then the parties shall resolve the dispute as
promptly as practicable by binding arbitration before a panel of three
arbitrators pursuant to the rules of the American Arbitration Association.
During the pendency of the arbitration proceeding, Executive's right to exercise
the Option shall be frozen. If the arbitration is not final within 60 days after
the date of the Board's Final Notice, then Executive may thereafter exercise the
Option to the extent vested, with the Shares being held in escrow pending final
determination of the arbitrators, subject to such exercise being unwound if the
arbitrators uphold the Board action.
ARTICLE VI. ISSUE OF SHARES
The Company agrees that it will, within 30 days from the date hereof, take
all actions necessary or appropriate to (i) prepare and file a registration
statement under Section 5 of the
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Securities Act of 1933 and all other applicable securities laws covering the
Shares issuable upon Executive's exercise of the Option and thereafter cause it
to become effective, and (ii) qualify the Shares for listing on the Nasdaq
Small-Cap Market and the Australian Stock Exchange.
ARTICLE VII. REORGANIZATION
If prior to the expiration of the Option, the Shares then subject to the
Option shall be affected by any recapitalization, merger, consolidation,
reorganization, stock dividend, stock split or other change in capitalization
affecting the common stock of Company, Company will appropriately adjust the
number and kind of Shares covered by the Option and the Option Price per share
as is necessary to prevent dilution or the enlargement of rights which might
otherwise result.
ARTICLE VIII. NOTICE
All notices given pursuant to or in connection with this Agreement shall
be in writing and shall be deemed to be duly given (a) when personally
delivered, (b) one day after dispatch via a nationally recognized "overnight"
courier service such as Federal Express, or (c) two (2) days after being mailed,
if sent by certified or registered mail, postage prepaid, return receipt
requested. Notices must be addressed to the Company's principal office,
attention of the Chairman of the Compensation Committee, or to Executive at his
last noted address as shown on the books and records of the Company, or to such
other address as the parties may indicate.
ARTICLE IX. NO RIGHT TO EMPLOYMENT CONFERRED
Nothing in this Agreement or the Plan shall confer upon Executive any
right to continue as an Executive of Company or a subsidiary or interfere in any
way with the right of Company or any subsidiary to terminate Executive's
employment at any time.
ARTICLE X. SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable, the
remaining provisions shall continue to be in full force and effect to the
maximum extent permitted by law. If the implementation or presence of any
provision of this Agreement would or will cause the Plan and thereby the Shares
purchased thereunder to not be in compliance with any statutory provision, such
Agreement provision shall not be implemented or, at Company's option following
notice, such provision shall be severed from this Agreement as is appropriate or
necessary to achieve statutory compliance; provided, however, that the parties
hereby agree to negotiate in good faith as may be necessary to modify this
Agreement to achieve statutory compliance or otherwise effect the intent of the
parties following a severance permitted by this Article X.
ARTICLE XI. AMENDMENT
This instrument contains the entire Agreement of the parties and may only
be amended by written agreement executed by the parties hereto or their
respective successors, as permitted by Article II above. Notwithstanding the
foregoing, the Administrator may, in its discretion, amend this
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agreement without the consent of Executive in such a manner as it believes will
prevent the Option from resulting in "applicable Executive remuneration" within
the meaning of Section 162(m) of the Internal Revenue Code or regulations
thereunder.
ARTICLE XII. GOVERNING LAW
This Agreement is made and entered into and shall be construed and
enforced in accordance with the laws of the State of Delaware.
ARTICLE XIII. HEADINGS
The section numbers and headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
ARTICLE XIV. CONDITION PRECEDENT
This Option is expressly conditioned on receipt of the approving vote of
the Company's stockholders at a date subsequent to its execution.
IN WITNESS WHEREOF, this Nonqualified Stock Option Agreement is hereby
executed as of September 23, 2004.
"COMPANY"
CATUITY INC., a corporation organized under the
laws of the State of Delaware
By:_____________________________________________
Alan L. Gilman, Chairman of the Compensation
Committee
"EXECUTIVE"
________________________________________________
Alfred Henry Racine, III
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APPENDIX B
CATUITY INC.
2005 EMPLOYEE RESTRICTED STOCK PLAN
ARTICLE 1. PURPOSE AND DURATION
SECTION 1.1 PURPOSE.
The Catuity Inc. 2005 Employee Restricted Stock Plan (the "Plan") has two
complementary purposes: (a) to promote the success of the Company by providing
incentives to the officers and other key employees of the Company and its
subsidiaries that will link their personal interests to the long-term financial
success of the Company and to growth in value; and (b) to permit the Company and
its subsidiaries to attract, motivate and retain experienced and knowledgeable
employees upon whose judgment, interest, and special efforts the successful
conduct of the Company's operations is largely dependent.
SECTION 1.2 DURATION.
The Plan will become effective on receipt of the approval of the Company's
shareholders at the Company's 2005 annual meeting of shareholders. The Plan
shall continue in effect until the earliest of: (a) May 31, 2015, (b) the date
the Board terminates the Plan pursuant to ARTICLE 9 herein, or (c) the date all
Shares reserved for issue under the Plan have been issued.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
SECTION 2.1 DEFINITIONS.
Wherever used in the Plan, the following terms shall have the meanings set forth
below and, when the meaning is intended, the initial letter of the word is
capitalized:
a. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
under the Exchange Act.
b. "Award" means a grant of Restricted Shares.
c. "Beneficial Owner" (or derivatives thereof) shall have the meaning
ascribed to such term in Rule 13d-3 under the Exchange Act.
d. "Board" means the Board of Directors of the Company.
e. "Cause" means: (1) if the Participant is subject to an employment
agreement, severance agreement or similar agreement with the Company or a
subsidiary that contains a definition of "cause", such definition; or (2)
otherwise, any of the following as
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determined by the Committee: (a) violation of the provisions of any employment
agreement, non-competition agreement, confidentiality agreement, or similar
agreement with the Company or any of its subsidiaries, or the Company's or any
of its subsidiaries' code of ethics, as then in effect; (b) conduct rising to
the level of gross negligence or willful misconduct in the course of employment
with the Company or any of its subsidiaries; (c) commission of an act of
dishonesty or disloyalty involving the Company or any of its subsidiaries; (d)
violation of any federal, state or local law in connection with the
Participant's employment; or (e) breach of any fiduciary duty to the Company or
any of its subsidiaries.
f. "Change in Control" means the occurrence of any one of the following: (i) any
Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or
other fiduciary holding securities under any employee benefit plan of the
Company or any of its subsidiaries, (C) an underwriter temporarily holding
securities pursuant to an offering of such securities or (D) a corporation
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock in the Company
("Excluded Persons") is or becomes the "Beneficial Owner" (as such term is
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or its Affiliates
after January 1, 2005, pursuant to express authorization by the Board that
refers to this exception and not including securities of the Company subject to
proxies held by such Person, but including securities of the Company subject to
exercisable options held by such Person) representing thirty three and one-third
percent (33-1/3%) or more of either the then outstanding shares of common stock
of the Company or the combined voting power of the Company's then outstanding
voting securities; or (ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals who,
on January 1, 2005, constituted the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company, as such
terms are used in former Rule 14a-11 of Regulation 14A under the Exchange Act)
whose appointment or election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors on January 1, 2005,
or whose appointment, election or nomination for election was previously so
approved; or (iii) the shareholders of the Company approve a merger,
consolidation or share exchange of the Company with any other corporation or
approve the issue of voting securities of the Company in connection with a
merger, consolidation or share exchange of the Company in connection with a
merger, consolidation or share exchange of the Company (or any direct or
indirect subsidiary of the Company) pursuant to applicable stock exchange
requirements, other than (A) a merger, consolidation or share exchange which
would result in the voting securities of the Company outstanding immediately
prior to such merger, consolidation or share exchange continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof) at least 50% of the combined voting
power of the voting securities of the Company of such surviving entity or any
parent thereof
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outstanding immediately after such merger, consolidation or share
exchange, or (B) a merger, consolidation or share exchange effected to
implement a recapitalization of the Company (or similar transaction) in
which no Person (other than an Excluded Person) is or becomes the
Beneficial Owner, directly or indirectly, of securities of the Company
(not including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its Affiliates after
January 1, 2005 pursuant to express authorization by the Board that refers
to this exception) representing thirty three and one-third percent
(33-1/3%) or more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then outstanding
voting securities; or (iv) the shareholders of the Company approve a plan
of complete liquidation or dissolution of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets (in one transaction or a series of related transactions
within any period of 24 consecutive months), other than a sale or
disposition by the Company of all or substantially all of the Company's
assets to an entity at least 75% of the combined voting power of the
voting securities of which are owned by Persons in substantially the same
proportions as their ownership of the Company immediately prior to such
sale.
g. "Code" means the Internal Revenue Code of 1986, as interpreted by rules
and regulations issued pursuant thereto, all as amended and in effect from
time to time. Any reference to a specific provision of the Code shall be
deemed to include reference to any successor provision thereto.
h. "Committee" means the Compensation Committee of the Board, or such
other committee appointed by the Board to administer the Plan pursuant to
ARTICLE 3 herein.
i. "Company" means Catuity Inc., a Delaware corporation, and any successor
as provided in ARTICLE 12.
j. "Eligible Employee" means a full-time exempt employee of the Company or
any of its subsidiaries or such other key employees as determined by the
Committee.
k. "Exchange Act" means the Securities Exchange Act of 1934, as
interpreted by rules and regulations issued pursuant thereto, all as
amended and in effect from time to time. Any reference to a specific
provision of the Exchange Act shall be deemed to include reference to any
successor provision thereto.
l. "Fair Market Value" means such value as determined by the Board based
on such valuation methods and/or indicia of value as the Board deems
advisable at the time of such determination. The use by the Board of any
method or indicia of value to determine Fair Market Value on any valuation
date will not, of itself, preclude the Board from use of a different
method or indicia on a subsequent valuation date.
m. "Inimical Conduct" means any act or omission that is inimical to the
best interests of the Company or any of its subsidiaries, as determined by
the Committee in its sole discretion, including but not limited to: (1)
violation of the provisions of any employment
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agreement, non-competition agreement, confidentiality agreement, or
similar agreement with the Company or any of its subsidiaries, or the
Company's or any of its subsidiaries' code of ethics, as then in effect;
(2) taking any steps or doing anything which would damage or negatively
reflect on the reputation of the Company or any of its subsidiaries; or
(3) failure to comply with applicable laws relating to trade secrets,
confidential information or unfair competition.
n. "Participant" means an Eligible Employee who has been granted an Award.
o. "Performance Goals" means any goal(s) the Committee establishes that
relate to one or more of the following with respect to the Company or any
one or more of its subsidiaries or other business units: net sales; cost
of sales; gross income; operating income; earnings before interest and
taxes; earnings before interest, taxes, depreciation and amortization;
income from continuing operations; net income; basic earnings per share;
diluted earnings per share; cash flow; net cash provided by operating
activities; net cash provided by operating activities less net cash used
in investing activities; ratio of debt to debt plus equity; return on
shareholder equity; return on invested capital; return on average total
capital employed; return on net assets employed before interest and taxes;
operating working capital; average accounts receivable (calculated by
taking the average of accounts receivable at the end of each month);
average inventories (calculated by taking the average of inventories at
the end of each month); and economic value added. As to each Performance
Goal, the relevant measurement of performance shall be computed in
accordance with generally accepted accounting principles, but, unless
otherwise determined by the Committee, will exclude the effects of (1)
extraordinary, unusual and/or non-recurring items of gain or loss; (2)
gains or losses on the disposition of a business; (3) changes in tax or
accounting regulations or laws; or (4) the effect of a merger or
acquisition, that in each case the Company identifies in its audited
financial statements, including footnotes, or the Management's Discussion
and Analysis Section of the Company's annual report on Form 10-K. In the
case of Awards that the Committee determines will not be considered
"performance-based compensation" under Code Section 162(m), the Committee
may establish other Performance Goals not listed in the Plan.
p. "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof.
q. "Plan" means this Catuity Inc. 2005 Employee Restricted Stock Plan as
from time to time amended and in effect.
r. "Restricted Shares" means Shares that are subject to a Restriction
Period.
s. "Restriction Period" means the period during which Shares issued under
the Plan may not be transferred and are subject to a substantial risk of
forfeiture.
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t. "Retirement" means a voluntary termination of employment from the
Company and its subsidiaries (other than for Cause) in accordance with a
Company retirement plan or policy. [David - we don't have a written plan
or policy. Does that affect this language?]
u. "Securities Act" means the Securities Act of 1933, as interpreted by
rules and regulations issued pursuant thereto, all as amended and in
effect from time to time. Any reference to a specific provision of the
Securities Act shall be deemed to include reference to any successor
provision thereto.
v. "Share" means a share of the common stock of the Company, or such other
securities specified in SECTION 4.3.
w. "Total and Permanent Disability" means the Participant's inability to
perform the material duties of his occupation as a result of a
medically-determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
period of at least 12 months, as determined by the Committee. The
Participant will be required to submit such medical evidence or to undergo
a medical examination by a doctor selected by the Committee as the
Committee determines is necessary in order to make a determination
hereunder.
SECTION 2.2 CONSTRUCTION.
Wherever any words are used in the masculine, they shall be construed as though
they were used in the feminine in all cases where they would so apply; and
wherever any words are use in the singular or the plural, they shall be
construed as though they were used in the plural or the singular, as the case
may be, in all cases where they would so apply. Titles of articles and sections
are for general information only, and the Plan is not to be construed by
reference to such items.
SECTION 2.3 SEVERABILITY.
In the event any provision of the Plan is held illegal or invalid for any
reason, the illegality or invalidity shall not affect the remaining parts of the
Plan, and the Plan shall be construed and enforced as if the said illegal or
invalid provision had not been included.
ARTICLE 3. ADMINISTRATION
SECTION 3.1 THE COMMITTEE.
The Committee shall administer the Plan. If at any time the Committee shall
cease to exist, then the Board shall administer the Plan or another committee
appointed by the Board, and each reference to the Committee herein shall be
deemed to refer to the Board or such committee appointed by the Board.
SECTION 3.2 AUTHORITY OF THE COMMITTEE.
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In addition to the authority specifically granted to the Committee in the Plan,
and subject to the provisions of the Plan, the Committee shall have full power
and discretionary authority to: (a) select Participants, grant Awards, and
determine the terms and conditions of each such Award, including but not limited
to the Restriction Period and the number of Shares to which the Award will
relate; (b) administer the Plan, including but not limited to the power and
authority to construe and interpret the Plan and any award agreement; (c)
correct errors, supply omissions or reconcile inconsistencies in the terms of
the Plan and any award agreement; (d) establish, amend or waive rules and
regulations, and appoint such agents, as it deems appropriate for the Plan's
administration; and (e) make any other determinations, including factual
determinations, and take any other action as it determines is necessary or
desirable for the Plan's administration. Notwithstanding the foregoing, the
Committee shall have no authority to act to adversely affect the rights or
benefits granted under any outstanding Award without the consent of the person
holding such Award (other than as specifically provided herein).
SECTION 3.3 DECISION BINDING.
The Committee's determination and decisions made pursuant to the provisions of
the Plan and all related orders or resolutions of the Board shall be final,
conclusive and binding on all persons who have an interest in the Plan or an
Award, and such determinations and decisions shall not be reviewable.
SECTION 3.4 PROCEDURES OF THE COMMITTEE.
The Committee's determinations must be made by not less than a majority of its
members present at the meeting (in person or otherwise) at which a quorum is
present, or by written majority consent, which sets forth the action, is signed
by each member of the Committee and filed with the minutes for proceedings of
the Committee. A majority of the entire Committee shall constitute a quorum for
the transaction of business. Service on the Committee shall constitute service
as a director of the Company so that the Committee members shall be entitled to
indemnification, limitation of liability and reimbursement of expenses with
respect to their Committee services to the same extent that they are entitled
under the Company's By-laws and Delaware law for their services as directors of
the Company.
SECTION 3.5 AWARD AGREEMENTS.
The Committee shall evidence the grant of each Award by an award agreement that
shall be signed by an authorized officer of the Company and by the Participant,
and shall contain such terms and conditions as may be approved by the Committee,
subject to the terms of the Plan. Terms and conditions of such Awards need not
be the same in all cases.
ARTICLE 4. SHARES SUBJECT TO THE PLAN; ADJUSTMENTS
SECTION 4.1 NUMBER OF SHARES.
Subject to adjustment as provided in SECTION 4.3, the aggregate number of Shares
that may be issued under the Plan shall not exceed 267,000 Shares.
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SECTION 4.2 LAPSED AWARDS.
If any Award is forfeited or terminated for any reason, the Restricted Shares
subject to such Award that are forfeited shall be available for the grant of a
new Award under the Plan.
SECTION 4.3 ADJUSTMENTS IN NUMBER OF SHARES.
In the event of any merger, reorganization, consolidation, recapitalization,
separation, liquidation, stock dividend, split-up, share combination, or other
change in the corporate structure of the Company affecting the Shares, the
Committee may adjust: (a) the number and class of Shares which may be delivered
under the Plan; (b) the number and class of Shares subject to outstanding
Awards, as it determines to be appropriate and equitable to prevent dilution or
enlargement of the rights intended to be granted hereunder and under any Award;
provided, however, that the number of Shares subject to any individual Award
shall be rounded down to the nearest whole number.
ARTICLE 5. PARTICIPATION
Subject to the provisions of the Plan, the Committee shall have the
authority to select the Eligible Employees to receive Awards. No Eligible
Employee shall have any right to be granted an Award, even if previously granted
an Award.
ARTICLE 6. TERMS AND CONDITIONS OF AWARDS
SECTION 6.1 GRANT OF AWARD.
Subject to the terms and provisions of the Plan, the Committee shall have the
authority to determine the number of Shares to which an Award shall relate, the
term of the Restriction Period and conditions for lapse thereof, including but
not limited to the attainment of one or more Performance Goals, and any other
terms and conditions of an Award.
SECTION 6.2 TERMS AND CONDITIONS OF AWARDS.
a. Period of Restriction. Unless the Committee determines otherwise, Restricted
Shares may not be sold, transferred, pledged, assigned, or otherwise alienated
or hypothecated by a Participant prior to the lapse of the Restriction Period,
other than by will or the laws of descent and distribution. The Restricted
Shares shall be subject to a substantial risk of forfeiture until the
termination of the applicable Restriction Period as set forth in the
Participant's award agreement or as provided herein. During the Restriction
Period, the Company shall have the right to hold the Restricted Shares.
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b. Certificate Legend. At the Committee's direction, each certificate
representing Restricted Shares may bear the following legend:
"THE SALE OR OTHER TRANSFER OF THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE, WHETHER VOLUNTARY, INVOLUNTARY, OR BY OPERATION OF LAW, IS SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THE CATUITY INC. 2005 EMPLOYEE
RESTRICTED STOCK PLAN, IN THE RULES AND ADMINISTRATIVE PROCEDURES ADOPTED
PURSUANT TO SUCH PLAN AND/OR IN A RESTRICTED STOCK AGREEMENT ISSUED PURSUANT TO
SUCH PLAN. A COPY OF THE FOREGOING DOCUMENTS MAY BE OBTAINED FROM THE SECRETARY
OF CATUITY INC."
c. Removal of Restrictions. Except as otherwise provided in this ARTICLE 6,
Restricted Shares shall become vested in, and freely transferable by, a
Participant after the last day of the Restriction Period. Once the Restricted
Shares are released from the restrictions, a Participant shall be entitled to
have the legend required by subsection (b) removed from his or her stock
certificate representing such shares.
d. Voting Rights. Unless otherwise determined by the Committee, during the
Restriction Period Participants holding Restricted Shares may exercise full
voting rights with respect to those Shares.
e. Dividends and Other Distributions. Any dividends or other distributions paid
or delivered with respect to Restricted Shares will be subject to the same terms
and conditions (including risk of forfeiture) as the Restricted Shares to which
they relate, and payment or delivery thereof will be deferred accordingly;
provided, however, that at any time and from time to time the Committee may, in
its sole discretion, provide for the earlier payout of deferred and/or current
dividends and distributions. No such deferred amount shall bear interest.
SECTION 6.3 TERMINATION OF EMPLOYMENT.
Except as otherwise provided by the Committee in a Participant's award
agreement, upon a Participant's termination of employment with the Company and
its subsidiaries, the following rules shall apply:
a. Retirement. If the Participant terminates employment due to Retirement, any
remaining Restriction Period shall continue as if the Participant continued in
active employment. Notwithstanding the foregoing, if the Committee determines
that the Participant has engaged in Inimical Conduct after his or her
Retirement, any Restricted Shares still subject to a Restriction Period shall
automatically be forfeited as of the date of the Committee's determination.
b. Death or Disability. If the Participant's employment terminates because of
death or Total and Permanent Disability at a time when the Participant could not
have been terminated for Cause, or if the Participant dies after Retirement
while holding an Award that is subject to a Restriction
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Period, any remaining Restriction Period shall automatically lapse as of the
date of such termination of employment or death, as applicable.
c. Termination for Other Reasons. If the Participant's employment terminates for
any reason not described above, then any Restricted Shares still subject to a
Restriction Period as of the date of such termination shall automatically be
forfeited and returned to the Company; provided, however, that in the event of
an involuntary termination of the employment of a Participant by the Company or
any of its subsidiaries other than for Cause, the Committee may waive the
automatic forfeiture of any or all such Shares and may add such new restrictions
to such Restricted Shares as it, in its sole and absolute discretion, deems
appropriate.
d. Suspension. The Committee may suspend payment or delivery of Shares (without
liability for interest thereon) pending its determination of whether a
Participant was or should have been terminated for Cause or whether a
Participant has engaged in Inimical Conduct.
SECTION 6.4 OTHER RESTRICTIONS.
The Committee may impose such other restrictions on any Awards granted under the
Plan (including after the Restriction Period lapses) as it may deem advisable
including, without limitation, restrictions under applicable Federal or state
securities laws, and the Company may legend certificates to give appropriate
notice of such restrictions.
ARTICLE 7. RIGHTS OF PARTICIPANTS
SECTION 7.1 EMPLOYMENT.
Nothing in the Plan shall interfere with or limit in any way the right of the
Company or any of its subsidiaries to terminate any Participant's employment at
any time, nor confer upon any Participant any right to continue in the employ of
the Company or any of its subsidiaries.
SECTION 7.2 NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE.
Neither the establishment of the Plan nor any amendment thereof shall be
construed as giving any Participant or any other person any legal or equitable
right unless such right shall be specifically provided for in the Plan or
conferred by specific action of the Committee in accordance with the terms and
provisions of the Plan.
SECTION 7.3 NO FUNDING
Except as provided in SECTION 6.2(e), Participants will only receive Shares upon
the expiration of the Restriction Period for Awards. Neither the Participant nor
any other person shall acquire, by reason of the Plan or any Award, any right in
or title to any assets, funds or property of the Company and its subsidiaries
whatsoever including, without limiting the generality of the foregoing, any
specific funds, assets, or other property which the Company or its subsidiaries
may, in their sole discretion, set aside in anticipation of a liability
hereunder. Any amounts which may become payable hereunder shall be paid from the
general assets of the Company and its
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subsidiaries, as applicable. The Participant shall have only a contractual right
to the amounts, if any, payable hereunder unsecured by any asset of the Company
or its subsidiaries. Nothing contained in the Plan constitutes a guarantee by
the Company or its subsidiaries that the assets of the Company or its
subsidiaries shall be sufficient to pay to any person any amount which may
become payable hereunder.
SECTION 7.4 OTHER RESTRICTIONS.
As a condition to the issue of any Shares under the Plan, the Committee may
require a Participant to enter into a restrictive stock transfer agreement or
other shareholder's agreement with the Company.
ARTICLE 8. CHANGE IN CONTROL
The Restriction Period for each outstanding Award shall automatically
lapse upon a Change in Control.
ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION
SECTION 9.1 AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN.
The Board may amend or terminate the Plan at any time, subject to the following
limitations: (a) shareholders must approve any amendment of the Plan if the
Committee determines such approval is required by: (i) the Exchange Act, (ii)
the Code, (iii) the listing requirements of the Nasdaq OTCBB, the Australian
Stock Exchange or any principal securities exchange or market on which the
Shares are then traded, or (iv) any other applicable law. Without the written
consent of the affected Participant or except as expressly provided in the Plan,
no termination, amendment or modification of the Plan shall adversely affect any
Award theretofore granted under the Plan.
SECTION 9.2 AMENDMENT OF AWARD AGREEMENTS.
The Committee may at any time amend any outstanding award agreement; provided,
however, that any amendment that decreases or impairs the rights of a
Participant under such agreement shall not be effective unless consented to by
the Participant in writing, except that Participant consent shall not be
required if an Award is amended, adjusted or cancelled under SECTION 4.4.
SECTION 9.3 SURVIVAL FOLLOWING TERMINATION.
Notwithstanding the foregoing, to the extent provided in the Plan, the authority
of (a) the Committee to amend, alter, adjust, suspend, discontinue or terminate
any Award, waive any conditions or restrictions with respect to any Award, and
otherwise administer the Plan and any Award and (b) the Board to amend the Plan,
shall continue beyond the date of the Plan's termination. Termination of the
Plan shall not affect the rights of Participants with respect to Awards
previously granted to them, and all unexpired Awards shall continue in force and
effect
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after termination of the Plan except as they may lapse or be terminated by their
own terms and conditions.
SECTION 9.4 SHAREHOLDER APPROVAL.
The material terms of the Plan shall be submitted for approval by the Company's
shareholders no later than the first annual shareholders' meeting (or special
meeting in lieu of such meeting) that occurs in 2005. This Plan shall not be
effective, nor may any grants be made hereunder, unless and until the Company's
shareholders have approved it.
ARTICLE 10. WITHHOLDING
SECTION 10.1 TAX WITHHOLDING.
The Company shall have the power and the right to deduct or withhold, or require
a Participant to remit to the Company, an applicable amount sufficient to
satisfy foreign, Federal, state and local taxes (including the Participant's
F.I.C.A. obligation) required by law to be withheld with respect to the issue of
Shares under the Plan or the lapse of the Restriction Period. The Company shall
also have the right to withhold Shares as to which the Restriction Period has
lapsed and which have a Fair Market Value equal to a Participant's minimum tax
withholding liability, to satisfy any withholding obligations. The value of the
Shares to be withheld is to be based on the Fair Market Value of the Shares on
the date that the amount of tax to be withheld is determined.
SECTION 10.2 STOCK DELIVERY OR WITHHOLDING.
Participants may elect, subject to the approval of the Committee and such rules
as it shall prescribe, to satisfy the withholding requirement, in whole or in
part, by tendering to the Company previously-acquired Shares (or by having the
Company withhold Shares as to which the Restriction Period has lapsed) in an
amount having a Fair Market Value equal to the amount required to be withheld to
satisfy the tax withholding obligations described in Section 10.1.
Such election must be made on or before the date the amount of tax to be
withheld is determined. Once made, the election is irrevocable. The value of the
Shares to be tendered (or withheld) is to be based on the Fair Market Value of
the Shares on the date that the amount of tax to be withheld is determined.
ARTICLE 11. LEGENDS; PAYMENT OF EXPENSES
SECTION 11.1 LEGENDS.
The Company may endorse such legend or legends upon the certificates for Shares
issued under the Plan, including but not limited to the legends referenced in
SECTION 6.2(b) and SECTION 6.4, and may issue such "stop transfer" instructions
to its transfer agent in respect of such Shares as it determines to be
necessary, appropriate or convenient to (a) prevent a violation of, or to
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perfect an exemption from, the registration requirements of the Securities Act,
applicable state securities laws or other legal requirements, or (b) implement
the provisions of the Plan or any agreement between the Company and a
Participant with respect to such Shares.
SECTION 11.2 PAYMENT OF EXPENSES.
The Company shall pay for all taxes with respect to the issue of Shares under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issue.
ARTICLE 12. SUCCESSORS
All obligations of the Company under the Plan respecting Awards shall be
binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation or
otherwise, of all or substantially all of the business and/or assets of the
Company. The Plan shall be binding upon and inure to the benefit of the
Participants and their heirs, executors, administrators or legal
representatives.
ARTICLE 13. REQUIREMENTS OF LAW
SECTION 13.1 REQUIREMENTS OF LAW.
The granting of Awards and the issue of Shares under the Plan shall be subject
to all applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
SECTION 13.2 GOVERNING LAW.
The Plan and the rights and obligations hereunder shall be governed by and
construed in accordance with the internal laws of the State of Delaware
(excluding any choice of law rules that may direct the application of the laws
of another jurisdiction).
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APPENDIX C
CATUITY INC.
2005 NONEMPLOYEE DIRECTOR RESTRICTED STOCK PLAN
ARTICLE 1. PURPOSE AND DURATION
SECTION 1.1 PURPOSE.
The Catuity Inc. 2005 Nonemployee Director Restricted Stock Plan (the "Plan")
has two complementary purposes: (a) to promote the success of the Company by
providing incentives to the nonemployee directors of the Company and its
subsidiaries that will link their personal interests to the long-term financial
success of the Company and to growth in value; and (b) to permit the Company and
its subsidiaries to attract, motivate and retain experienced and knowledgeable
nonemployee directors upon whose judgment, interest, and special efforts the
successful conduct of the Company's operations is largely dependent.
SECTION 1.2 DURATION.
The Plan will become effective on receipt of the approval of the Company's
shareholders at the Company's 2005 annual meeting of shareholders. The Plan
shall continue in effect until the earliest of: (a) May 31, 2015, (b) the date
the Board terminates the Plan pursuant to ARTICLE 9 herein, or (c) the date all
Shares reserved for issue under the Plan have been issued.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
SECTION 2.1 Definitions.
Wherever used in the Plan, the following terms shall have the meanings set forth
below and, when the meaning is intended, the initial letter of the word is
capitalized:
a. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
under the Exchange Act.
b. "Award" means a grant of Restricted Shares.
c. "Beneficial Owner" (or derivatives thereof) shall have the meaning
ascribed to such term in Rule 13d-3 under the Exchange Act.
d. "Board" means the Board of Directors of the Company.
e. "Cause" means any of the following as determined by the Committee: (1)
violation of the provisions of any non-competition agreement,
confidentiality agreement, or similar agreement with the Company or any of
its subsidiaries, or the Company's or any of its
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subsidiaries' code of ethics, as then in effect; (2) conduct rising to the
level of gross negligence or willful misconduct in the course of board
duties with the Company or any of its subsidiaries; (3) commission of an
act of dishonesty or disloyalty involving the Company or any of its
subsidiaries; (4) violation of any federal, state or local law in
connection with the Participant's service as a Board member; or (5) breach
of any fiduciary duty to the Company or any of its subsidiaries.
f. "Change in Control" means the occurrence of any one of the following:
(i) any Person (other than (A) the Company or any of its subsidiaries, (B)
a trustee or other fiduciary holding securities under any employee benefit
plan of the Company or any of its subsidiaries, (C) an underwriter
temporarily holding securities pursuant to an offering of such securities
or (D) a corporation owned, directly or indirectly, by the shareholders of
the Company in substantially the same proportions as their ownership of
stock in the Company ("Excluded Persons") is or becomes the "Beneficial
Owner" (as such term is defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its Affiliates after January 1, 2005,
pursuant to express authorization by the Board that refers to this
exception and not including securities of the Company subject to proxies
held by such Person, but including securities of the Company subject to
exercisable options held by such Person) representing thirty three and
one-third percent (33-1/3%) or more of either the then outstanding shares
of common stock of the Company or the combined voting power of the
Company's then outstanding voting securities; or (ii) the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on January 1, 2005, constituted
the Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company, as such terms are
used in former Rule 14a-11 of Regulation 14A under the Exchange Act) whose
appointment or election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on January
1, 2005, or whose appointment, election or nomination for election was
previously so approved; or (iii) the shareholders of the Company approve a
merger, consolidation or share exchange of the Company with any other
corporation or approve the issue of voting securities of the Company in
connection with a merger, consolidation or share exchange of the Company
in connection with a merger, consolidation or share exchange of the
Company (or any direct or indirect subsidiary of the Company) pursuant to
applicable stock exchange requirements, other than (A) a merger,
consolidation or share exchange which would result in the voting
securities of the Company outstanding immediately prior to such merger,
consolidation or share exchange continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) at least 50% of the combined
voting power of the voting securities of the Company of such surviving
entity or any parent thereof outstanding immediately after such merger,
consolidation or share exchange, or (B) a merger, consolidation or share
exchange effected to implement a recapitalization of the Company (or
similar transaction) in which no Person (other than an Excluded Person) is
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or becomes the Beneficial Owner, directly or indirectly, of securities of
the Company (not including in the securities beneficially owned by such
Person any securities acquired directly from the Company or its Affiliates
after January 1, 2005 pursuant to express authorization by the Board that
refers to this exception) representing thirty three and one-third percent
(33-1/3%) or more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then outstanding
voting securities; or (iv) the shareholders of the Company approve a plan
of complete liquidation or dissolution of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets (in one transaction or a series of related transactions
within any period of 24 consecutive months), other than a sale or
disposition by the Company of all or substantially all of the Company's
assets to an entity at least 75% of the combined voting power of the
voting securities of which are owned by Persons in substantially the same
proportions as their ownership of the Company immediately prior to such
sale.
g. "Code" means the Internal Revenue Code of 1986, as interpreted by rules
and regulations issued pursuant thereto, all as amended and in effect from
time to time. Any reference to a specific provision of the Code shall be
deemed to include reference to any successor provision thereto.
h. "Committee" means the Compensation Committee of the Board, or such
other committee appointed by the Board to administer the Plan pursuant to
ARTICLE 3 herein.
i. "Company" means Catuity Inc., a Delaware corporation, and any successor
as provided in ARTICLE 12.
j. "Eligible Nonemployee Director" means shall mean a director meeting the
definition of "non-employee director" set forth in Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended, or any successor
rule.
k. "Exchange Act" means the Securities Exchange Act of 1934, as
interpreted by rules and regulations issued pursuant thereto, all as
amended and in effect from time to time. Any reference to a specific
provision of the Exchange Act shall be deemed to include reference to any
successor provision thereto.
l. "Fair Market Value" means such value as determined by the Board based
on such valuation methods and/or indicia of value as the Board deems
advisable at the time of such determination. The use by the Board of any
method or indicia of value to determine Fair Market Value on any valuation
date will not, of itself, preclude the Board from use of a different
method or indicia on a subsequent valuation date.
m. "Inimical Conduct" means any act or omission that is inimical to the
best interests of the Company or any of its subsidiaries, as determined by
the Committee in its sole discretion, including but not limited to: (1)
violation of the provisions of any non-competition agreement,
confidentiality agreement, or similar agreement with the Company or any of
its subsidiaries, or the Company's or any of its subsidiaries' code of
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ethics, as then in effect; (2) taking any steps or doing anything which
would damage or negatively reflect on the reputation of the Company or any
of its subsidiaries; or (3) failure to comply with applicable laws
relating to trade secrets, confidential information or unfair competition.
n. "Participant" means an Eligible Nonemployee Director who has been
granted an Award.
p. "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof.
q. "Plan" means this Catuity Inc. 2005 Nonemployee Director Restricted
Stock Plan as from time to time amended and in effect.
r. "Restricted Shares" means Shares that are subject to a Restriction
Period.
s. "Restriction Period" means the period beginning on the date of a
particular Award during which Shares issued under the Plan may not be
transferred and are subject to a substantial risk of forfeiture. Such
Restriction Period shall be determined as provided elsewhere in this Plan,
or at the discretion of the Committee.
t. "Retirement" means a voluntary termination of membership on the
Company's Board for any reason other than for Cause.
u. "Securities Act" means the Securities Act of 1933, as interpreted by
rules and regulations issued pursuant thereto, all as amended and in
effect from time to time. Any reference to a specific provision of the
Securities Act shall be deemed to include reference to any successor
provision thereto.
v. "Share" means a share of the common stock of the Company, or such other
securities specified in SECTION 4.3.
w. "Total and Permanent Disability" means the Participant's inability to
perform the material duties of his occupation as a result of a
medically-determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
period of at least 12 months, as determined by the Committee. The
Participant will be required to submit such medical evidence or to undergo
a medical examination by a doctor selected by the Committee as the
Committee determines is necessary in order to make a determination
hereunder.
SECTION 2.2 CONSTRUCTION.
Wherever any words are used in the masculine, they shall be construed as though
they were used in the feminine in all cases where they would so apply; and
wherever any words are use in the singular or the plural, they shall be
construed as though they were used in the plural or the singular, as the case
may be, in all cases where they would so apply. Titles of articles and
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sections are for general information only, and the Plan is not to be construed
by reference to such items.
SECTION 2.3 SEVERABILITY.
In the event any provision of the Plan is held illegal or invalid for any
reason, the illegality or invalidity shall not affect the remaining parts of the
Plan, and the Plan shall be construed and enforced as if the said illegal or
invalid provision had not been included.
ARTICLE 3. ADMINISTRATION
SECTION 3.1 THE COMMITTEE.
The Committee shall administer the Plan. If at any time the Committee shall
cease to exist, then the Board shall administer the Plan or another committee
appointed by the Board, and each reference to the Committee herein shall be
deemed to refer to the Board or such committee appointed by the Board.
SECTION 3.2 AUTHORITY OF THE COMMITTEE.
In addition to the authority specifically granted to the Committee in the Plan,
and subject to the provisions of the Plan, the Committee shall have full power
and discretionary authority to: (a) administer the Plan, including but not
limited to the power and authority to construe and interpret the Plan and any
award agreement; (b) correct errors, supply omissions or reconcile
inconsistencies in the terms of the Plan and any award agreement; (c) establish,
amend or waive rules and regulations, and appoint such agents, as it deems
appropriate for the Plan's administration; and (d) make any other
determinations, including factual determinations, and take any other action as
it determines is necessary or desirable for the Plan's administration.
Notwithstanding the foregoing, the Committee shall have no authority to act to
adversely affect the rights or benefits granted under any outstanding Award
without the consent of the person holding such Award (other than as specifically
provided herein).
SECTION 3.3 DECISION BINDING.
The Committee's determination and decisions made pursuant to the provisions of
the Plan and all related orders or resolutions of the Board shall be final,
conclusive and binding on all persons who have an interest in the Plan or an
Award, and such determinations and decisions shall not be reviewable.
SECTION 3.4 PROCEDURES OF THE COMMITTEE.
The Committee's determinations must be made by not less than a majority of its
members present at the meeting (in person or otherwise) at which a quorum is
present, or by written majority consent, which sets forth the action, is signed
by each member of the Committee and filed with the minutes for proceedings of
the Committee. A majority of the entire Committee shall constitute a quorum for
the transaction of business. Service on the Committee shall
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constitute service as a director of the Company so that the Committee members
shall be entitled to indemnification, limitation of liability and reimbursement
of expenses with respect to their Committee services to the same extent that
they are entitled under the Company's By-laws and Delaware law for their
services as directors of the Company.
SECTION 3.5 AWARD AGREEMENTS.
The Committee shall evidence the grant of each Award by an award agreement that
shall be signed by an authorized officer of the Company and by the Participant,
and shall contain such terms and conditions as may be approved by the Committee,
subject to the terms of the Plan.
ARTICLE 4. SHARES SUBJECT TO THE PLAN; ADJUSTMENTS
SECTION 4.1 NUMBER OF SHARES.
Subject to adjustment as provided in SECTION 4.3, the aggregate number of Shares
that may be issued under the Plan shall not exceed 50,000 Shares.
SECTION 4.2 LAPSED AWARDS.
If any Award is forfeited or terminated for any reason, the Restricted Shares
subject to such Award that are forfeited shall be available for the grant of a
new Award under the Plan.
SECTION 4.3 ADJUSTMENTS IN NUMBER OF SHARES.
In the event of any merger, reorganization, consolidation, recapitalization,
separation, liquidation, stock dividend, split-up, share combination, or other
change in the corporate structure of the Company affecting the Shares, the
Committee may adjust: (a) the number and class of Shares which may be delivered
under the Plan; (b) the number and class of Shares subject to outstanding
Awards, as it determines to be appropriate and equitable to prevent dilution or
enlargement of the rights intended to be granted hereunder and under any Award;
provided, however, that the number of Shares subject to any individual Award
shall be rounded down to the nearest whole number.
ARTICLE 5. PARTICIPATION
Only Eligible Nonemployee Directors of the Company may participate in or
receive Awards under this Plan. Any Eligible Nonemployee Director that holds
five (5) or more percent of the Company's outstanding shares may elect, at any
time, to not participate in receiving Restricted Shares in lieu of cash
compensation.
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ARTICLE 6. TERMS AND CONDITIONS OF AWARDS
SECTION 6.1 GRANT OF AWARD.
Subject to the exception for 5% or greater holders of the Company's outstanding
shares above, each of the Company's Eligible Nonemployee Directors, beginning on
September 30, 2005, and at each subsequent quarter end until such time as the
Company has achieved profitability and positive cash flow for two consecutive
fiscal quarters, shall be granted Restricted Shares equal to fifty percent (50%)
of his/her otherwise cash based compensation as determined by the Board of
Directors and approved by shareholders. The number of Restricted Shares granted
shall be, at a minimum, equal to 50% of the compensation amount due to the
Director divided by the closing price of the Company's stock on the Nasdaq
market (for U.S. Directors) or the Australian Stock Exchange (ASX) (for
Australian Directors) on the last trading day of the fiscal quarter. Such price
shall be deemed the Fair Market Value of each share. A fractional share owed as
a result of the above described calculation shall be rounded up to one share or
down to no shares based on whether more or less than one half (1/2) share is
owed to the Director. Until such time as the Company has achieved profitability
and positive cash flow for two consecutive fiscal quarters, any Eligible
Nonemployee Director may elect, in his/her sole discretion, to receive more than
50% of his/her compensation in Restricted Shares so long as the Director
notifies the Chief Financial Officer (CFO) of the Company in writing of his/her
election prior to the first day of the fiscal quarter that he/she wishes to
receive more than 50% of his/her compensation in Restricted Shares. Once a
voluntary election is made to receive more than 50% of compensation in
Restricted Shares, the election must remain in effect for a minimum of two
fiscal quarters before the Director may change the voluntary percentage
election.
Any Restricted Shares awarded during the period from September 30, 2005 until
such time as the Company has achieved profitability and positive cash flow for
two consecutive fiscal quarters, shall vest, and the restriction shall be
lifted, on the first calendar day after the Company has achieved profitability
and positive cash flow for two consecutive fiscal quarters.
Any Eligible Nonemployee Director may elect, in his/her sole discretion, to
receive any portion of his/her compensation in Restricted Shares in any quarter
after the Company has achieved profitability and positive cash flow for two
consecutive fiscal quarters, so long as the Director notifies the Chief
Financial Officer (CFO) of the Company in writing of his/her election prior to
the first day of the fiscal quarter. Once a voluntary election is made to
receive a portion of (or all) compensation in Restricted Shares, the election
must remain in effect for a minimum of two fiscal quarters before the Director
may change the voluntary percentage election. Any Restricted Shares awarded
pursuant to a Director's voluntary election to take a portion, or all, of
his/her compensation in Restricted Shares after the Company has achieved
profitability and positive cash flow for two consecutive fiscal quarters shall
vest, and the restriction be lifted, one year after the grant date.
SECTION 6.2 TERMS AND CONDITIONS OF AWARDS.
a. Period of Restriction. Restricted Shares may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated by a Participant prior
to the lapse of the Restriction Period,
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other than by will or the laws of descent and distribution. The Restricted
Shares shall be subject to a substantial risk of forfeiture until the
termination of the applicable Restriction Period as provided herein. During the
Restriction Period, the Company shall have the right to hold the Restricted
Shares.
b. Certificate Legend. At the Committee's direction, each certificate
representing Restricted Shares may bear the following legend:
"THE SALE OR OTHER TRANSFER OF THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE, WHETHER VOLUNTARY, INVOLUNTARY, OR BY OPERATION OF LAW, IS SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THE CATUITY INC. 2005
NONEMPLOYEE DIRECTOR RESTRICTED STOCK PLAN, IN THE RULES AND ADMINISTRATIVE
PROCEDURES ADOPTED PURSUANT TO SUCH PLAN AND/OR IN A RESTRICTED STOCK AGREEMENT
ISSUED PURSUANT TO SUCH PLAN. A COPY OF THE FOREGOING DOCUMENTS MAY BE OBTAINED
FROM THE SECRETARY OF CATUITY INC."
c. Removal of Restrictions. Except as otherwise provided in this ARTICLE 6,
Restricted Shares shall become vested in, and freely transferable by, a
Participant after the last day of the Restriction Period. Once the Restricted
Shares are released from the restrictions, a Participant shall be entitled to
have the legend required by subsection (b) removed from his or her stock
certificate representing such shares.
d. Voting Rights. Unless otherwise determined by the Committee, during the
Restriction Period Participants holding Restricted Shares may exercise full
voting rights with respect to those Shares.
e. Dividends and Other Distributions. Any dividends or other distributions paid
or delivered with respect to Restricted Shares will be subject to the same terms
and conditions (including risk of forfeiture) as the Restricted Shares to which
they relate, and payment or delivery thereof will be deferred accordingly;
provided, however, that at any time and from time to time the Committee may, in
its sole discretion, provide for the earlier payout of deferred and/or current
dividends and distributions. No such deferred amount shall bear interest.
SECTION 6.3 TERMINATION OF DIRECTOR STATUS.
Upon a Participant's termination of membership on the Company's Board of
Directors, the following rules shall apply:
a. Retirement. If the Participant terminates Board membership due to Retirement,
any remaining Restriction Period shall continue as if the Participant continued
as an active member. Notwithstanding the foregoing, if the Committee determines
that the Participant has engaged in Inimical Conduct after his or her
Retirement, any Restricted Shares still subject to a Restriction Period shall
automatically be forfeited as of the date of the Committee's determination.
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b. Death or Disability. If the Participant's Board membership terminates because
of death or Total and Permanent Disability at a time when the Participant could
not have been terminated for Cause, or if the Participant dies after Retirement
while holding an Award that is subject to a Restriction Period, any remaining
Restriction Period shall automatically lapse as of the date of such termination
of Board membership or death, as applicable.
c. Termination for Cause. If the Participant's Board membership terminates
because he or she was removed from the Board or was not nominated at a
shareholders meeting for re-election and if such removal or failure to be
nominated was for Cause, then any Restricted Shares still subject to a
Restriction Period as of the date of such termination shall automatically be
forfeited and returned to the Company.
d. Suspension. The Committee may suspend payment or delivery of Shares (without
liability for interest thereon) pending its determination of whether a
Participant's membership on the Board was or should have been terminated for
Cause or whether a Participant has engaged in Inimical Conduct.
SECTION 6.4 OTHER RESTRICTIONS.
The Committee may impose such other restrictions on any Awards granted under the
Plan (including after the Restriction Period lapses) as it may deem advisable
including, without limitation, restrictions under applicable Federal or state
securities laws, and the Company may legend certificates to give appropriate
notice of such restrictions.
ARTICLE 7. RIGHTS OF PARTICIPANTS
SECTION 7.1 BOARD MEMBERSHIP.
Nothing in the Plan shall interfere with or limit in any way the right of the
Company's shareholders to remove or fail to re-elect any Participant to the
Board at any time, nor confer upon any Participant any right to continue as a
member of the Board or any of its subsidiaries.
SECTION 7.2 NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE.
Neither the establishment of the Plan nor any amendment thereof shall be
construed as giving any Participant or any other person any legal or equitable
right unless such right shall be specifically provided for in the Plan or
conferred by specific action of the Committee in accordance with the terms and
provisions of the Plan.
SECTION 7.3 NO FUNDING.
Except as provided in SECTION 6.2(e), Participants will only receive Shares upon
the expiration of the Restriction Period for Awards. Neither the Participant nor
any other person shall acquire, by reason of the Plan or any Award, any right in
or title to any assets, funds or property of the Company and its subsidiaries
whatsoever including, without limiting the generality of the foregoing, any
specific funds, assets, or other property which the Company or its subsidiaries
C-9
may, in their sole discretion, set aside in anticipation of a liability
hereunder. Any amounts which may become payable hereunder shall be paid from the
general assets of the Company and its subsidiaries, as applicable. The
Participant shall have only a contractual right to the amounts, if any, payable
hereunder unsecured by any asset of the Company or its subsidiaries. Nothing
contained in the Plan constitutes a guarantee by the Company or its subsidiaries
that the assets of the Company or its subsidiaries shall be sufficient to pay to
any person any amount which may become payable hereunder.
SECTION 7.4 OTHER RESTRICTIONS.
As a condition to the issue of any Shares under the Plan, the Committee may
require a Participant to enter into a restrictive stock transfer agreement or
other shareholder's agreement with the Company.
ARTICLE 8. CHANGE IN CONTROL
The Restriction Period for each outstanding Award shall automatically
lapse upon a Change in Control.
ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION
SECTION 9.1 AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN.
The Board may amend or terminate the Plan at any time, subject to the following
limitations: (a) shareholders must approve any amendment of the Plan if the
Committee determines such approval is required by: (i) the Exchange Act, (ii)
the Code, (iii) the listing requirements of the Nasdaq OTCBB, the Australian
Stock Exchange or any principal securities exchange or market on which the
Shares are then traded, or (iv) any other applicable law. Without the written
consent of the affected Participant or except as expressly provided in the Plan,
no termination, amendment or modification of the Plan shall adversely affect any
Award theretofore granted under the Plan.
SECTION 9.2 AMENDMENT OF AWARD AGREEMENTS.
The Committee may at any time amend any outstanding award agreement; provided,
however, that any amendment that decreases or impairs the rights of a
Participant under such agreement shall not be effective unless consented to by
the Participant in writing, except that Participant consent shall not be
required if an Award is amended, adjusted or cancelled under SECTION 4.3.
SECTION 9.3 SURVIVAL FOLLOWING TERMINATION.
Notwithstanding the foregoing, to the extent provided in the Plan, the authority
of (a) the Committee to amend, alter, adjust, suspend, discontinue or terminate
any Award, waive any conditions or restrictions with respect to any Award, and
otherwise administer the Plan and any Award and (b) the Board to amend the Plan,
shall continue beyond the date of the Plan's termination. Termination of the
Plan shall not affect the rights of Participants with respect to
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Awards previously granted to them, and all unexpired Awards shall continue in
force and effect after termination of the Plan except as they may lapse or be
terminated by their own terms and conditions.
SECTION 9.4 SHAREHOLDER APPROVAL.
The material terms of the Plan shall be submitted for approval by the Company's
shareholders no later than the first annual shareholders' meeting (or special
meeting in lieu of such meeting) that occurs in 2005. This Plan shall not be
effective, nor may any grants be made hereunder, unless and until the Company's
shareholders have approved it.
ARTICLE 10. WITHHOLDING
SECTION 10.1 TAX WITHHOLDING.
The Company shall have the power and the right to deduct or withhold, or require
a Participant to remit to the Company, an applicable amount sufficient to
satisfy foreign, Federal, state and local taxes (including the Participant's
F.I.C.A. obligation) required by law to be withheld with respect to the issue of
Shares under the Plan or the lapse of the Restriction Period. The Company shall
also have the right to withhold Shares as to which the Restriction Period has
lapsed and which have a Fair Market Value equal to a Participant's minimum tax
withholding liability, to satisfy any withholding obligations. The value of the
Shares to be withheld is to be based on the Fair Market Value of the Shares on
the date that the amount of tax to be withheld is determined.
SECTION 10.2 STOCK DELIVERY OR WITHHOLDING.
Participants may elect, subject to the approval of the Committee and such rules
as it shall prescribe, to satisfy the withholding requirement, in whole or in
part, by tendering to the Company previously-acquired Shares (or by having the
Company withhold Shares as to which the Restriction Period has lapsed) in an
amount having a Fair Market Value equal to the amount required to be withheld to
satisfy the tax withholding obligations described in Section 10.1.
Such election must be made on or before the date the amount of tax to be
withheld is determined. Once made, the election is irrevocable. The value of the
Shares to be tendered (or withheld) is to be based on the Fair Market Value of
the Shares on the date that the amount of tax to be withheld is determined.
ARTICLE 11. LEGENDS; PAYMENT OF EXPENSES
SECTION 11.1 LEGENDS.
The Company may endorse such legend or legends upon the certificates for Shares
issued under the Plan, including but not limited to the legends referenced in
SECTION 6.2(b) and SECTION 6.4, and may issue such "stop transfer" instructions
to its transfer agent in respect of such Shares
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as it determines to be necessary, appropriate or convenient to (a) prevent a
violation of, or to perfect an exemption from, the registration requirements of
the Securities Act, applicable state securities laws or other legal
requirements, or (b) implement the provisions of the Plan or any agreement
between the Company and a Participant with respect to such Shares.
SECTION 11.2 PAYMENT OF EXPENSES.
The Company shall pay for all taxes with respect to the issue of Shares under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issue.
ARTICLE 12. SUCCESSORS
All obligations of the Company under the Plan respecting Awards shall be
binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation or
otherwise, of all or substantially all of the business and/or assets of the
Company. The Plan shall be binding upon and inure to the benefit of the
Participants and their heirs, executors, administrators or legal
representatives.
ARTICLE 13. REQUIREMENTS OF LAW
SECTION 13.1 REQUIREMENTS OF LAW.
The granting of Awards and the issue of Shares under the Plan shall be subject
to all applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
SECTION 13.2 GOVERNING LAW.
The Plan and the rights and obligations hereunder shall be governed by and
construed in accordance with the internal laws of the State of Delaware
(excluding any choice of law rules that may direct the application of the laws
of another jurisdiction).
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APPENDIX D
LEADENHALL AUSTRALIA LIMITED
A.C.N. 007 997 248
CORPORATE ADVISERS
Level 8, 350 Collins Street, Melbourne
Victoria 3000 Australia
Telephone (03)9600 4344
Facsimile (03) 9600 2295
Toll Free: 1800 355 778
E-Mail: mmileo@leadenhall.com.au
Home Page: http://www.leadenhall.com.au
PRIVATE AND CONFIDENTIAL
8 May 2005
Mr John Racine
President & CEO
Catuity Inc
2711 E Jefferson Avenue
Detroit
Michigan 48207
USA
Dear John,
RE: FAIRNESS OPINION - CATUITY INC PROPOSED ACQUISITION OF LOYALTY MAGIC PTY
LTD
1. EXECUTIVE SUMMARY
The Board of Catuity Inc ("Catuity") engaged Leadenhall Australia Limited
("Leadenhall") to provide an opinion as to whether their proposed acquisition of
Loyalty Magic Pty Ltd ("Loyalty Magic") is fair from a financial point of view
to Catuity shareholders. Our opinion is provided as at the valuation date and is
subject to the assumptions and limiting conditions set out in this opinion
letter.
Our opinion is that the proposed transaction is fair to Catuity shareholders
from a financial point of view. The basis for our opinion is as follows:
1.1. FAIR MARKET VALUE OF LOYALTY MAGIC VERSUS CONSIDERATION
The table below illustrates that the consideration to be offered to Loyalty
Magic is less that the Fair Market Value. The proposed transaction is therefore
fair from a transaction perspective.
US $000s
LOYALTY MAGIC FAIR MARKET VALUE 5,212.1
CONSIDERATION 4,225.7
--------
EXCESS OF VALUE OVER CONSIDERATION $ 986.4
--------
D-1
1.2. POTENTIAL CHANGE IN CATUITY EQUITY VALUE - USD
The table below illustrates the potential pre and post fair/fair
market value of Catuity common equity on a minority basis. The
currency of the value per share is USD.
The table illustrates that the change in equity value is
approximately 5 % depending on the valuation approach considered.
SYNTHESIS OF DCF & MARKET VALUE PER SHARE (MINORITY INTEREST)
PRE ACQ ACQ POST ACQ % Change
------- --- -------- --------
DISCOUNTED CASH FLOW $3.66 $3.98 $3.85 5.3%
MARKET VALUE (CURRENT & POTENTIAL) $3.73 $4.06 $3.92 5.2%
On the basis that the assumptions underlying the potential change in
Catuity equity value are appropriate, the proposed acquisition is
fair from a Catuity shareholder perspective.
1.3. OTHER KEY QUALIFYING POINTS
No limitations were imposed on us by Catuity in relation to our
investigations and analysis in the preparation of our opinion.
In relation to the consideration offered to Loyalty Magic, we were
not involved in any of the negotiations or provided any advice to
Catuity. We were engaged subsequent to the sale agreement being
signed between Loyalty Magic and Catuity.
During the past two (2) years, Leadenhall, nor any of its
representatives, had any material relationship with Catuity or
Loyalty Magic.
D-2
2. LEADENHALL BRIEF
Our brief and subsequent engagement letter dated 21 March 2005, set out the
following instructions:
- Provide the Catuity Board with an independent opinion as to the
fairness of the proposed acquisition of Loyalty Magic
- Assess the potential value of Catuity equity both pre & post the
proposed transaction
- Provide Catuity with input into their SEC filing requirements
- Prepare an allocation of purchase price compliant with SFAS 141
(report provided under separate cover)
2.1. SPECIFIC EXCLUSIONS OF THE BRIEF
We were not instructed to opine on the following:
- Relative merits of the proposed acquisition
- Purchase consideration offered
- Alternate acquisitions
- Alternate consideration structures
Consequently, our opinion does not factor any of the above points, nor does it
incorporate the potential financial outcome alternatives arising from the above
points.
2.2. CONSIDERATIONS FACTORED IN ESTABLISHING OUR OPINION
We have undertaken the following analysis and reviews in establishing the
fairness opinion.
- Assessment of Australian general economic, market and financial
conditions
- Review of valuation and risk indicators for comparable Australian
listed companies
- Analysis of various historical and forecast financial reports and
data for both Catuity and Loyalty Magic as set out in the following
section
- Adoption of spot and forward exchange rates between the U.S. and
Australian currencies
- Meetings and numerous telephone conference calls with senior
management of Catuity and Loyalty Magic
- Discussions with Catuity's tax advisors in relation to the potential
tax impacts of the proposed acquisition
- Reviews of industry-based reports on key trends in the customer
loyalty/relationship marketing and information technology sectors
- Application of valuation techniques to the above points in order to
establish the financial basis of our opinion
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2.2.1. LEADENHALL RELIANCE ON CATUITY AND LOYALTY MAGIC DATA, REPORTS AND
REPRESENTATIONS
We were provided with the following key financial reports:
- Audited financial accounts for Loyalty Magic for the financial years
ending 30 June 2002 to 30 June 2004
- Loyalty Magic management accounts restating the above mentioned
audited account periods to 31 December year end equivalents
- Loyalty Magic management accounts for the periods ending 31 January
2005 to 28 February 2005
- Earnings and Cash Flow forecasts for Catuity and Loyalty Magic for
the financial years ending 31 December 2005 to 31 December 2010
- Share Purchase Agreement between Catuity and Loyalty Magic
In addition to the above financial reports provided we reviewed the financial
accounts of Catuity as filed with the SEC and Australian Stock Exchange ("ASX")
for the periods ending 31 December 2002 to 31 December 2004.
In relation to forecast financial information provided, we have not sought to
verify or comment on the validity of the forecasts. We have assumed that all
financial information provided is both accurate and complete. We have assumed
that all information provided has been prepared on a reasonable basis and
reflects the best currently available estimates and judgements and as such
provides a reasonable foundation to conduct our analyses.
In relation to financial forecasts provided to us, neither Catuity or Loyalty
Magic provide 3rd parties or make available to the public, forecasts as provided
to us and used in the development of this fairness opinion. As such, the
forecasts were not provided to us with a view to public disclosure or compliance
with published guidelines of the SEC or American Institute of Certified Public
Accountants.
We have relied on verbal representations provided to us by Catuity's tax
advisors in relation to the ability to carry forward tax losses for both Catuity
and Loyalty Magic into the forecast periods. These representations are material
as they have resulted in the assumption that no income tax will be payable by
either Catuity or Loyalty Magic in the medium term.
The proposed acquisition has been negotiated and will be settled in Australian
currency ("AUD"). This opinion has been prepared translating the Australian
currency to U.S. currency ("USD") as Catuity reports and files in USD. The
exchange rates used to translate AUD to USD were a combination of spot rates at
the date of the preparation of our analysis and forward rates corresponding with
the forecast periods.
We have assumed that the proposed acquisition will comply with all statutory and
regulatory requirements in the relevant jurisdictions.
D-4
3. PROPOSED TRANSACTION OVERVIEW
We understand that 100% of the Loyalty Magic equity is to be acquired via
acquisition of the share capital.
3.1. CONSIDERATION
The Share Purchase Agreement sets out the following consideration parameters. As
the currency of the consideration is to be in AUD, a conversion to USD has been
calculated.
CONSIDERATION STRUCTURE
A $000s USD|AUD US $000s
CASH 3,600.0 0.7683 2,765.9
CATUITY INC SCRIP 1,900.0 0.7683 1,459.8
------- ------- -------
TOTAL CONSIDERATION 5,500.0 4,225.7
------- ------- -------
The USD|AUD exchange rate is based on the spot rate as at 2 May 2005.
We understand that Catuity is to seek to issue additional shares to fund the
cash portion of consideration for the proposed acquisition. We also understand
the Catuity shares to be issued to shareholders of Loyalty Magic are to be
subject to escrow conditions for a period of six (6) months following
consummation of the acquisition.
3.2. LOYALTY MAGIC ASSETS ACQUIRED
The following table sets out the fair value of Loyalty Magic assets acquired as
per the SFAS 141 allocation of purchase price review undertaken by us under a
separate report to the Catuity Board.
VALUE OF ASSETS (IN US $ 000s)
NET WORKING CAPITAL $ 191.0
PP&E $ 183.9
CAPITAL LEASE OBLIGATIONS ($ 58.2)
INTANGIBLE ASSETS
TRADEMARKS $ 535.6
SOFTWARE $ 408.4
CUSTOMER CONTRACTS $ 273.2
CUSTOMER RELATIONSHIPS $ 152.1
IPR&D $ 205.9
GOODWILL $ 2,333.8
----------
NET ASSETS $ 4,225.7
----------
IDENTIFIABLE INTANGIBLE ASSETS $ 1,575.2
----------
D-5
4. ANALYSIS SUPPORTING OUR OPINION
In accordance with our brief, we have undertaken the following analysis of the
proposed acquisition in support of our opinion.
- Valuation of Loyalty Magic (including and excluding acquisition
synergy benefits potentially accruing to Catuity)
- Valuation of Catuity (with reference to current traded prices)
- Review of the acquisition consideration for Loyalty Magic
- Comparison of the value of Loyalty Magic relative to the acquisition
consideration
- Analysis of the proposed acquisition from the perspective of Catuity
shareholders with reference to value per share before and after the
proposed acquisition
4.1. VALUATION PARAMETERS
The following section sets out the broad valuation parameters applicable
to Catuity and Loyalty Magic.
- The valuation has been prepared as at 30 June 2005. This date
represents the expected consummation date of the proposed
acquisition.
- The standard of value adopted is Fair Market Value.
- The valuation has been prepared on the premise that both Catuity and
Loyalty Magic are going concerns.
- The assets valued include the following:
- 100 % Equity of Loyalty Magic
- 100% Equity of Catuity
- Minority Interest Value of Catuity Equity
4.2. VALUATION APPROACHES ADOPTED
The income approach was the principle approach for the valuation of
Loyalty Magic. The income and market approaches were adopted for the
valuation of Catuity.
4.2.1. MARKET APPROACH
We searched for comparable transactions in Australia that could
provide guidance as to market prices for companies comparable to
Loyalty Magic. We could not locate transactions that were comparable
and therefore could not apply the Market Approach for the valuation
of Loyalty Magic.
The Market Approach was adopted in the valuation of Catuity equity.
D-6
4.2.2. COMPARABLE COMPANIES
The initial comparable company analysis commenced with a review of those
companies that constitute the Software and Services Industry on the ASX. From a
list of approximately 100 companies, we identified nine (9) companies that it
deemed comparable to Catuity. All of the comparable companies are classified
under the Global Industry Classification Standard ("GICS") under the Software
and Services Industry except for Photon Group Ltd (Marketing Services) whose
comparable financials were not used due to the volatility parameters being
unavailable.
The selected comparable companies were chosen with a similar market
capitalisation to Catuity and possessing a positive EBITDA in the last reported
financial year.
The comparable companies used were: Pacsoft Ltd, Trysoft Corporation Ltd,
HarvestRoad Ltd, Dark Blue Sea Ltd, Working Systems Solutions Ltd and ComOps
Ltd.
We reviewed the financial information for the comparable companies as at June 30
2004. The market capitalisation for the comparable companies ranged from
approximately AUD $1.3 million to approximately AUD $31 million and last twelve
month revenue ranged from approximately AUD $4.8 million to AUD $11.4 million.
In comparison Catuity had a market capitalisation of AUD $4 million and revenue
of approximately AUD $1 million.
4.2.3. DISCOUNT RATE
The comparable company analysis suggested that an annual discount rate of 18.2%
(post-tax nominal) was appropriate as derived from the Capital Asset Pricing
Formula ("CAPM").
Capital Asset Pricing Model (CAPM) =
Risk Free Rate + Beta (Equity Risk Premium) + Size Premium + Company Specific
Premium
- Risk Free Rate = the 10-year Australian Treasury Bond Rate for 26
April 2005 of 5.36% p.a.
- Equity Risk Premium = 6% p.a.
- Beta = 2.14, the median re-levered Beta observed for the Guideline
Companies used.
- No size or Company Specific Risk Premium has been included as the
guideline companies adopted are broadly comparable.
D-7
4.2.4. COMPARABLE COMPANY MULTIPLES
EBITDA
This ratio represents the multiple by which a company's earnings (pre-interest,
tax, depreciation and amortisation) are capitalised to determine its value. It
relies on the multiplication of estimated future maintainable earnings (`FME')
(pre-interest, tax, depreciation and amortisation) stream by a number or
multiple. Our analysis of comparable companies has provided an EBITDA Multiple
of 6.9.
REVENUE MULTIPLE
Revenue Multiples represent the multiple by which a company's revenue is
capitalised to determine its value. Our analysis of comparable companies has
provided a revenue multiple of 1.3 based on FY 2004. We did not use the Revenue
Multiple approach as it is not a reliable measure of returns, relative to the
EBITDA multiple. The EBITDA multiple defines profitability and is therefore a
more suitable metric.
4.3. VALUATION OF LOYALTY MAGIC
Based on a review of the historical and projected financial data and certain
other qualitative data of Loyalty Magic, we utilised two (2) valuation
methodologies to determine a range of values for Loyalty Magic. Loyalty Magic
has been valued on a Discounted Cash Flow Basis ("DCF") and on a Capitalisation
of Earnings basis.
4.3.1. DISCOUNTED CASH FLOW VALUATION
A discounted cash flow ("DCF") analysis estimates value based on a company's
projected future free cash flow discounted at a rate reflecting risks inherent
in its business and capital structure.
DEBT-FREE CASH FLOW
Debt-Free Cash Flow has been forecast explicitly for the 6 months period to
December 2005 and for the financial years 2006 to 2010. The valuation forecasts
an ongoing Debt-Free Cash Flow after 2010.
The projections show a strong continual increase in Debt-Free Cash Flow from
$0.1176m in FY2006 to $1.1096m in FY2010.
DISCOUNT RATE
The discount rate used is 18.2%. Components of the discount rate are explained
in section 4.2.3.
NON MARKETABILITY DISCOUNT
A Non-Marketability Discount of 15% has been incorporated into the DCF
Valuation, reflecting that status of Loyalty Magic as a private company.
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DCF RESULT
The Net DCF Value for Loyalty Magic determined by us is US $5.2121m.
The table below summarise the DCF valuation and shows the pre and post synergy
benefit components of the DCF result.
TOTAL
TOTAL INC SYNERGIES TOTAL EXC
SYNERGIES US $ 000s SYNERGIES
--------- --------- ---------
PRESENT VALUE - FORECAST PERIOD $ 2,388.7 $1,027.7 $1,361.0
PRESENT VALUE - PERPETUITY $ 3,743.2 $1,302.1 $2,441.1
--------- -------- --------
TOTAL PRESENT VALUE $ 6,131.8 $2,329.8 $3,802.0
LESS NON-MARKETABILITY DISCOUNT 15.0% 15.0% 15.0%
--------- -------- --------
NET DISCOUNTED CASH FLOW VALUE $ 5,212.1 $1,980.3 $3,231.7
--------- -------- --------
4.3.2. EBITDA MULTIPLE
The Capitalisation of Earnings Methodology uses projected earnings, a multiple
derived from comparative companies and a control premium to create a Net
Capitalisation of Earnings Value.
Base EBITDA * EBITDA Multiple = Gross EBITDA Multiple Value Gross EBITDA
Multiple Value + Control Premium = Net Capitalisation of Earnings Value
BASE EBITDA
FY 2006 EBITDA of $0.6486m has been used. This would be the first full year
EBITDA under Catuity ownership.
EBITDA MULTIPLE
The EBITDA multiple is based on listed comparable company market capitalisations
divided by reported EBITDA. As stated in section 4.2.4, the gross multiple
adopted is 6.9 times. An adjustment to the gross multiple is required to reflect
the fact that the gross multiple is based on FY2004 earnings, while the base
earnings for Loyalty Magic is based on FY 2006 earnings.
CONTROL PREMIUM
The control premium is an adjustment to reflect the fact that listed company
market capitalisations are based on minority share parcels in order to compare
100% control of loyalty magic with 100% control of listed company comparables.
CAPITALISATION OF EARNINGS - EBITDA VALUE
Our estimate of value derived under the Capitalisation of Earnings - EBITDA
methodology is US $ 5.0108m.
D-9
The table below sets out the EBITDA-based valuation.
The table below sets out the EBITDA-based valuation.
CAPITALISATION OF EARNINGS - EBITDA TOTAL INC TOTAL TOTAL EXC
(US $ 000s) SYNERGIES SYNERGIES SYNERGIES
- ----------------------------------- --------- --------- ---------
BASE EBITDA $ 648.6 $ 230.0 $ 418.6
GROSS EBITDA MULTIPLE 6.9 6.9 6.9
ADJUSTMENT TO EBITDA MULTIPLE -10% -10% -10%
-------- -------- --------
ADJUSTED EBITDA MULTIPLE 6.2 6.2 6.2
GROSS EBITDA MULTIPLE VALUE $4,008.6 $1,421.5 $2,587.1
ADD CONTROL PREMIUM 25.0% 25.0% 25.0%
-------- -------- --------
NET CAPITALISATION OF EBITDA VALUE $5,010.8 $1,776.9 $3,233.9
======== ======== ========
4.3.3. SYNTHESIS OF RESULTS
The table below summarises the valuation results under the DCF and
Capitalisation of earnings approaches. The valuations fall within an acceptable
band of +/- 4% and therefore we are satisfied that the cross check under both
approaches a sound reasonableness check.
We prefer the DCF methodology and in the case of Loyalty Magic the earnings
growth in the earlier forecast years are more adequately addressed by the DCF
approach.
Our preferred value for Loyalty Magic is therefore US 5.2121 m.
SYNTHESIS OF INCOME APPROACH VALUATIONS TOTAL INC TOTAL TOTAL EXC
(US $ 000s) SYNERGIES SYNERGIES SYNERGIES
- --------------------------------------- --------- --------- ---------
DISCOUNTED CASH FLOW $ 5,212.1 $ 1,980.3 $ 3,231.7
CAPITALISATION OF EARNINGS $ 5,010.8 $ 1,776.9 $ 3,233.9
--------- --------- ---------
LEADENHALL PREFERRED VALUE $ 5,212.1 $ 1,980.3 $ 3,231.7
========= ========= =========
4.4. VALUATION OF CATUITY
The valuation of Catuity has been undertaken via a DCF approach which has been
cross checked to the market values of Catuity as traded on the ASX. As Catuity
has negative earnings as is not forecasting positive earnings in the short term
the Capitalisation of Earnings approach was not appropriate for Catuity.
4.4.1. DISCOUNTED CASH FLOW APPROACH - DCF
The DCF valuation resulted in a gross value PER SHARE of US$4.88. A minority
discount of 25% was deducted reflecting lack of control over cash flow,
dividends and management of the company. Further, in order to cross check the
DCF value to the market traded prices on the ASX (converted to USD equivalents)
the minority discount adjustment was required to compare values on a minority
interest basis.
The table below sets out the calculations for the DCF
CATUITY DISCOUNTED CASH FLOW VALUATION
CATUITY DCF VALUE $ 2,536.0
ADD SURPLUS CASH $ 1,261.3
---------------
NET DISCOUNTED CASH FLOW VALUE $ 3,797.2
---------------
SHARES OUTSTANDING 778,336
---------------
GROSS VALUE PER SHARE $ 4.88
---------------
LESS MINORITY DISCOUNT 25.0%
---------------
MINORITY DCF VALUE PER SHARE $ 3.66
---------------
MINORITY DISCOUNT
This usually reflects the minority's inability to block special resolutions or
to influence the composition of the Board. After the reducing the gross value
per share of US$4.88 by a minority discount, the Minority Discount Adjusted DCF
value PER SHARE is US$3.66.
D-11
4.4.2. MARKET APPROACH
It was evident through our analysis of market values for Catuity on the ASX (CAT
code) and NASDAQ (CTTY code) that the ASX volumes were significantly lower than
the NASDAQ volumes and therefore the liquidity levels and subsequently, reliance
on market prices is less appropriate on the ASX.
We note in addition to the liquidity and volume difference for Catuity shares
traded that the proposed acquisition is to be funded in Australia and that
currently approximately 85% of Catuity shareholders are Australian-based. It is
our position therefore that the ASX market prices represent a more appropriate
basis to adopt in the fairness opinion.
Our analysis of the Australian share price for Catuity (converted to USD) during
the month of April 2005 identified a low share price of $3.74 and a high share
price of $4.60. The mid point of these two share prices is $4.17.
The mid-point of the discounted cash flow valuation is $3.66 and the mid-point
market value of $4.17 was used to ascertain the preferred value per share for
Catuity of $3.91 (the mid point between the two).
MARKET VALUE
LOW MID HIGH
CAT AS TRADED ASX CONVERTED TO USD $ 3.74 $ 4.17 $ 4.60
(Note: Low 28 April 2005, High 7 April 2005, mid = average low and high)
4.4.3. SYNTHESIS OF DCF AND MARKET APPROACH VALUATIONS
Our analysis of the Australian share price for Catuity (converted to USD) during
the month of April 2005 identified a low share price of $3.74 and a high share
price of $4.60. The mid point of these two share prices is $4.17. The mid-point
of the discounted cash flow valuation is $3.66 and the mid-point market value of
$4.17 was used to ascertain the preferred value per share of Catuity is $3.91
(the mid point between the two).
The table below summarises the synthesis of DCF and Market Approaches.
SYNTHESIS OF DCF & MARKET VALUE PER SHARE (MINORITY INTEREST)
DISCOUNTED CASH FLOW $ 3.66
MID POINT MARKET VALUE $ 4.17
============
LEADENHALL PREFERRED VALUE PER SHARE USD $ 3.91
------------
D-12
4.4.4. ASSUMED CATUITY PRICE ADOPTED IN SHARE ISSUE
The DCF value per share for Catuity of US$3.66 has been used to calculate the
approximate number of new shares to be issued in order to fund the proposed
acquisition. Under the market approach an issue price of US$3.73 has been used
as this reflects the current price at the time of writing.
4.4.5. SHARES ISSUED TO FUND ACQUISITION
Based on a consideration of US$4.2257 m and an assumed share issue price of
US$3.66 (per the DCF valuation) approximately 1, 154, 563 new shares will be
issued. (Note this does not include an allowance for the costs of the share
raising).
Based on a consideration of US$4.2257 m and an assumed share issue price of
US$3.73 (per the market valuation) approximately 1, 134, 021 new shares will be
issued. (Note this does not include an allowance for the costs of the share
raising).
Approximately 35% of the new shares will be provided to Loyalty Magic
shareholders as part consideration.
4.5. CATUITY VALUE PER SHARE - PRE & POST ACQUISITION
The table below sets out the increase in equity value and resultant impact on
value per share both pre and post the proposed acquisition based on the DCF and
market derived share issue prices. We note that Catuity shareholders are
estimated to benefit from the acquisition by approximately 5% both under the DCF
and market approaches.
DCF ISSUE PRICE BASED VALUE PER SHARE
PRE ACQ ACQ POST ACQ % Change
------------ ----------- -------------- --------
TOTAL PRESENT VALUE $ 2,536.0 $ 6,131.8 $ 8,667.8 242%
ADD SURPLUS CASH $ 1,261.3 $ 0.0 $ 1,261.3 0%
------------ ----------- -------------- ---
CONSOLIDATED DISCOUNTED CASH FLOW VALUE $ 3,797.3 $ 6,131.8 $ 9,929.1 161%
SHARES OUTSTANDING [7] 778,336 1,154,563 1,932,899 148%
------------ ----------- -------------- ---
GROSS VALUE PER SHARE $ 4.88 $ 5.31 $ 5.14 5.3%
------------ ----------- -------------- ---
LESS MINORITY DISCOUNT 25.0% 25.0% 25.0% 0%
------------ ----------- -------------- ---
MINORITY DCF VALUE PER SHARE $ 3.66 $ 3.98 $ 3.85 5.3%
------------ ----------- -------------- ---
CURRENT MARKET ISSUE PRICE BASED VALUE PER SHARE
PRE ACQ ACQ POST ACQ % Change
------------ ----------- -------------- --------
MARKET CAPITALISATION MAY 4 2005 2,900.3 2,900.3
ADDITIONAL MARKET VALUE FROM ACQUISITION 6,131.8 6,131.8
LESS MINORITY DISCOUNT ON ADDITIONAL MKT VALUE (1,533.0) (1,533.0)
------------ ----------- --------------
IMPLIED MARKET CAPITALISATION PRE & POST ACQUISITION 2,900.3 4,598.9 7,499.1
------------ ----------- --------------
SHARES OUTSTANDING 778,336 1,134,021 1,912,357
------------ ----------- --------------
POTENTIAL POST ACQ. MARKET VALUE PER SHARE $ 3.73 $ 4.06 $ 3.92 5.2%
============ =========== ============== ===
D-13
SYNTHESIS OF DCF AND MARKET VALUE PER SHARE
SYNTHESIS OF DCF & MARKET VALUE PER SHARE (MINORITY INTEREST)
PRE ACQ ACQ POST ACQ % Change
------------ ----------- -------------- --------
DISCOUNTED CASH FLOW $ 3.66 $ 3.98 $ 3.85 5.3%
MARKET VALUE (CURRENT & POTENTIAL) $ 3.73 $ 4.06 $ 3.92 5.2%
D-14
5. CONCLUSION
It is our opinion that the proposed acquisition is fair with reference to the
following:
- The consideration offered is less than the fair market value of
Loyalty Magic inclusive of synergy benefits. We note, however, that
the consideration is in excess of the Loyalty Magic fair market
value when synergistic benefits are excluded
- The potential change in value of Catuity shares pre and post the
proposed acquisition is an increase of approximately 5%. The
acquisition is therefore potentially value accretive for Catuity
shareholders
- We also understand that the proposed acquisition will assist in the
continuity of Catuity's NASDAQ listing compliance requirements due
to the increase in shareholder's equity base
Key issues qualifying our opinion are as follows:
- Catuity must achieve the forecast financial performance in the
future to create value for its shareholders. Given the recent
trading results of Catuity, a marked turnaround is required
- It is evident from the DCF analysis that a significant proportion of
value in both Loyalty Magic and Catuity resides in the present value
of perpetuity cash flows which occur after FY 2010
- Future movements in exchange rates will influence the actual
earnings and cash flows realised. The majority of the earnings will
be driven by Loyalty Magic in the earlier years of the forecast
period as Catuity works toward turning around earnings performance.
Therefore the quantum and timing of exchange range movements may
adversely impact the earnings (and potentially dividend streams)
attributable to Catuity Shareholders
- The tax losses carried forward by both Catuity and Loyalty Magic
result in no income tax payments over the majority of the forecast
period. This period of tax free earnings is a key driver of the
fairness of the proposed transaction
- On the basis that all contained assumptions hold the price at which
new shares are issued should be not less than the value that would
result in a value neutral position for shareholders (approximately
$US 3.50 at a USD|AUD rate of 0.7683.)
D-15
6. LEADENHALL AUSTRALIA LIMITED CAPABILITY
Leadenhall is a Corporate Adviser of over twenty years standing and is the
holder of an Australian Financial Services Licence issued by the Australian
Securities and Investments Commission ("ASIC"). Leadenhall is the author of the
major text, the Australian Valuation Handbook, and is the Asia-Pacific
representative of Valuation Research Group, an international group based in the
USA. (Refer to www.valuationresearch.com)
Leadenhall specialises in financial valuations including the valuation of
companies, businesses and intangible assets. We are members of the Australian
Taxation Office ("ATO") national panel for valuations and the ASIC Panel of
Independent Experts. Leadenhall has provided numerous fairness opinions in
Australian merger and acquisition transactions.
7. CERTIFICATION OF APPRAISERS
Leadenhall certifies that, to the best of our knowledge and belief:
The statements of fact contained in this report are true and correct, however,
we have relied, without independent verification, on the accuracy, completeness,
and fairness of all financial and other data that were publicly available or
furnished to us by the management of the subject business and their accountants,
legal counsel or other advisors.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represents our personal,
unbiased professional analyses and conclusions.
Neither Leadenhall nor its authorized representative have a present or
prospective interest in the property that is the subject of this report, no
personal interest or bias with respect to the parties involved, and has not
provided non-appraisal related services to the client or the subject business.
Our compensation is not contingent on an action or event resulting form the
analyses in, or the use of, this report.
As a condition of the engagement between Leadenhall and Catuity, Catuity has
agreed to indemnify and hold Leadenhall harmless against all claims and
liabilities whatsoever arising out of the execution or purported execution by
Leadenhall of its obligations arising out of its engagement by Catuity, whether
such claims and liabilities arise out of the proper or improper execution or the
alleged proper or improper execution by Leadenhall of its obligations or
otherwise.
D-16
8. DISCLAIMER
Leadenhall's opinion is based on economic, share market, business trading and
other conditions and expectations prevailing at the date of this Report. These
conditions can change significantly over relatively short periods of time. If
they do change materially, Leadenhall's valuation and opinion could be different
in these changed circumstances.
This Report is based on financial and other information provided by Catuity.
Leadenhall has considered and relied upon this information and has no reason to
believe that any material facts have been withheld. The information provided has
been evaluated through analysis, enquiry and review for the purpose of forming
an opinion as to whether the Catuity Inc offer to Loyalty Magic is fair.
However, in preparing reports such as this, time is limited and Leadenhall does
not warrant that its enquiries have identified or verified all of the matters
that an audit, extensive examination or due diligence investigation might
disclose. In any event, an opinion as to fairness is more in the nature of an
overall review rather than a detailed audit or investigation.
An important part of the information used in forming an opinion of the kind
expressed in this Report is comprised of the opinions and judgments of
management. This type of information was also evaluated through analysis,
enquiry and review to the extent practicable. However, such information is often
not capable of external verification or validation.
Catuity is responsible for the forward looking statements. Leadenhall has used
and relied on those forward looking statements for the purposes of its analysis
and has assumed that these forward looking statements were prepared
appropriately and accurately based on the information available to management at
the time and within the practical constraints and limitations of such estimates.
Leadenhall has assumed that these forecasts do not reflect any material bias,
either positive or negative, and has no reason to believe otherwise. The major
assumptions underlying these forward looking statements were reviewed by
Leadenhall in the context of current economic, financial and other conditions.
Compilation and preparation of this document involved making judgments which may
be affected by unforeseen future events including wars, economic disruption,
dislocations, business cycles, industrial relations, labour difficulties,
political action, changes of government and other factors, the effects of which
are not capable of precise assessment. In many cases, value judgments must be
made based on material compiled by government agencies, scientific
organisations, research organisations, industrial, commercial and professional
organisations and others.
Leadenhall will not be liable for any loss or damage caused to its client, or
any other third party as a result of any errors in data which is either supplied
by the client, supplied by a third party to Leadenhall, or which Leadenhall is
required to estimate.
D-17
Yours sincerely
/s/ T O Lebbon /s/ M J Mileo
- ---------------------------- ----------------------------
T O Lebbon M J Mileo
Executive Director Senior Adviser
LEADENHALL AUSTRALIA LIMITED LEADENHALL AUSTRALIA LIMITED
D-18
APPENDIX E
SHARE SALE AGREEMENT BETWEEN
CATUITY INC. AND THE SHAREHOLDERS OF LOYALTY MAGIC PTY. LTD.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE i
E-1
TABLE OF CONTENTS
Page no.
1 DEFINITIONS AND INTERPRETATION ......................................... 6
1.1 Definitions ..................................................... 6
1.2 Words and expressions ........................................... 14
1.3 Other rules of interpretation ................................... 14
2 CONDITIONS ............................................................. 15
2.1 Conditions ...................................................... 15
2.2 Reasonable endeavours ........................................... 17
2.3 Waiver of conditions ............................................ 17
2.4 Non-satisfaction ................................................ 17
2.5 Notice of satisfaction .......................................... 17
3 SALE AND PURCHASE OF SHARES ............................................ 17
3.1 Sale and purchase ............................................... 17
3.2 Free from Encumbrances .......................................... 17
3.3 Title and property .............................................. 17
3.4 Waiver .......................................................... 18
3.5 Employee Options ................................................ 18
4 PURCHASE CONSIDERATION ................................................. 18
4.1 Purchase Consideration .......................................... 18
4.2 Apportionment of Purchase Consideration ......................... 18
5 PROVISION OF THE PURCHASE CONSIDERATION ................................ 19
5.1 Satisfaction of Purchase Consideration .......................... 19
5.2 Adjustment of Consideration Securities .......................... 19
5.3 Hold Back Amounts ............................................... 21
5.4 Hold Back Securities ............................................ 21
5.5 Release of Hold Back Securities and payment of Hold Back
Amounts ......................................................... 22
5.6 Downside Protection ............................................. 22
5.7 Public Announcement ............................................. 24
5.8 No limitation ................................................... 24
6 COMPLETION ............................................................. 24
6.1 Time and place of Completion .................................... 24
6.2 Items to be delivered by the Vendors and Optionholders at
Completion ...................................................... 24
6.3 Board meeting of the Company .................................... 25
6.4 Obligations of the Purchaser .................................... 25
6.5 Simultaneous Completion ......................................... 26
6.6 Interdependence ................................................. 26
6.7 Listing of Consideration Securities ............................. 26
6.8 Agreement Not To Trade Consideration Securities ................. 26
7 CONDUCT OF BUSINESS PENDING COMPLETION ................................. 26
7.1 Conduct of Business ............................................. 26
7.2 Undertakings .................................................... 27
8 COMPLETION ADJUSTMENT .................................................. 28
8.1 Adjustment Amount ............................................... 28
8.2 Calculation of Cash and Cash Equivalents ........................ 28
8.3 Supporting Documents ............................................ 28
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE ii
E-2
8.4 Definitions ..................................................... 28
8.5 Proportional Mix ................................................ 29
9 PURCHASER'S WARRANTIES, REPRESENTATIONS AND INDEMNITY .................. 29
9.1 Representations and warranties .................................. 29
9.2 Indemnity ....................................................... 30
10 MAJOR VENDORS' WARRANTIES, REPRESENTATIONS AND INDEMNITIES ............. 30
10.1 Major Vendor Qualifications ..................................... 30
10.2 Major Vendor Warranties ......................................... 30
10.3 Independent warranties .......................................... 30
10.4 Disclosures ..................................................... 31
10.5 Meaning of "fairly and accurately disclosed" .................... 31
10.6 Knowledge and belief ............................................ 31
10.7 Reliance ........................................................ 31
10.8 Indemnity ....................................................... 31
11 LIMITATIONS OF LIABILITY ............................................... 32
11.1 Notice of Claims ................................................ 32
11.2 Major Vendors not liable ........................................ 32
11.3 Time limit on Claim ............................................. 32
11.4 Limits on the amount of Claim ................................... 33
11.5 Satisfaction of a Claim ......................................... 33
11.6 Disputes regarding Warranty Claims .............................. 33
12 ADJUSTMENT FOR TAX LIABILITY ........................................... 35
12.1 Tax Claims ...................................................... 35
12.2 Reduction in Purchase Consideration ............................. 35
12.3 Obligations excluded ............................................ 35
12.4 Payments ........................................................ 35
12.5 Payment of interest ............................................. 36
12.6 Assessable income ............................................... 36
12.7 Written notice of Tax Claim ..................................... 36
12.8 Refund by Purchaser ............................................. 36
12.9 Dispute resolution .............................................. 36
12.10 Time ............................................................ 37
12.11 Limitations ..................................................... 37
13 ACCESS TO RECORDS AFTER COMPLETION ..................................... 37
13.1 Vendors' access to Records ...................................... 37
13.2 Purchaser's access to records ................................... 37
14 PROTECTIVE COVENANTS ................................................... 38
14.1 Restriction ..................................................... 38
14.2 Restricted Activities ........................................... 38
14.3 Restriction Area ................................................ 38
14.4 Restriction Period .............................................. 38
14.5 Effective Restriction Area and Restriction Period ............... 38
14.6 Severability .................................................... 39
14.7 Injunction ...................................................... 39
14.8 Survival ........................................................ 39
14.9 Exceptions ...................................................... 39
15 CONFIDENTIALITY ........................................................ 40
15.1 Confidentiality ................................................. 40
15.2 Legal requirements .............................................. 40
15.3 Permitted disclosure to officers and professional advisers ...... 40
15.4 Damages inadequate .............................................. 41
15.5 After termination ............................................... 41
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE iii
E-3
15.6 Confidentiality survives termination ............................ 41
16 PUBLICITY .............................................................. 41
16.1 No public announcements ......................................... 41
16.2 Joint statement ................................................. 41
17 COSTS AND STAMP DUTY ................................................... 41
17.1 Costs ........................................................... 41
17.2 Stamp duty ...................................................... 41
18 GST .................................................................... 42
18.1 Definitions ..................................................... 42
18.2 GST on claims ................................................... 42
19 SURVIVAL OF REPRESENTATIONS AND INDEMNITIES ............................ 42
19.1 Representations and warranties .................................. 42
19.2 Indemnities ..................................................... 42
20 OBSERVER AND INFORMATION RIGHTS ........................................ 42
21 NOTICES ................................................................ 43
21.1 Method .......................................................... 43
21.2 Receipt ......................................................... 43
21.3 Notice to/from Vendors .......................................... 43
21.4 Address of parties .............................................. 43
22 SUPERVENING LEGISLATION ................................................ 44
23 GENERAL ................................................................ 44
23.1 Entire Agreement ................................................ 44
23.2 Paramountcy of agreement ........................................ 44
23.3 No merger ....................................................... 44
23.4 Attorneys ....................................................... 44
23.5 Amendment ....................................................... 44
23.6 Assignment ...................................................... 44
23.7 Severability .................................................... 44
23.8 Waiver .......................................................... 44
23.9 Rights, remedies additional ..................................... 45
23.10 Further assurances .............................................. 45
23.11 Governing law ................................................... 45
23.12 Jurisdiction .................................................... 45
SCHEDULE 3 - WARRANTIES ................................................ 46
1 Vendor's Qualifications ......................................... 46
2 Corporate standing and authority ................................ 46
3 Financial Position .............................................. 47
4 Financial Warranties ............................................ 47
5 Business ........................................................ 47
6 Records ......................................................... 48
7 Litigation ...................................................... 48
8 Insurance ....................................................... 48
9 Intellectual Property ........................................... 48
10 Software ........................................................ 49
11 Plant and Equipment ............................................. 49
12 Business Premises and Property Leases ........................... 50
13 Environment ..................................................... 51
14 Material Contracts .............................................. 51
15 Suppliers and customers ......................................... 52
16 Litigation ...................................................... 52
17 Employees ....................................................... 52
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE iv
E-4
18 Superannuation 52
19 Information 53
20 Tax and Duty 53
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE v
E-5
THIS AGREEMENT is made on March 2005
PARTIES
Each party set out in schedule 1
and
CATUITY INC
of Level 4, Ballarat House
68-72 Wentworth Avenue, Surry Hills, NSW 2010
(" PURCHASER")
BACKGROUND
A The Shares comprise all of the issued share capital in the Company.
B The Vendors are the registered holders of all of the Shares. Each of the
Vendors hold the number of Shares as set out in schedule 1 opposite their
respective names in their capacity as described in Schedule 1.
C The Vendors have agreed to sell the Shares and the Purchaser has agreed to
buy the Shares on the terms and conditions of this agreement.
AGREED TERMS
1 DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this agreement, unless the context requires otherwise:
"1936 ACT " means the Income Tax Assessment Act 1936 (Cth).
"1997 ACT " means the Income Tax Assessment Act 1997 (Cth).
" 2005 BUSINESS PLAN" means the budget and business plan of the Company
for the 2004/2005 fiscal year.
"A&B OBSERVER" means any observer appointed by A&B Venture Fund Company
Pty Ltd under clause 20.
"ACCOUNTING STANDARDS" means:
(a) the accounting standards from time to time approved under the law of
the Australia;
(b) the requirements of the law of Australia in relation to the
preparation and content of the accounts; and
(c) if and to the extent that any matter is not covered by the
accounting standards means other relevant accounting standards and
generally accepted accounting principles
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 6
E-6
applied from time to time in Australia for a company similar to the
relevant Group Entity, except those principles and practices which
are inconsistent with the standards or requirements referred to in
paragraph (a) or (b).
"ASIC" means the Australian Securities and Investment Commission.
"ASSETS" means, in respect of each Group Entity, all of the assets used to
conduct the Business.
"ASSOCIATE" has the meaning given to that term by section 9 of the
Corporations Act.
"ASX" means Australian Stock Exchange Limited.
"BUSINESS" means the business of providing loyalty and relationship
marketing solutions conducted by the Group.
"CAPITAL RAISING" means the creation, issue and allotment by the Purchaser
of additional securities to raise funds of at least $5.6 million.
"CLAIM" includes any allegation, debt, cause of action, Liability, claim,
proceeding, suit or demand of any nature howsoever arising and whether
present or future, fixed or unascertained, actual or contingent, whether
at law, in equity, under statute or otherwise.
"CLAIM AMOUNT" means the amount a person is required to pay in Tax to a
Tax Authority as a result of any Tax Claim.
"COMPANY" means Loyalty Magic Pty Ltd (ACN 075 350 239).
"COMPLETION" means completion of the sale and purchase of the Shares in
accordance with clause 6 and "COMPLETE" has a corresponding meaning.
"COMPLETION DATE" means the date that is 2 Business Days' after the date
on which the last of the Conditions is satisfied or waived or such later
date as the Purchaser and the Majority Vendors agree.
"COMPLETION PAYMENT" means the amount to be paid by the Purchaser to each
Vendor and to each Optionholder on Completion as listed opposite the name
of each Vendor or Optionholder as the case may be in the second column in
part 1 of Schedule 1 (as those amounts may be adjusted in accordance with
Condition 7 of clause 2.1 and clause 8 of this agreement).
"COMPLETION SECURITIES" means the number of fully paid ordinary shares in
the Purchaser to be issued by the Purchaser in partial satisfaction of the
Purchase Consideration as set out in the fourth column in part 1 of
Schedule 1 (as that number of fully paid ordinary shares may be adjusted
in accordance with Condition 7 of clause 2.1, clause 5 and/ or clause 8 of
this agreement.
"CONDITIONS" has the meaning given to that term in clause 2.1.
"CONFIDENTIALITY AGREEMENTS" means the confidentiality agreements between
each Employee and the Purchaser.
"CONFIDENTIAL INFORMATION" means all trade secrets, concepts, ideas,
know-how, processes, technology, techniques, research, data, plans,
materials, financial, marketing and technical information, product
development and other information, regardless of its form, relating to a
Group Entity or its affairs or the Business which is proprietary or
confidential in nature or which is treated by a Group Entity as
confidential except information that is in the public domain, otherwise
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 7
E-7
than through a breach of confidentiality by the Group Entity or any person
to whom the Group Entity disclosed the information.
"CONSIDERATION SECURITIES" means the number of fully paid ordinary shares
in the Purchaser to be issued by the Purchaser in partial satisfaction of
the Purchase Consideration as set out in part 1 of Schedule 1, being the
aggregate of the Completion Securities and the aggregate of the Hold Back
Securities.
"CONSOLIDATED GROUP" has the same meaning ascribed to that term in section
995-1 of the 1997 Act.
"CONTROL" means the possession directly or indirectly of the power,
whether or not having statutory, legal or equitable force, and whether or
not based on statutory, legal or equitable rights, directly or indirectly
to control the membership of the controlling body of the relevant entity
or to otherwise directly or indirectly direct or influence the direction
of the management and policies of the relevant entity whether by means of
trust, agreements, arrangements, understandings, practices, the ownership
of Securities of the relevant entity or otherwise.
"CONTRACT" means every binding agreement and arrangement entered into by a
Group Entity.
"CORPORATIONS ACT" means the Corporations Act 2001 (Cth).
"DEPOSITHOLDER" means Computershare Investor Services Pty Ltd or such
other reputable share registrar or a reputable investment bank nominated
by the Purchaser.
"EMPLOYEES" means each of the existing employees of the Company as set out
in Schedule 5.
"EMPLOYMENT CONTRACTS" means the current employment contracts between the
Employees and the Company.
"ENCUMBRANCE" means an interest or power:
(a) reserved in or over any interest in any asset including, without
limitation, any retention of title; or
(b) created or otherwise arising in or over any interest in any asset
under a bill of sale, mortgage, charge, lien, pledge, trust or
power,
by way of security for the payment of debt or any other monetary
obligation or the performance of any other obligation and any interest,
right or power arising from any option, equity, preferential interest,
adverse interest or third party claim or right of any kind and whether
existing or agreed to be granted or created.
"END DATE" means 30 June 2005.
"ESCROW AGREEMENTS" means each agreement entered into between the Major
Vendors and the Purchaser dated on or about the date of this Agreement.
"ESCROW PERIOD" means a period of 6 months from the date of Completion.
"EQUITY SECURITIES" means shares, preference shares, options, convertible
notes, warrants or other securities or instruments convertible or
exercisable into shares or other securities in the Purchaser.
"EXPERT" means an independent accountant appointed by the Vendors and the
Purchaser, or if they do not agree on the person to be appointed within 5
days of one party requesting the
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 8
E-8
appointment, an independent accountant appointed by the President for the
time being of the Australian Institute of Chartered Accountants (Victoria
branch) at the request of any of the Vendors or the Purchaser.
"FINANCIAL INDEBTEDNESS" means any debt or other monetary liability
(whether actual or contingent) in respect of moneys borrowed or raised or
any financial accommodation whatsoever and irrespective of whether the
debt is owned or incurred by a person alone or severally or jointly or
both with any other person.
"GOVERNMENT AGENCY" means:
(a) a government or government department;
(b) a governmental, semi-governmental, regulatory or judicial entity or
government agency; or
(c) a person (whether autonomous or not) who is charged with the
administration of a law.
"GROUP" means, from time to time, the group of companies and trusts
comprising the Group Entities.
"GROUP ENTITY" means any of the Company and any:
(a) company the shares of which is wholly owned by the Company or
ultimately wholly beneficially owned by the Company from time to
time;
(b) unit trust the units of which is wholly owned by the Company or
ultimately wholly beneficially owned by the Company (and, where
relevant, a reference to such unit trust includes a reference to the
trustee of that trust) from time to time,
and "GROUP ENTITIES" means all of them.
"HOLD BACK AMOUNT" means the amount to be paid by the Purchaser to the
Depositholder in accordance with Clause 5.3 as listed opposite the name of
each Vendor in the third column in Schedule 1.
"HOLD BACK PERCENTAGE" in respect of a Major Vendor means the percentage
that the number of Hold Back Securities listed opposite the name of that
Major Vendor in the fifth column in Schedule 1 bears to the aggregate of
the total number of Completion Securities and Hold Back Securities listed
opposite the name of that Major Vendor in the fourth and fifth columns in
Schedule 1.
"HOLD BACK SECURITIES" means the number of fully paid ordinary shares in
the Purchaser to be issued by the Purchaser in partial satisfaction of the
Purchase Consideration as listed opposite the name of each Vendor and each
applicable Optionholder in the fifth column in Schedule 1 (if any) that
are actually issued to each Vendor or Optionholder and released from
holdback in accordance with Clause 5.4.
"HEAD COMPANY" has the same meaning as is ascribed that term in section
995-1 of the 1997 Act.
"IMMEDIATELY AVAILABLE FUNDS" has the meaning given to that term in clause
1.3(a).
"INSOLVENCY EVENT" means the occurrence of any of the following events in
relation to any person:
(a) the person becomes insolvent as defined in the Corporations Act,
states that it is insolvent or is presumed to be insolvent under an
applicable law;
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 9
E-9
(b) the person is wound up, dissolved or declared bankrupt;
(c) the person becomes an insolvent under administration as defined in
the Corporations Act;
(d) a liquidator, provisional liquidator, controller, receiver, receiver
and manager (or any one else who is in possession or has control of
the person's property to enforce an Encumbrance) administrator,
trustee for creditors, trustee in bankruptcy or other similar person
is appointed to, or takes possession or control of, any or all of
the person's assets or undertaking;
(e) the person enters into or becomes subject to:
(i) any arrangement or composition with one or more of its
creditors or any assignment for the benefit of one or more of
its creditors; or
(ii) any re-organisation (other than solvent reconstructions or
re-organisations), moratorium, deed of company arrangement or
other administration involving one or more of its creditors;
(f) an application or order is made (and, in the case of an application,
it is not stayed, withdrawn or dismissed within 30 days), resolution
passed, proposal put forward, or any other action taken which is
preparatory to or could result in any of (b), (c), (d) or (e) above;
(g) the person is taken, under section 459F(1) of the Corporations
Act, to have failed to comply with a statutory demand;
(h) the person suspends payment of its debts, ceases or threatens to
cease to carry on all or a material part of its business or becomes
unable to pays its debts when they fall due; or
(i) anything occurs under the law of any jurisdiction which has a
substantially similar effect to any of the other paragraphs of this
definition.
"INTELLECTUAL PROPERTY RIGHTS" means:
(a) any patents, utility models, copyrights, registered and unregistered
trade marks or service marks, trade names, brand names, business
names, indications of source or appellations of origin, eligible
layout rights, plant variety rights, registered designs and
commercial names and designations;
(b) any invention, discovery, trade secret, know-how, computer software
and confidential, scientific, technical and product information;
(c) any other rights resulting from intellectual activity in the
industrial, scientific, literary and artistic fields whether
industrial, commercial, agricultural or extractive and whether
dealing with manufactured or natural products; and
(d) any letters patent, deed of grant, certificate or document of title
for any thing referred to in paragraphs (a), (b), or (c) and any
medium in which a thing referred to in those paragraphs is stored or
embodied.
"KEY EMPLOYMENT CONTRACT" means the employment contract between the
Purchaser and Chris Leach.
"LAST ACCOUNTS" means the balance sheet and profit and loss statement of
the Company for the period ending 31 January 2005 prepared in accordance
with Accounting Standards which is annexed as Schedule 4.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 10
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"LIABILITY" includes all liabilities (whether actual, contingent or
prospective), losses, damages, costs and expenses of whatsoever nature or
description irrespective of when the acts, events or things giving rise to
the liability occurred.
"LOSS" includes any damage, loss, cost, Claim, Liability or expense
(including legal costs and expenses).
"MAJOR VENDORS" means A&B Venture Fund Company Pty Ltd as trustee of the
Allen & Buckeridge II Trust, Judith Course as trustee of the Course Family
Trust, Warren Voss as trustee of the Bernadene Hug Family Trust and Antony
Course, Bernadene Hug and Chris Leach (who are regarded as Vendors for the
purpose of this definition), Warana Grange Pty Ltd and Navon Pty Ltd as
trustee of the Shemesh Trust.
"MAJORITY VENDORS" means such of the Major Vendors who between them hold
more than 50% of the Shares held by all Major Vendors. The options held by
Chris Leach will be counted as Shares for the purpose of this definition.
"MATERIAL ADVERSE CHANGE" means any one or more changes, effects, events,
occurrences, state of facts or developments that resulted in, or could
reasonably be expected to result in, an adverse change of more than 10% of
net assets, occurring between the date of this agreement and the
Completion Date.
"OPTION PLAN" means the employee share option plan entered into by the
Company and in force on 1 January 2005.
"OPTIONHOLDER" mean a holder of employee options over ordinary shares
issued under and in accordance with the Option Plan and Michelle Benson in
respect of the amount of the Purchase Consideration that the Vendors have
agreed to pay to her (as detailed in Schedule 1) in consideration for her
services to the Company prior to the date of this Agreement.
"PROTECTED VENDORS" means:
(a) A&B Venture Fund Company Pty Ltd;
(b) Chris Leach (who is regarded as a Vendor for the purpose of this
definition); and
(c) each other Major Vendor listed on the list of Major Vendors that is
provided to the Purchaser prior to Completion pursuant to clause 5.6
who is accepted by the Purchaser.
"PURCHASE CONSIDERATION" means the purchase price payable and the
Consideration Securities to be issued as consideration for the sale of the
Shares as specified in clause 4.1.
"PURCHASER'S GROUP ENTITY" means any of the Purchaser and any:
(a) company the shares of which is wholly owned by the Purchaser or
ultimately wholly beneficially owned by the Purchaser from time to
time;
(b) unit trust the units of which is wholly owned by the Purchaser or
ultimately wholly beneficially owned by the Purchaser (and, where
relevant, a reference to such unit trust includes a reference to the
trustee of that trust) from time to time,
and PURCHASER'S GROUP ENTITIES means all of them.
"RECORDS" means originals and copies, in machine readable or printed form,
of all books, files, reports, records, correspondence, documents, data and
other material of or relating to or used in connection with a Group Entity
or the Business including:
(a) minute books, records of meetings or resolutions of shareholders and
directors, statutory books and registers, books of account,
journals, copies of tax returns, assessments,
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 11
E-11
notices and all other such records required by law to be kept by a
Group Entity, tax advice provided and tax position papers;
(b) all financial statements, books of accounts, accounts, trading and
financial records, title documents, records with respect to
employees and superannuation entitlements of employees, leases,
Contracts, agreements and insurance policies;
(c) sales literature, market research reports, brochures and other
promotional material (including printing blocks, negatives, sound
tracks and associated material);
(d) all sales and purchasing records, technical and business records,
databases, lists of all regular suppliers and customers and customer
and supplier files and correspondence; and
(e) all other records, data, documents and papers relating to the
Business, its Assets and operations and liabilities of the Group
Entity kept by or for it.
"REGULATORY APPROVALS" means:
(a) any consent, authorisation, registration, filing, lodgement, permit,
franchise, agreement, notarisation, certificate, permission,
licence, approval, direction, declaration, authority, ruling or
exemption from, by or with a Government Agency; or
(b) in relation to anything that would be fully or partly prohibited or
restricted by law if a Government Agency intervened or acted in any
way within a specified period after lodgement, filing, registration
or notification, the expiry of that period without intervention or
action,
as may be necessary to satisfy the condition precedent in condition 2 in
clause 2.1.
"RELATED BODY CORPORATE" has the meaning given to that term in section 9
of the Corporations Act.
"RELATED DIRECTOR" means, in relation to a Vendor that is a company or
corporate trustee, each person who is or in the last six months has been a
director of that Vendor.
"RELATED ENTITY" has the meaning given to that term in the Corporations
Act.
"RESPECTIVE VENDOR LIABILITY" means each Major Vendor's respective
proportional liability to any Claims made by the Purchaser against the
Major Vendors under this agreement which is an amount equivalent to the
relevant Major Vendor's proportion of the Purchase Consideration provided
to all Major Vendors (including, for the avoidance of doubt, Chris Leach),
which for convenience is set out opposite the name of each Major Vendor as
a percentage in the ninth column of Schedule 1 of this agreement. Chris
Leach's Respective Vendor Liability is to be calculated as though he had
exercised his options and had been paid in the same manner as the Vendors.
Each Major Vendors' liability is subject to the maximum cap and other
limitations set out in clause 11.
"RESTRICTED ACTIVITIES" has the meaning given to that term in clause 14.2.
"RESTRICTION AREA" has the meaning given to that term in clause 14.3.
"RESTRICTION PERIOD" has the meaning given to that term in clause 14.4.
"RETIRING OFFICERS" means each person named in Schedule 2.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 12
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"REQUIRED APPROVALS" means each of the following as may be required:
(a) an ordinary resolution of the Purchaser's members to approve the
issue of the Consideration Securities to the Vendors pursuant to the
terms of this agreement;
(b) approvals by necessary legal, securities and regulatory authorities
in the United States, Australia and other jurisdictions, as
necessary;
(c) approval by shareholders of the Purchaser of the acquisition of the
Company and the Capital Raising including without limitation:
(i) a shareholder resolution in accordance with ASX listing rule
7.1 in connection with the issue of more than 15% of the share
capital of the Purchaser in a 12 month period;
(ii) a shareholder resolution in accordance with ASX listing rule
11.1 in connection with a significant change in the scale of
the activities of the Purchaser.
"SEC" means the Securities and Exchange Commission.
"SECURITIES" means shares, debentures, stocks, bonds, notes, interests,
units, warranty, options, derivative instruments or any other securities.
"SHARES" means all of the shares in the capital of the Company and, in
respect of each Vendor, means the shares in the capital of the Company
held by that Vendor on the Completion Date.
"SOFTWARE" means the software described in Part B of Schedule 6.
"TAX" means any present or future tax, levy, impost, deduction, charge,
duty, compulsory loan or withholding of whatever kind and whether direct
or indirect, including but not limited to income tax, capital gains tax,
recoupment tax, land tax, sales tax, goods and services tax, payroll tax,
tax instalment deduction, fringe benefits tax, group tax, profit tax,
interest tax, property tax, undistributed profits tax, withholding tax,
municipal rates, stamp duty, import duty (and any related interest,
penalty, fine or expense in connection with any of them) levied or imposed
by any Tax Authority, whether accruing before or after Completion.
"TAX AUTHORITY" means the Australian Taxation Office or any Australian
state authority responsible for Tax, wherever situated.
"TAX CLAIM" means an assessment (including a Tax return deemed to be an
assessment), notice, demand or other document issued or action taken by or
on behalf of a Tax Authority, whether before or after the date of this
agreement, as a result of which the Company is liable to make a payment
for Tax or is deprived of any Tax credit, rebate, refund, relief,
allowance, deduction, or loss carried forward subject to the time limit on
any claim as described in Section 10.3 (ii).
"TAX PROVISION" means at any time, the sum of:
(a) the provision for current Tax; and
(b) the deferred tax provision,
each as stated in the Last Accounts.
"VENDOR" means each person named as a vendor in Schedule 1. For the
purposes of Clauses 5.1 and 5.2, each of Chris Leach, Bernadene Hug and
Michelle Benson will also be deemed to be a Vendor.
"VENDOR QUALIFICATIONS" means the warranties provided in part A of
schedule 3.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 13
E-13
" WARRANTIES" means the Major Vendors' warranties set out in schedule 3
excluding the Vendor Qualifications.
1.2 WORDS AND EXPRESSIONS
In this agreement, unless the context requires otherwise:
(a) the singular includes the plural and vice versa;
(b) words denoting any gender include all genders;
(c) where a word or phrase is defined, its other grammatical forms have
a corresponding meaning;
(d) a reference to a party, clause, paragraph, schedule or annexure is a
reference to a party, clause, paragraph, schedule or annexure to or
of this agreement;
(e) a reference to this agreement includes any schedules or annexures;
(f) the background or recitals to this agreement are adopted as and form
part of this agreement;
(g) a reference to any document or agreement includes a reference to
that document or agreement as amended, novated, supplemented, varied
or replaced from time to time;
(h) a reference to "$", "A$" or "dollar" is a reference to Australian
currency;
(i) a reference to a time is a reference to Australian Eastern Standard
Time;
(j) a reference to a party includes its executors, administrators,
successors, substitutes (including persons taking by novation) and
permitted assigns;
(k) a reference to writing includes any method of representing words,
figures or symbols in a permanent and visible form;
(l) words and expressions denoting natural persons include bodies
corporate, partnerships, associations, firms, governments and
governmental authorities and agencies and vice versa;
(m) a reference to any legislation or to any provision of any
legislation includes:
(i) any modification or re-enactment of the legislation;
(ii) any legislative provision substituted for, and all
legislation, statutory instruments and regulations issued
under, the legislation or provision; and
(iii) where relevant, corresponding legislation in any State or
Territory of Australia or the United States of America;
(n) no rule of construction applies to the disadvantage of a party
because that party was responsible for the preparation of this
agreement or any part of it; and
(o) the words "including", "for example", "such as" or other similar
expressions (in any form) are not words of limitation.
1.3 OTHER RULES OF INTERPRETATION
In this agreement, unless expressly provided otherwise:
(a) (METHOD OF PAYMENT) any payment of money by one party to another
will be made in Australian currency in cash, by bank cheque or by
credit of cleared funds to a bank account specified by the recipient
(" IMMEDIATELY AVAILABLE FUNDS");
(b) (CLAIM PAYMENTS IN WHOLE) all payments required to be made by the
Major Vendors or the Depositholder under this agreement must be made
in accordance with any award made by an Arbitrator under clause
11.5(a) without set-off or counter claim;
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 14
E-14
(c) (HEADINGS) headings are for convenience and do not affect
interpretation;
(d) (BUSINESS DAYS) if:
(i) the day on or by which any act, matter or thing is to be done
is a day other than a Business Day, the act, matter or thing
will be done on the next Business Day; and
(ii) any money falls due for payment on a date other than a
Business Day, that money will be paid on the next Business Day
(without interest or any other amount being payable in respect
of the intervening period);
(e) (INCONSISTENCY WITHIN AGREEMENT) if a clause of this agreement is
inconsistent with a schedule or annexure of this agreement, the
clause prevails to the extent of the inconsistency;
(f) (MATERIALITY THRESHOLD) without limitation, any Claim that is made
in respect of an amount in excess of the minimum amount specified in
clause 11.4(a)(ii) will be deemed to be material.
2 CONDITIONS
2.1 CONDITIONS
The obligations of each party to complete the sale and purchase of the
Shares under this agreement is subject to the satisfaction of each of the
following conditions:
NO. CONDITION PARTY ENTITLED TO THE BENEFIT
- ---- ----------------------------------------------- ------------------------------
1 (REQUIRED APPROVALS) the passing of the Majority Vendors and Purchaser
Required Approvals.
2 (REGULATORY APPROVALS) All Regulatory Majority Vendors and Purchaser
Approvals required to implement the
transaction contemplated by this agreement
are granted or obtained.
3 (LISTING) As at the Completion Date, the Majority Vendors and Purchaser
Purchaser's main class of securities are
quoted on the NASDAQ & ASX.
4 (COMPANY DUE DILIGENCE) Completion of Purchaser
business, operational and financial due
diligence of the Company by the Purchaser
and the Purchaser is satisfied that no Material
Adverse Change has occurred since the date
of this agreement.
5 (PURCHASER DUE DILIGENCE) Completion of Vendors
business, operational and financial due
diligence of the Purchaser by the Vendors
and the Vendors are satisfied that no Material
Adverse Change has occurred since the date
of this agreement.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 15
E-15
NO. CONDITION PARTY ENTITLED TO THE BENEFIT
- ---- ----------------------------------------------- ------------------------------
6 (LEGAL DUE DILIGENCE) Completion of the Purchaser
legal due diligence of the Company by the
Purchaser and the Purchaser is satisfied that
no Material Adverse Change has occurred
since the date of this agreement.
7 (BALANCE SHEET) The Vendors written Purchaser
confirmation of the cash and cash equivalents
(as determined under the Accounting
Standards and in the manner specified in
Clause 8.2) on the balance sheet of the
Company as at the Completion Date. Any
shortfall below $300,000 can be deducted
from the Purchase Consideration payable to
each Vendor (proportionately from the
Completion Payment and the Completion
Securities).
8 (INTELLECTUAL PROPERTY) The Major Vendors Purchaser
providing written confirmation by executing
this agreement that the Company's
Intellectual Property Rights listed in
Schedule 6 are not subject to any third party
ownership claims, are not subject to third
party infringement claims and completion of a
technical and product audit.
9 (KEY EMPLOYMENT CONTRACT) Execution of Purchaser
the Key Employment Contract.
10 (ESCROW AGREEMENTS) Execution of the Purchaser
Escrow Agreements.
11 (MATERIAL CONTRACTS) Review of the Material Purchaser
Contracts is completed and the Purchaser is
satisfied that if any of the Material Contracts
are capable of being terminated by any other
party to those Material Contracts as a
consequence of the change in control of the
Company that, the Vendors have obtained the
consent of those parties to the sale by the
Vendors of the Shares to the Purchaser.
12 (CONFIDENTIALITY AGREEMENTS) Execution of Purchaser
the Confidentiality Agreements.
13 (CAPITAL RAISING) Successful closing of the Majority Vendors and Purchaser
Capital Raising.
14 (DEPOSIT AGREEMENT) Execution of an Majority Vendors and Purchaser
agreement with the Depositholder.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 16
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NO. CONDITION PARTY ENTITLED TO THE BENEFIT
- ---- ----------------------------------------------- ------------------------------
15 (KEY EMPLOYMENT CONTRACT) Execution of Majority Vendors and Purchaser
the Key Employment Contract.
16 (REPRESENTATIONS AND WARRANTIES) Any of Purchaser
the Warranties is not true and correct in all
material respects at the date that it is made,
unless the Purchaser has accepted a written
notification from the Major Vendors regarding
that Warranty.
2.2 REASONABLE ENDEAVOURS
The parties agree to use all reasonable endeavours to ensure that the
Conditions are satisfied by the End Date.
2.3 WAIVER OF CONDITIONS
A Condition may only be waived in writing by each party entitled to the
benefit of that Condition and the waiver will only be effective to the
extent specifically set out in that waiver.
2.4 NON-SATISFACTION
If any of the conditions under clause 2.1 is not satisfied by the End
Date, then at the option of a party entitled to the benefit under the
condition precedent, this agreement may be terminated with immediate
effect by giving written notice to the other parties. In the case of a
condition to the benefit of the Vendors, only Majority Vendors may
terminate. For the avoidance of doubt, if this Agreement is terminated
pursuant to this clause 2.4, none of the parties have any liability to any
other party.
2.5 NOTICE OF SATISFACTION
Each party must notify the other parties in writing as soon as practicable
after it becomes aware that any Condition is satisfied or that any
Condition is incapable of being satisfied.
3 SALE AND PURCHASE OF SHARES
3.1 SALE AND PURCHASE
(a) Subject to clause 2, on the Completion Date each Vendor will sell
the Shares set out opposite the name of that Vendor in schedule 1 to
the Purchaser and the Purchaser will buy those Shares for the
Purchase Consideration on and subject to the terms and conditions of
this agreement.
(b) The Vendors will do all things necessary to ensure the transfer of
the legal and beneficial title of the Shares to the Purchaser on the
terms and conditions of this agreement.
3.2 FREE FROM ENCUMBRANCES
The Shares must be transferred to the Purchaser under clause 3.1 on and
from Completion free from all Encumbrances (but excluding any Encumbrance
created by or on behalf of the Purchaser) and with all rights, including
dividend rights, attached or accruing to them.
3.3 TITLE AND PROPERTY
Title to and risk in the Shares passes to the Purchaser on Completion.
Until Completion, the Vendors remain the owners of and bear all risk in
connection with the Shares.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 17
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3.4 WAIVER
By executing this agreement, each Vendor waives any pre-emptive rights
they may have in respect of the sale or transfer of the Shares, including,
without limitation, under the constitution or shareholders agreement of
the Company.
3.5 EMPLOYEE OPTIONS
The Optionholders are as set out in part 2 of Schedule 1. In accordance
with the terms of the Option Plan of the Company, the board of the Company
has resolved that all the options on issue over ordinary shares which are
not exercised prior to the date of this agreement will be cancelled in
exchange for the difference between the amount of cash consideration
payable for each Share in the Company and the exercise price of the
relevant options. For this purpose, on the Completion Date, the Purchaser
on behalf of the Company must pay to each of the Optionholders an amount
being the difference between the amount of cash consideration payable for
each Share in the Company and the exercise price of the relevant options.
All Optionholders other than Chris Leach will be paid in cash only. The
consideration payable to Chris Leach will be apportioned between the
Completion Payments and Completion Securities as set out in Schedule 1. If
any Optionholder exercises any of his options prior to the date on which
they are due to be cancelled, the parties will make such adjustments
between them to ensure that the Optionholder is treated as a Vendor for
the purposes of this Agreement and the Purchase Consideration shall be
reapportioned amongst all of the Vendors (including the Optionholder) and
Schedule 1 shall be amended accordingly.
4 PURCHASE CONSIDERATION
4.1 PURCHASE CONSIDERATION
The Purchase Consideration for the Shares is:
(a) $3,600,000 less any amount that is deducted pursuant to Condition 7
in clause 2.1 plus any additional amount calculated in accordance
with clause 8; and
(b) the issue by the Purchaser of the Consideration Securities less any
number of Consideration Securities deducted pursuant to Condition 7
in clause 2.1 plus any additional Consideration Securities issued in
accordance with clause 5.2 or clause 8.
For illustrative purposes, assuming a price of $5.10 for each of the
Consideration Securities, the Purchaser is issuing $1,900,000 worth
of Consideration Securities. The aggregate value and number of the
Consideration Securities may be reduced pursuant to Condition 7 of
clause 2.1. Likewise, the number of Consideration Securities may be
increased pursuant to clause 5.2 or clause 8.
4.2 APPORTIONMENT OF PURCHASE CONSIDERATION
(a) The Purchase Consideration will be apportioned between the Vendors
and the Optionholders in the proportions set out in Schedule 1. Each
of the Vendors and the Optionholders unequivocally and irrevocably
agrees to the apportionment set out in Schedule 1 and confirms to
the Purchaser that this apportionment accurately reflects the
arrangements between them (including, without limitation, the rights
of each person to whom an option has been granted by the Company and
the rights of Chris Leach, Bernadene Hug and Michelle Benson under
an incentive arrangement agreed between the Vendors, the Company and
each of them).
(b) If there is an adjustment to the Purchase Consideration as a result
of Condition 7 in clause 2.1 or clause 8:
(i) each Vendors' Completion Payment and Completion Securities (as
applicable) will proportionately adjusted to reflect the
adjusted Purchase Consideration; and
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 18
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(ii) the details set out in Schedule 1 of this agreement are deemed
to be varied automatically (without the need for any action on
the part of any party) to reflect the adjustment.
5 PROVISION OF THE PURCHASE CONSIDERATION
5.1 SATISFACTION OF PURCHASE CONSIDERATION
As has been agreed with each Vendor and set out in Schedule 1, the
Purchase Consideration will be satisfied on Completion:
(a) in respect of each Vendor who has elected to receive its
consideration in cash, by the payment by the Purchaser to that
Vendor of the Completion Payment set out opposite the name of that
Vendor in Schedule 1 with the applicable Hold Back Amount to be held
by the Depositholder in accordance with this agreement; or
(b) in respect of each Vendor who has elected to receive its
consideration in part in cash and in part by the issue of
Consideration Securities, in part by the payment by the Purchaser to
that Vendor of the Completion Payment set out opposite the name of
that Vendor in Schedule 1 and in part by the Purchaser issuing or
procuring the issue to that Vendor of the number of Completion
Securities set out opposite the name of that Vendor in Schedule 1
with the applicable Hold Back Amount and Hold Back Securities to be
held by the Depositholder in accordance with this agreement;
(c) in respect of each Vendor who has elected to receive its
consideration solely by the issue of Consideration Securities, by
the issue by the Purchaser to that Vendor of the number of
Completion Securities set out opposite the name of that Vendor in
Schedule 1 with the applicable Hold Back Securities to be held by
the Depositholder in accordance with this agreement;
(d) in respect of each Optionholder other than Chris Leach, by the
payment by the Purchaser to that Optionholder of the Completion
Payment set out opposite the name of that Optionholder in
Schedule 1;
(e) in respect of Chris Leach, in part by the payment by the Purchaser
to that Optionholder of the Completion Payment set out opposite the
name of that Optionholder in Schedule 1 and in part by the Purchaser
issuing or procuring the issue to that Optionholder of the number of
Completion Securities set out opposite the name of that Optionholder
in Schedule 1 with the applicable Hold Back Amount and Hold Back
Securities to be held by the Depositholder in accordance with this
agreement.
If applicable, after Completion, the Purchase Consideration will be
satisfied by the issue of such additional Completion Securities calculated
in accordance with clause 5.2 of this agreement with additional Hold Back
Securities (if any) to be held by the Depositholder in accordance with
clause 5.4 of this agreement.
5.2 ADJUSTMENT OF CONSIDERATION SECURITIES
(a) Subject to clauses 5.2(c), and (e), for the period from the date of
this agreement until 6 months from Completion Date and including the
Capital Raising, if the Purchaser issues or agrees to issue
additional ordinary shares in itself unattached to any other Equity
Securities in itself and the effective issue price for those
ordinary shares is less than A$5.10, the Purchaser agrees to
immediately issue to the Vendors who received Consideration
Securities (in whole or as a portion of the Purchase Consideration
for their Shares) such number of additional ordinary shares in the
Purchaser calculated as follows:
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 19
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(NP)
S = ----- x (NCS) - NCS
(LIP)
where:
S is the number of further shares to be issued to that Vendor;
LIP is the lower issue price of the ordinary shares issued by the
Purchaser during the Escrow Period;
NCS is the number of Consideration Securities set out opposite the
name of that Vendor in Schedule 1 (as may be adjusted by previous
application of this clause).
NP is A$5.10 or such lower price at which ordinary shares may
previously have been issued by the Purchaser during the Escrow
Period and in respect of which issue this clause 5.2 was previously
applied.
(b) Subject to clauses 5.2(b)(ii), and (e), for the period from the date
of this agreement until 6 months from the Completion Date and
including the Capital Raising, if the Purchaser issues or agrees to
issue additional ordinary shares in itself ("Additional Shares")
attached to any other Equity Securities in itself and the effective
issue price for the acquisition of a minimum parcel of those
Additional Shares and Equity Securities is less than A$5.10, the
Purchaser agrees to immediately issue to the Vendors who received
Consideration Securities (in whole or as a portion of the Purchase
Consideration for their Shares):
(i) such number of additional ordinary shares in the Purchaser
calculated as follows:
(NP)
S = ----- x (NCS) - NCS
(LIP)
where:
S is the number of further ordinary shares to be issued to
that Vendor;
LIP is the lower effective issue price of each ordinary share
in the parcel of ordinary shares and Equity Securities that
are issued by the Purchaser during the Escrow Period;
NCS is the number of Consideration Securities set out opposite
the name of that Vendor in Schedule 1 (as may be adjusted by
previous application of this clause).
NP is A$5.10 or such lower price at which ordinary shares may
previously have been issued by the Purchaser during the Escrow
Period and in respect of which issue this clause 5.2 was
previously applied.
(ii) such number of Equity Securities calculated as follows:
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 20
E-20
ES = CS x AS
where:
ES is the number of Equity Securities to be issued to that
Vendor.
S is the number of Consideration Securities that will be held
by that that Vendor after the further issue of ordinary shares
under clause 5.2(b)(i).
AS is the number of Equity Securities attached to each
Additional Share in a minimum parcel of those Additional
Shares and Equity Securities to be issued by the Purchaser.
(c) In any particular circumstances, the Major Vendors by unanimous
decision may waive or agree to vary the operation of the provisions
of clause 5.2(a) or 5.2(b) (as applicable).
(d) For the avoidance of doubt, no Vendor will be required to pay any
additional amount for the issue to it of any Additional Shares or
Equity Securities pursuant to clause 5.2(b) unless the amount
payable by a third party to acquire a minimum parcel of Additional
Shares and attached Equity Securities exceeds A$5.90. If the amount
payable by a third party to acquire a minimum parcel of Additional
Shares and attached Equity Securities exceeds A$5.90, the Vendor is
entitled to such whole number of Additional Shares and thereafter
such whole number of Equity Securities that are able to be acquired
for an amount not exceeding A$5.90. The relevant Vendor may also
elect to pay the difference between A$5.90 and the higher actual
third party subscription price above A$5.90 in order to receive all
of the Additional Shares and attached Equity Securities in the
parcel offered to the third parties.
(e) If any additional ordinary shares or Equity Securities are to be
issued by the Purchaser to a Major Vendor pursuant to clauses 5.2(a)
or (b), the Hold Back Percentage of those additional ordinary shares
will be held back by the Depositholder in accordance with clause 5.4
of this agreement.
5.3 HOLD BACK AMOUNTS
(a) The Major Vendors and the Purchaser will jointly instruct the
Depositholder to hold the Hold Back Amounts in an interest bearing
account in the names of the Major Vendors and the Purchaser and to
pay the aggregate Hold Back Amount together with accrued interest on
the date that is six months after the Completion Date unless the
Purchaser has given notice of a Claim pursuant to clause 11.1.
(b) If the Purchaser has given notice of a Claim pursuant to clause
11.1, the Hold Back Amounts will be paid in accordance with any
agreement reached by the Purchaser and the Major Vendors who, but
for the Claim, would have been entitled to that Hold Back Amount and
otherwise in accordance with the decision of any Mediator or
Arbitrator appointed pursuant to clause 11.6.
(c) Interest on the Hold Back Amounts (or any portion of the Hold Back
Amounts) must be paid to whichever of the Purchaser or the Major
Vendors is entitled to the Hold Back Amounts (or that portion of
those Hold Back Amounts) under this clause 5.3.
(d) The party who is entitled to the Hold Back Amount bears the risk of
losing the Hold Back Amount if the Depositholder defaults in paying
the Hold Back Amount to that party when required to do so under the
terms of the joint instructions given to the Depositholder by the
Major Vendors and the Purchaser.
5.4 HOLD BACK SECURITIES
If the Purchaser has given notice of a Claim pursuant to clause 11.1, the
Hold Back Securities will be delivered to the Vendors or the required
number of Hold Back Securities will be returned to the Purchaser in
accordance with any agreement reached by the Purchaser and the Major
Vendors
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 21
E-21
who, but for the Claim, would have been entitled to be issued the Hold
Back Securities and otherwise in accordance with the decision of any
Mediator or Arbitrator appointed pursuant to clause 11.6.
5.5 RELEASE OF HOLD BACK SECURITIES AND PAYMENT OF HOLD BACK AMOUNTS
Any release of Hold Back Securities pursuant to clause 5.4 or payment of
the Hold Back Amounts pursuant to clause 5.3 will be done in accordance
with clause 11.5.
5.6 DOWNSIDE PROTECTION
(a) Prior to Completion A&B Venture Fund Company Pty Ltd shall deliver
to the Purchaser a list of the Protected Vendors and the number of
Consideration Securities (including the share certificate number or
other identifying number) held by each such Protected Vendor to
which the succeeding provisions of this clause 5.6 applies
("Protected Securities"). The number of Protected Securities
referred to on the list must not exceed 150,000. Upon any additional
ordinary shares or Equity Securities being issued by the Purchaser
pursuant to clauses 5.2(a) or (b), the number of Protected
Securities shall be recalculated accordingly and the Major Vendors
shall deliver to the Purchaser a revised list specifying the revised
number of Protected Securities (including the share certificate
number or other identifying number) held by each Protected Vendor,
which revised numbers shall be in the same proportions as the
numbers specified on the original list.
(b) If the Purchaser is able to arrange or approves a placement, the
number of Protected Securities will be reduced as follows:
DV
NCS = ( 1 - ------- ) x OCS
BV
where:
NCS is the revised number of Protected Securities;
DV is the aggregate amount (in Australian Dollars) payable by a
purchaser of the Consideration Securities under the placement;
BV is A$775,000 (as that amount may have been reduced by the amount
payable by a purchaser of Consideration Securities under any prior
placement to which this clause applied;
OCS is the number of Protected Securities prior to the placement,
being as the date of this Agreement, 150,000.
For the avoidance of doubt, this clause 5.6 will cease to apply once
the revised number of Protected Securities is reduced to zero.
(c) The succeeding provisions of this clause 5.6 will apply if at the
close of trading on NASDAQ on the last business day immediately
before the day that is 6 months from the Completion Date
("Protection Date") the weighted average share price (as converted
into Australian Dollars in the manner specified in paragraph 5.6(g))
of the ordinary shares in the Purchaser traded on NASDAQ for the 20
trading days immediately preceding and ending on (and including) the
Protection Date is less than A$5.10 or such lower price at which
ordinary shares may previously have been issued by the Purchaser
during the Escrow Period and in respect of which issue clause 5.2
was previously applied.
(d) Subject to the succeeding provisions of this clause 5.6, within 14
days of the date that is the first anniversary of the Completion
Date (or if later, the date that is six months after the relevant
Protected Securities are released from any further escrow imposed by
the ASX or NASDAQ) each Protected Vendor may request the Purchaser
to pay to it and the
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 22
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Purchaser is required to pay an amount in Immediately Available
Funds calculated as follow
AA = ( LIP - LTP ) x PCS
Where:
AA is the additional amount to be paid to that Protected Vendor;
LIP is the lower A$5.10 or such lower price at which ordinary shares
may previously have been issued by the Purchaser during the Escrow
Period and in respect of which issue clause 5.2 was previously
applied;
LTP is the higher of:
(i) the weighted average share price (as converted into Australian
Dollars in the manner specified in paragraph 5.6(g)) of the
ordinary shares in the Purchaser traded on NASDAQ for the 20
trading days immediately preceding and ending on (and
including) the Protection Date: and
(ii) the average price that that Protected Vendor sold its
Protected Securities during the period:
(A) from the date that is 6 months after the Completion Date
to, but not, including the first anniversary of the
Completion Date; or
(B) if the relevant Protected Securities are subject to
escrow by NASDAQ or ASX for a continuous period of
longer than 6 months after the Completion Date, from the
date that is 6 months after the Completion Date to, but
not, including, the date that is six months after the
relevant Protected Securities are released from that
escrow.
PCS is the number of Protected Securities sold by that Protected
Vendor during the applicable period referred to in subclause (ii) of
the definition of LTP.
Any such request must contain such reasonable details as the
Purchaser may require including details of all sales of shares made
by that Protected Vendor during that period, the sale price of those
shares (exclusive of the cost of that transaction) and the details
of each sale that relates to Protected Securities.
(e) The maximum aggregate amount that the Purchaser may be required to
pay to the Protected Vendors pursuant to clause 5.6(d) is A$510,000.
(f) The provisions of this clause 5.6 cease to apply immediately upon
the Protected Vendors having received A$775,000 from the sale of any
Protected Securities (whether under any placement or otherwise) or
pursuant to the operation of this clause 5.6.
(g) The exchange rate applicable to this clause 5.6 will be the average
of the USD/AUD exchange rates for the 20 trading days immediately
preceding and ending on (and including) the Protection Date as
published in the Australian Financial Review.
(h) In consideration for the obligations agreed to by the Purchaser
pursuant to this clause 5.6, each of the Protected Vendors agrees to
dispose of their Consideration Securities and other Equity
Securities in the Purchaser in a fair and reasonable manner so as to
ensure that at all times there is an orderly and efficient market
for the Purchaser's shares and that there is not undue downward
pressure on or fluctuations in the traded price of the Purchaser's
securities.
(i) In the event that the ordinary shares of the Purchaser are not
quoted on NASDAQ during the periods required to give effect to this
clause 5.6, the references to "NASDAQ" in this clause 5.6 are to be
replaced by "ASX" and the clause is to be otherwise varied to give
effect to the intention of the clause.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 23
E-23
5.7 PUBLIC ANNOUNCEMENT
During the applicable period referred to in subclause (ii) of the
definition of LTP in clause 5.6, no Protected Vendor may make or authorise
any other person to make any public announcement or communication relating
to a sale or proposed sale of any of their Consideration Securities or
other Equity Securities in the Purchaser prior to the sale of those
securities.
5.8 NO LIMITATION
For the avoidance of doubt, nothing in this clause 5 limits the amount of
any Claim that the Purchaser is otherwise entitled to make under clause
11.
6 COMPLETION
6.1 TIME AND PLACE OF COMPLETION
Completion will take place on the Completion Date at the Melbourne offices
of Arnold Bloch Leibler or such other time and place as the Purchaser and
the Vendors agree.
6.2 ITEMS TO BE DELIVERED BY THE VENDORS AND OPTIONHOLDERS AT COMPLETION
On or before the Completion Date, the Vendors must:
(a) deliver to the Purchaser:
(i) (CONSENTS OR WAIVERS) copies of any consents or waivers
required under clause 2.1 and 2.3;
(ii) (SHARE CERTIFICATES) original share certificates for all of
the Shares or an indemnity in lieu thereof;
(iii) (TRANSFERS OF SHARES) share transfer forms duly executed and
completed by the Vendors in favour of the Purchaser for all of
the Shares;
(iv) (CERTIFICATES OF INCORPORATION) the certificates of
incorporation of the Group Entities;
(v) (CONSTITUTION AND RECORDS) all constitutions and the Records
of the Group Entities;
(v) (RESIGNATIONS) written resignations of each of the Retiring
Officers as officers of the Company, to be effective on the
appointment of the officers appointed at the board meeting to
be convened pursuant to clause 6.3;
(vii) (ACKNOWLEDGMENTS) written acknowledgments from all of the
Retiring Officers that:
(A) they have no claim for fees, entitlements, salary or
compensation for loss of office, breach of contract,
redundancy, bonus payment, repayment of loans or
otherwise against the Company; and
(B) there is no agreement, arrangement or understanding
(whether written or unwritten) under which the Company
has, or could have, any obligation to them, other than
in respect of any continuing employment or consulting
arrangements with the Company or other obligations
disclosed in this agreement as being obligations that
continue after the Completion Date;
(viii)(APPLICATION FOR CONSIDERATION SECURITIES) an application for
the Consideration Securities which will contain an agreement
to be bound by the Purchaser's constitution; and
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 24
E-24
(b) execute all documents and do all other things necessary or desirable
to transfer the Shares to the Purchaser free from all Encumbrances
(excluding any encumbrance created by or on behalf of the
Purchaser).
On or before the Completion Date, the Vendors must procure that the
Optionholders:
(a) deliver to the Purchaser original option certificates for all of
their employee options or an indemnity in lieu thereof; and
(b) execute all documents and do all other things necessary or desirable
to effect the cancellation of the employee options free from all
Encumbrances (excluding any encumbrance created by or on behalf of
the Purchaser).
6.3 BOARD MEETING OF THE COMPANY
The Vendors must ensure that at or prior to Completion, a meeting of the
directors of the Company is convened and conducts the following business:
(a) (APPROVAL REGISTRATION) approval of the transfer of the Shares to
the Purchaser under this agreement and to the recording of the
Purchaser as the registered holder of the Shares in the books of the
Company with effect from Completion;
(b) (CANCELLATION OF OPTIONS) approval of the cancellation of all
employee options that are not exercised prior to the date of this
agreement and the variation of the Option Plan to the extent
necessary to vary the timing of the cancellation of such options to
accord with the terms of this agreement;
(c) (SHARE CERTIFICATES) approval of the issue of a new share
certificate for the Shares in the name of the Purchaser;
(d) (APPOINT OFFICERS) appointment of the nominees of the Purchaser as
directors, secretary, auditors and public officer of the Company
and, effective on those appointments, acceptance of the resignation
of the Retiring Officers and auditors and public officer of the
Company; and
(e) (REVOKE BANKING MANDATES) revoke existing mandates to operate bank
accounts of the Company and approve new mandates in favour of
officers of the Company nominated by the Purchaser.
6.4 OBLIGATIONS OF THE PURCHASER
Subject to the Vendor's performance of its obligations under clauses 6.2
and 6.3, at Completion the Purchaser must:
(a) (CONFIRMATION) deliver to the Vendors written confirmation of the
satisfaction of all the Conditions applicable to the Purchaser;
(b) (PAYMENT) pay $3,600,000 (less any amount that is deducted pursuant
to condition 7 in clause 2.1 plus any amount calculated under clause
8) to the Vendors and Optionholders in the proportions set out in
Schedule 1 with the Hold Back Amount to be held by the Depositholder
in accordance with this agreement;
(c) (CONSIDERATION SECURITIES) do or cause to be done any act or thing
that is necessary to issue the Consideration Securities to the
Vendors in the proportions set out in Schedule 1 with the Hold Back
Securities to be initially issued as treasury stock in the capital
of the Purchaser and held by the Depositholder in accordance with
this agreement and converted into ordinary shares in the capital of
the Purchaser at the end of the Escrow Period; and
(d) (CONSENTS OF NEW OFFICERS) deliver to the Company written consents
to act from the persons nominated by the Purchaser as the directors,
secretaries, and public officers of the Company.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 25
E-25
6.5 SIMULTANEOUS COMPLETION
(a) Notwithstanding any other term of this agreement, neither the
Vendors on the one hand nor the Purchaser on the other is required
to Complete unless the other is ready, willing and able to Complete
simultaneously.
(b) If any Vendor does not comply with its obligations under this clause
6 the Purchaser:
(i) will be under no obligation to Complete or to purchase any of
the Shares from any of the Vendors;
(ii) will not be liable for any Liability suffered or incurred by
any Vendor or any other person as a result of not Completing;
and
(iii) may elect to terminate this agreement.
(c) Notwithstanding clause 10.8, no Vendor (other than the defaulting
Vendor) will be liable for any Liability suffered or incurred by any
party for a failure to comply with its obligations to Complete under
clause 3 or this clause 6.
(d) If any of the parties fail to fully comply with their obligations
under this clause 6 and the parties do not Complete then:
(i) each party must return to the other parties all documents
delivered to it under this clause 6;
(ii) each party must repay to the other parties all payments or
benefits received by it under this clause 6 (including any
Consideration Securities issued to any Vendors); and
(iii) each party must do everything reasonably required by the other
parties to reverse any action taken under this clause 6.
6.6 INTERDEPENDENCE
In respect of Completion:
(a) the obligations of the parties under this clause 6 are
interdependent; and
(b) all actions performed are taken to have occurred simultaneously on
the Completion Date.
6.7 LISTING OF CONSIDERATION SECURITIES
Prior to Completion, the Purchaser will notify NASDAQ and the ASX and seek
quotation of the Consideration Securities. Purchaser shall begin work on
the necessary SEC registration filing in order for the Consideration
Securities to be freely tradeable as soon as reasonably practicable
following Completion.
6.8 AGREEMENT NOT TO TRADE CONSIDERATION SECURITIES
All Major Vendors that receive Consideration Securities agree not to trade
Consideration Securities issued to them during the Escrow Period without
the consent of the Purchaser, which Consideration Securities will be held
in escrow in accordance with the Escrow Agreements.
7 CONDUCT OF BUSINESS PENDING COMPLETION
7.1 CONDUCT OF BUSINESS
The Vendors must cause the directors of the Company to ensure that from
the date of this agreement to Completion, unless the Purchaser first
consents in writing, the Company:
(a) (PRESERVE GOODWILL) will use its best endeavours to preserve the
goodwill of the Business;
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 26
E-26
(b) (OPERATION OF BUSINESS) will operate and account for the Business in
the ordinary and usual course of business, consistent with past
practice;
(c) (COMPLIANCE WITH LAWS) will conduct the Business so as to comply in
all material respects will all applicable laws and regulations;
(d) (ACCESS TO RECORDS) will give reasonable access to the Purchaser,
its solicitors, accountants and other authorised representatives
during normal business hours to all available Records.
7.2 UNDERTAKINGS
In addition to the undertakings contained in clause 7.1, the Vendors must
ensure that from the date of this agreement to Completion, unless the
Purchaser first consents in writing, the Company:
(a) (ASSET DISPOSAL) will not dispose of any of its assets other than in
the normal course of business and for arm's length value;
(b) (NO ENCUMBRANCES) will not Encumber any assets beneficially owned by
it;
(c) (NO FINANCIAL INDEBTEDNESS) will not incur any Financial
Indebtedness in excess of $10,000 except in the usual course of
business or provided in the 2005 Business Plan;
(d) (EMPLOYMENT CONTRACTS) will not enter into any employment contract,
or renew or amend any existing employment contract (including
superannuation benefits) except in the usual course of business or
provided in the 2005 Business Plan;
(e) (BUSINESS RELATIONSHIPS) will use its best endeavours to preserve
intact its current business relationships;
(f) (TAX MATTERS) will not make any Tax election (including an election
to enter into any consolidation effective at any time prior to
Completion) or settle or compromise any income tax liability, unless
that election, settlement or compromise is required by law, is
supported by an opinion of counsel, and is reasonably acceptable to
the Purchaser;
(g) (ACCOUNTING PRACTICES) will not make any change in accounting
methods, principles or practices used by it except if required by a
change in the Accounting Standards;
(h) (NO LEASE OF ASSETS) will not lease, licence or otherwise dispose of
any of its assets, except in the ordinary course of business
consistent with past practices and at fair value;
(i) (CAPITAL EXPENDITURE) will not make any capital expenditure in
excess of the amounts specified in the 2005 Business Plan;
(j) (MAINTAIN INSURANCES) will maintain (and where necessary use
reasonable efforts to renew) each of the insurance policies in force
on 30 November 2004 and will promptly notify the Purchaser if any
renewal proposal is not accepted by the relevant insurer;
(k) (BUSINESS PLAN) will continue to make expenditures in the amounts
and at the times provided for in its 2005 Business Plan for the
purpose of growing the Business;
(l) (EXISTING CUSTOMERS) will not voluntarily cease to do business with
an existing customer without obtaining the prior written consent of
the Purchaser prior to doing so;
(m) (CORPORATE ACTIONS) will not without the prior written consent of
the Purchaser:
(i) increase, reduce or otherwise alter its capital or issue any
Securities except for Securities issued under the Option Plan
(as approved by the Board of the Company);
(ii) declare or pay any dividends or distributions to its members;
(iii) distribute or return any capital to its members;
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 27
E-27
(iv) make a distribution or revaluation of assets;
(v) alter its constitution;
(v) buy back or redeem any of its shares; or
(vii) pay any bonuses to executives or employees except in
accordance with past practices and timing and unless
previously disclosed to and approved by the Purchaser prior to
the date of signing this Agreement.
8 COMPLETION ADJUSTMENT
8.1 ADJUSTMENT AMOUNT
At Completion, if the cash or cash equivalents (as determined under the
Accounting Standards) on the balance sheet of the Company as at the
Completion Date exceeds $300,000 as a consequence of the entry by the
Company of a Qualifying Agreement, the Purchase Price is to be increased
by the Qualifying Amount attributable to that Qualifying Agreement.
8.2 CALCULATION OF CASH AND CASH EQUIVALENTS
For the purposes of this Agreement, in calculating the amount of the cash
or cash equivalents (as determined under the Accounting Standards) on the
balance sheet of the Company as at the Completion Date:
(a) any liabilities of the Company that were due for payment on or
before the Completion Date;
(b) the proportional amount of any liabilities which had accrued prior
to the Completion Date, and
(c) the amounts paid to the Optionholders by the Purchaser on behalf of
the Company under this Agreement,
will be deducted from the amount of the cash or cash equivalents
calculated under the Accounting Standards.
8.3 SUPPORTING DOCUMENTS
To support the calculation of the cash or cash equivalents (as determined
under the Accounting Standards) on the balance sheet of the Company as at
the Completion Date, the Company must provide a balance sheet, profit and
loss statement, cash flow statement (including details of all actual and
accrued liabilities) as at the Business Day immediately before the
Completion Date.
8.4 DEFINITIONS
For the purposes of this clause:
"Qualifying Agreement" means an agreement that had not been executed prior
to the date of this Agreement and which the chief executive officers of
the Purchaser and the Company acting reasonably agree is be treated as a
"Qualifying Agreement" for the purpose of this clause.
"Qualifying Amount" in respect of a Qualifying Agreement means the
proportion of the amounts paid by the other party under that Qualifying
Agreement prior to the Completion Date which the chief executive officers
of the Purchaser and the Company acting reasonably agree has caused the
cash or cash equivalents of the Company as at the Completion Date to
exceed A$300,000. In making this assessment the chief executive officers
of the Purchaser and the Company must take into account the past practices
of the Company, usual industry practice, the extent to which the amounts
paid represent a prepayment of amounts due under that Qualifying Agreement
or any other agreement between the Company and that other party or any of
their respective related bodies corporate, the extent to which amounts
will be foregone or otherwise not paid to the
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 28
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Company under that Qualifying Agreement or any other agreement between the
Company and that other party or any of their respective related bodies
corporate, and the extent to which the amounts paid are required to be
retained by the Company to enable it or any of its related bodies
corporate to satisfy any obligation or liability (actual or contingent)
under, in respect of or as a consequence of entering into that Qualifying
Agreement or any other agreement between the Company and that other party
or any of their respective related bodies corporate.
8.5 PROPORTIONAL MIX
The Purchase Price will be paid in the proportional mix of Consideration
securities and cash as set out in schedule 1.
9 PURCHASER'S WARRANTIES, REPRESENTATIONS AND INDEMNITY
9.1 REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Vendors that each of the
following statements are true and correct as at the date of this agreement
and will be as at the Completion Date:
(a) (AUTHORISATIONS) the Purchaser has taken all necessary action to
authorise the execution, delivery and performance of this agreement
in accordance with its terms and to carry out the transactions
contemplated by this agreement. At the date of this Agreement, this
warranty is qualified by the need to obtain the Required Approvals;
(b) (GOVERNMENT AGENCY) the Purchaser has full power and authority to
enter into and perform its obligations under this agreement;
(c) (BINDING OBLIGATIONS) this agreement constitutes legal, valid and
binding obligations and is enforceable in accordance with its terms;
(d) (TRANSACTION PERMITTED) the execution, delivery and performance by
the Purchaser of this agreement does not and will not violate:
(i) any law, regulation, authorisation, ruling, consent, judgment,
order or decree of any Governmental Agency;
(ii) the Constitution of the Purchaser or any other of its
constituent documents; or
(iii) any Encumbrance or document which is binding upon the
Purchaser;
(e) (GOOD TITLE) the Vendors will receive good and marketable title and
full beneficial title to the Consideration Securities issued to them
under clause 5 regardless of whether they are held by the
Depositholder. For the avoidance of doubt, all documents of title to
the Consideration Securities issues to the Major Vendors will be
held by the Major Vendors. The Purchaser will do all things
necessary to register the Consideration Securities that are not Hold
Back Securities with the SEC in a timely manner following Completion
or, in respect of the Hold Back Securities, will do all things
necessary to register the Hold Back Securities with the SEC in a
timely manner after the completion of the Escrow Period. All of the
Consideration Securities will be validly issued, fully paid and free
from all Encumbrances (excluding any Encumbrance created by or on
behalf of the relevant Vendor). The Consideration Securities issued
to the Major Vendors will not be freely transferable and tradeable
during the Escrow Period and will be held in escrow in accordance
with the Escrow Agreements;
(f) (COMPLIANCE) the issue of the Consideration Securities to the
Vendors will not contravene:
(i) any provisions of the General Corporation Law of Delaware or
any other applicable law; or
(ii) any direction, ruling or request of the SEC properly given to
it.
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(g) (DUE DILIGENCE AND OWN INQUIRIES) the Purchaser acknowledges that it
has had the opportunity to conduct due diligence on the Company and
that it has undertaken such due diligence that it considers prudent
in light of the Purchaser's circumstances and the conduct of and
statements made by the Company and of its officers, employees,
agents or professional advisers. In conducting its due diligence and
in determining the extent of its due diligence, the Purchaser has
been guided by the views expressed by the Company or any of its
officers, employees, agents or professional advisers in relation to
operational matters, the performance and importance of key
personnel, the policies and procedures adopted by the Company, and
the Company's view of the prospects of new business from present and
prospective customers.
(h) (ACCURACY OF PAST FILINGS) Each of the Purchaser's Group Entities
has filed all of the forms required by any Tax Authority. The
Purchaser has also made a number of public filings which have been
made available to the Vendors prior to the Completion Date and
attest to the compliance by the Purchaser's Group Entities with all
Tax laws, the absence of any residual liability on the part of the
Purchaser's Group Entities to meet any tax liability owed to a Tax
Authority, do not reveal any unresolved Tax disputes with a Tax
Authority, tax audits or investigations or failures on the part of a
Purchaser Group Entity to comply with any tax ruling issued by a Tax
Authority, confirm that each Purchaser Group Entity has made
adequate provisions for any tax liability which it is aware is owed
by it to a Tax Authority and has made all required deductions from
all amounts that it has received that it is required to pay to any
Tax Authority, and that all Taxes assessed or imposed on a
Purchaser's Group Entity have been paid by the final date for
payment.
9.2 INDEMNITY
The Purchaser indemnifies the Vendors from all Liability which the Vendors
suffer or incur by reason of:
(a) any of the statements in clause 9.1 being untrue or inaccurate;
(b) any other covenant or representation of the Purchaser in this
agreement being untrue or inaccurate; or
(c) any failure by the Purchaser to fulfil its obligations under this
agreement.
10 MAJOR VENDORS' WARRANTIES, REPRESENTATIONS AND INDEMNITIES
10.1 MAJOR VENDOR QUALIFICATIONS
The Major Vendors severally represent and warrant to the Purchaser that,
except as provided in this agreement, each of the Vendor Qualifications
are true and correct as at the date of this Agreement and on each date to
and including the Completion Date. In respect of Chris Leach, the Vendor
Qualifications are varied as applicable to reflect the fact that Chris
Leach holds options and that those options will be cancelled by the
Company.
10.2 MAJOR VENDOR WARRANTIES
The Major Vendors severally represent and warrant to the Purchaser that,
except as provided in this agreement, to the best of their knowledge and
belief, each of the Warranties are true and correct in all material
respects as at the date of this Agreement and on each date to and
including the Completion Date.
10.3 INDEPENDENT WARRANTIES
Each of the Warranties is to be treated as a separate representation and
warranty and the interpretation of any Warranty made may not be restricted
by reference to, or inference from, any other Warranty.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 30
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10.4 DISCLOSURES
Each of the Warranties is qualified by, and the Major Vendors are not
liable to make any payment (whether by way of damages, indemnity or
otherwise) for any breach of any Warranty to the extent that that breach
is based on any fact, matter or circumstance:
(a) fairly and accurately disclosed in this agreement, including without
limitation, in the disclosure schedule set out in Schedule 15; or
(b) is within the Purchaser's knowledge at the date of this Agreement
(provided, however, that for the purposes of this clause 10.4(b) and
clause 11.2 the Purchaser will only be deemed to know information
which is known to any of its executive directors non- executive
directors, management, employees, consultants or advisers);
(c) fairly and accurately disclosed in writing to the Purchaser, in the
course of any due diligence investigation the Purchaser undertakes
into the affairs of the Group; or
(d) that was not known and ought not to have been known to the Vendors
prior to the date of this Agreement and became known to the Vendors
and was fairly and accurately disclosed in writing by the Major
Vendors to the Purchaser after the date of this Agreement but before
Completion. (For the avoidance of doubt, nothing in this clause
limits the rights of the Purchaser under Condition 16 in clause 2.1
to terminate this Agreement on receipt of such notification.)
10.5 MEANING OF "FAIRLY AND ACCURATELY DISCLOSED"
For the purpose of this agreement "fairly and accurately disclosed" means
a disclosure in such detail as to enable a reasonable person in the
position of the Purchaser to make a reasonable and informed assessment of
the matter concerned.
10.6 KNOWLEDGE AND BELIEF
The Warranties or other statements made by a Major Vendor on the basis of
the best of their knowledge, information, belief or awareness, are made on
the basis that that Major Vendor has, in order to establish that the
Warranty or statement is accurate and not misleading in any material
respect, made all reasonable enquiries of their and each relevant Group
Entity's officers, managers and employees who could reasonably be expected
to have information relevant to matters to which the Warranty or statement
relates.
10.7 RELIANCE
The Purchaser has undertaken its own due diligence in relation to the
Company. The Major Vendors acknowledge that the Purchaser has entered into
this agreement in reliance on the Warranties and that the Warranties have
been given with the intention of inducing the Purchaser to enter into this
agreement. To the maximum extent permitted by law any representation or
warranty not expressly set out in this agreement is hereby excluded.
10.8 INDEMNITY
Subject to the same limitations set out in clauses 11.2(b) to 11.2(f)
inclusive, clause 11.3, clause 11.4 and clause 11.5, each Major Vendor
indemnifies the Purchaser to the extent of its Respective Vendor Liability
against:
(a) Liability which the Purchaser suffers or incurs by reason of any of
the Vendor Qualifications and Warranties made by it being untrue or
inaccurate in a material respect; and
(b) any failure by that Major Vendor to fulfil any of its material
obligations under this agreement, including, without limitation,
under clauses 3 and 6 (subject to clause 6.1(c)), 7, 10, 12, 14 and
15.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 31
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11 LIMITATIONS OF LIABILITY
11.1 NOTICE OF CLAIMS
If a Claim is made against the Purchaser or a Group Entity which relates
to a Warranty being untrue or inaccurate:
(a) the Purchaser must give written notice of the Claim to the Major
Vendors within a reasonable time of becoming aware of that Claim or
instituting the Claim against the Major Vendors;
(b) the notice must contain such details of the facts, matters or
circumstances of that Claim as are known to the Purchaser at the
date the notice is given; and
(c) in case of a Claim by a third party against the Purchaser or a Group
Entity, neither the Purchaser nor that Group Entity may settle, make
any admission of liability or compromise any Claim, or any matter
which gives or may give rise to that Claim, without the prior
consent of the Major Vendors (which consent must not be unreasonably
withheld). The consent of the Major Vendors will be deemed to have
been given if the Purchaser has made a request for such consent and
the Major Vendors have not responded to that request within 15
Business Days of the day on which the request was made.
11.2 MAJOR VENDORS NOT LIABLE
The Major Vendors are not liable to the Purchaser (or any person deriving
title from the Purchaser) for any Claim under clause 10 in connection with
this agreement to the extent that:
(a) the Claim does not relate to a Liability which the Purchaser suffers
or incurs by reason of any of the Vendor Qualifications and
Warranties made by them being untrue or inaccurate in a material
respect or any failure by a Major Vendor to fulfil any of its
material obligations under this agreement, including, without
limitation, under clauses 3, 6, 7, 10, 12, 14 and 15.
(b) the Claim relates to a thing done or not done after the date of this
agreement at the request or with the approval of the Purchaser;
(c) the Claim is caused, created or increased by any act or omission
(including delay) after Completion by the Purchaser or any Group
Entity;
(d) the Claim has been fairly and accurately disclosed to the Purchaser
or is within the Purchaser's knowledge at the date of this
Agreement;
(e) to the extent that the Claim is recovered under insurance (or would
have been recovered under insurance if notified to the insurers in a
timely manner);
(f) in respect of each specific Major Vendor, for any amount in excess
of the Major Vendor's Respective Vendor Liability.
No Optionholder (other than Chris Leach in his capacity as a Major Vendor)
and none of the Vendors who are not Major Vendors are liable to the
Purchaser for any Claim.
11.3 TIME LIMIT ON CLAIM
The Purchaser may not claim for a breach of Warranty unless the Purchaser
has given notice of the Claim to the Major Vendors in accordance with
clause 11.6(a), which must contain such details of the facts, matters or
circumstances of that Claim as are known to the Purchaser at the date the
notice is given together with a statement that the Purchaser considers
that the quantum of the Claim will exceed the monetary thresholds
specified in clause 11.4 within:
(i) in respect of a Claim for breach of a Warranty not relating to
Tax: 6 months of the Completion Date; or
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 32
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(ii) in respect of a Claim for breach of a Warranty relating to
Tax, the period in which the Australian Tax Office is able to
make a Claim against the Company, but in no event greater than
7 years from the date of the relevant rebate or other tax
event.
11.4 LIMITS ON THE AMOUNT OF CLAIM
(a) The Purchaser may not Claim:
(i) subject to clause 10.4(b), if the amount finally adjudicated
or agreed against the Vendors in respect of the breach or a
series of breaches relating to the same or substantially
similar facts, matters or circumstances is less than $50,000;
and
(ii) unless and until the aggregate of all amounts finally
adjudicated or agreed against the Vendors in respect of all
breaches exceeds $200,000;
(b) The maximum liability of each Major Vendor is the aggregate of all
Completion Payments and the value of all Consideration Securities
(calculated as having a value of $A5.10) as set out opposite the
name of that Major Vendor in Schedule 1 to this Agreement. The
Purchaser may not make a Claim against any Major Vendor in excess of
this maximum liability.
11.5 SATISFACTION OF A CLAIM
(a) Subject to clause 11.5(c), once determined by agreement between the
Purchaser and the Major Vendors or by mediation or arbitration
pursuant to clause 11.6, a Claim will be satisfied by each Major
Vendor in respect of its Respective Vendor Liability in cash and
Consideration Securities in the same proportions as cash and
Consideration Securities were provided to that Major Vendor under
clause 5.1.
For example, if a Claim of $1 million is determined against the
Major Vendors, a Major Vendor who has a Respective Vendor Liability
of 10% and who has received 60% of its proportion of the Purchaser
Consideration in cash and 40% of its proportion in Consideration
Securities will be required to pay the Purchaser $60,000 in cash and
permit to be cancelled Consideration Securities that have a value of
$40,000 (which value will be determined in the manner specified in
clause 11.5(b).
(b) In respect of any Claim notified in the 6 months after the
Completion Date, the value ascribed to each Holdback Security is
taken to be $5.10 or such lower price at which ordinary shares may
previously have been issued by the Purchaser during the Escrow
Period and in respect of which issue the provisions of clause 5.2
was applied
(c) In respect of any Claim notified more than 6 months after the
Completion Date, , the Major Vendors must satisfy that Claim in
cash.
11.6 DISPUTES REGARDING WARRANTY CLAIMS
(a) If the Purchaser wishes to make a Claim against Major Vendors in
respect of a breach of Warranty the Purchaser shall give written
notice of that Claim to the Major Vendors containing the details
referred to in Clause 11.3. If the Major Vendors dispute that Claim
then the dispute may be referred by the Purchaser or the Major
Vendor for resolution in accordance with the succeeding provisions
of this Clause 11.6. Each Major Vendor must nominate one person to
represent themself in the processes outlined in the succeeding
provisions of this Clause 11.6, which person shall have the
authority to represent and bind the relevant Major Vendor to the
outcome of those processes.
(b) Matters referred to mediation pursuant to paragraph (a) of this
Clause 11.6 shall be referred to mediation administered by a person
("the Mediator") to be mutually agreed upon by the parties in
dispute or, if they are unable to agree on the appointment of the
Mediator within 3 Business Days of a referral pursuant to Clause
11.6, by a person
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 33
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nominated (within 2 Business Days of a request for such nomination)
by the President for the time being of the Institute of Arbitrators
and Mediators Australia.
(c) The parties in dispute will procure that their nominated
representatives will attend at any conference arranged by the
Mediator for the purpose of the attempted resolution of the dispute.
At any mediation conference arranged by the Mediator the mediation
will be conducted under and in accordance with such procedures and
rules as may be agreed between the parties and failing agreement, in
accordance with the rules set down by the Mediator and advised to
the parties in dispute.
(d) Evidence of anything said, documents presented to, admissions made
or matters raised in the course of any conference with the Mediator
will be confidential to the parties and the Mediator and will not,
unless all parties consent, be admissible at any subsequent hearing,
arbitration or litigation proceedings.
(e) Failing any agreement to the contrary between the parties to the
mediation, the costs of the Mediator shall be borne 50% by Purchaser
and the balance equally by the Major Vendors who are parties to the
mediation.
(f) If the mediation procedures referred to in the preceding provisions
of this Clause 11.6, are unable to resolve the dispute, then the
Purchaser or the Major Vendors may commence court proceedings in
Victoria, unless within 14 days of the date on which the mediation
conference is held the Major Vendors unanimously agree to refer the
matter to arbitration in accordance with the following provisions of
this Clause 11.6.
(g) Matters referred to arbitration shall be referred for determination
by a person ("the Arbitrator") to be mutually agreed upon by the
parties in dispute or, if they are unable to agree on the
appointment of the Arbitrator within 3 Business Days of referral
pursuant to paragraph (f) of this Clause 11.6, by a person nominated
(within 2 Business Days of request) by the President of the
Institute of Arbitrators Australia.
(h) Any such dispute shall be determined by the Arbitrator in accordance
with and subject to the Institute of Arbitrators Rules for the
Conduct of Commercial Arbitrations. The Arbitrator may obtain or
refer to any documents, information or material and undertake any
inspections or enquiries as he or she determines appropriate. The
Arbitrator must provide the parties with a draft of his or her
determination and must give the parties an opportunity to comment on
the draft determination before it is finalised.
(i) The determination made by the Arbitrator shall be final and binding
on the parties to the arbitration as to questions of both fact and
law.
(j) The costs of the arbitration shall be borne 50% by the Purchaser and
the balance equally by the Major Vendors who are parties to the
Arbitration.
(k) The Purchaser and each Major Vendor shall comply with the
Arbitrator's determination as soon as practicable after the delivery
of that determination and in any event within 14 days of delivery of
the determination.
(l) If arbitration is commenced pursuant to this Clause 11.6, then
subject to the provisions of the Commercial Arbitration Act 1984
(Victoria), no party to the dispute shall be entitled to commence or
maintain any action or court proceedings upon the dispute until such
matter has been referred and determined as provided for in this
Clause 11.6.
(m) If a party breaches the terms of this Clause 11.6 and does not
rectify that breach within 2 Business Days of receipt of notice from
another party to that dispute (which notice expressly refers to the
consequences of such breach as set out in this paragraph), the other
parties to the dispute are not required to continue to comply with
the dispute resolution procedures set out in this Clause 11.6, and
may take other actions including initiating court proceedings.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 34
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(n) Nothing in this Clause 11.6, (including paragraph (l), prevents a
party from seeking or obtaining interlocutory relief.
12 ADJUSTMENT FOR TAX LIABILITY
12.1 TAX CLAIMS
If a Group Entity, or the Head Company of a Consolidated Group of which
the Group Entity is a member, receives or suffers a Tax Claim that relates
to an act or omission of, or occurrence affecting, that Group Entity
before the close of business on the Completion Date, then the Major
Vendors must pay to the Purchaser the amount by which the sum of:
(a) the Claim Amount for that Tax Claim; and
(b) all other Loss in respect of the Tax Claims that relate to an act or
omission of, or occurrence affecting a Group Entity before the close
of business on the Completion Date,
exceeds the Tax Provision.
12.2 REDUCTION IN PURCHASE CONSIDERATION
Any payment under clause 12.1 is to be treated as a reduction in the
Purchase Consideration.
12.3 OBLIGATIONS EXCLUDED
The obligations of the Major Vendors under clause 12.1 do not apply in
respect of a Tax Claim:
(a) to the extent that the Tax Claim arises from the failure by the
Purchaser to supply to the Major Vendors on a timely basis
information which is reasonably requested by the Major Vendors in
relation to the Tax Claim;
(b) to the extent that the Tax Claim represents the disallowance of any
deduction, and the disallowance results from:
(i) any Group Entity not carrying on the same business after
Completion as the Business immediately before Completion;
(ii) any Group Entity, after Completion, deriving income from a
business that it did not carry on or from a transaction of a
kind that it had not entered into in the course of its
business operations before Completion; or
(iii) a change of control of any Group Entity.
12.4 PAYMENTS
Payments under clause 12.1 must be made to the Purchaser as follows:
(a) if a Group Entity, or the Head Company of a Consolidated Group of
which the Group Entity is a member, must make a payment of Tax in
respect of a Tax Claim or any related Loss to which clause 12.1
applies - seven days before the latest date on which that payment is
required to be paid; and
(b) if a Group Entity, or the Head Company of a Consolidated Group of
which the Group Entity is a member, is deprived of any credit,
rebate, refund, relief, allowance, deduction, loss carried forward -
seven days before the latest date on which Tax is required to be
paid without incurring any penalty or additional tax for late
payment, being Tax which would not have been payable were it not for
the Tax Claim.
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12.5 PAYMENT OF INTEREST
The Major Vendors must pay interest to the Purchaser on any moneys due
under this clause 12.4(a) but unpaid, from the date payment is due until
paid in full, at a rate equal to as prescribed in Division 1 of Part IIA
of the Taxation Administration Act 1953.
12.6 ASSESSABLE INCOME
If for any reason an amount received by the Purchaser under clause 12.1 is
treated as assessable income of the Purchaser, or the Head Company of a
Consolidated Group of which the Purchaser is a member, under any law
relating to Tax the Major Vendors agree to pay to the Purchaser an
increased amount so that, after deducting from that amount all Tax paid or
payable in respect of the receipt, the balance remaining is equal to the
amount due under the relevant clause.
12.7 WRITTEN NOTICE OF TAX CLAIM
(a) If the Purchaser becomes aware of a Tax Claim the Purchaser must
give written notice of it to the Major Vendors within a reasonable
time of becoming so aware.
(b) The Purchaser must ensure the Major Vendors and their professional
advisers have reasonable access to the personnel of the Purchaser
and the Group Entities and to any relevant premises, assets and
Records within the custody, power, possession or control of the
Purchaser to enable the Major Vendors and their professional
advisers to examine the Tax Claim and Records and to take copies of
them, at the expense of the Major Vendors, provided the Major
Vendors and their professional advisers give to the Purchaser such
undertakings as to confidentiality as the Purchaser may reasonably
require.
(c) The Purchaser must take any proper and reasonable action (provided
that such action is not detrimental to a Group Entity) that the
Major Vendors request to avoid, resist, compromise or defend a
demand or notice issued by a Government Agency which gives rise to
the Tax Claim, provided the Major Vendors indemnify the Purchaser
and the Group Entities to the reasonable satisfaction of the
Purchaser against any Liability or loss which may be suffered or
costs, damages or expenses which may be incurred as a result of
compliance with the Major Vendor's request.
(d) The Major Vendors may request the Group Entities make appeals and
objections, in respect of a Tax Claim provided that all other
avenues of review have been exhausted.
(e) The Major Vendors must give the Purchaser immediate notice of any
investigation or communications relating to Tax from a Tax Authority
in respect of the Business (prior to Completion).
(f) Any action required under this clause 12.7 must be taken in a timely
manner.
12.8 REFUND BY PURCHASER
If, following the making of a payment under clause 12.1 for a Tax Claim,
all or part of the Claim Amount or any related Loss is refunded either in
cash or by credit to a Group Entity, or the Head Company of a Consolidated
Group of which the Group Entity is a member, (including, but not limited
to, any amount or credit received following a successful objection or
appeal), the Purchaser must immediately pay to the Major Vendors the
lesser of the refund and the amount of the payment paid under clause 12.1.
12.9 DISPUTE RESOLUTION
(a) If the Major Vendors and the Purchaser cannot agree under this
clause 12 within 21 days of a dispute arising between the Major
Vendors and Purchaser, then the dispute will be determined by an
Expert, such Expert to be a person with over ten years experience in
Tax. The Expert is to be mutually agreed upon by the parties in
dispute or, if they are
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 36
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unable to agree on the appointment of the Expert within 3 Business
Days after the end of the 21 day period, the Expert will be a person
nominated (within 2 Business Days of a request for such nomination)
by the President of The Institute of Chartered Accountants in
Australia.
(b) The decision of the Expert is to be conclusive and binding on the
parties in the absence of manifest error. Unless otherwise
determined by the Expert, the Major Vendors and the Purchaser will
each pay one half of the Expert's costs and expenses in connection
with the reference. The Expert is appointed as an expert and not as
an arbitrator. The procedures for the settlement of the dispute are
to be decided by the Expert in its absolute discretion.
12.10 TIME
A Claim may be brought by the Purchaser under this clause 12 in respect of
Tax matters relating to the relevant Group Entity in any period up to and
including Completion only during the period referred to in clause
11.3(ii).
12.11 LIMITATIONS
For the avoidance of doubt, the liability of the Major Vendors under this
clause 12 is subject to the same limitations as set out in clauses 11.2(b)
to 11.2(f) (inclusive), 11.4 and 11.5.
13 ACCESS TO RECORDS AFTER COMPLETION
13.1 VENDORS' ACCESS TO RECORDS
At any time after the Completion Date, the Purchaser will, upon request of
any of the Vendors, give the Vendors reasonable access (at the Vendors'
expense) to the Records handed over to the Purchaser at Completion which
relate to the period before the Completion Date:
(a) subject to clause 13.1(b) in the case of a dispute with a statutory
or Government Agency and for the purpose of prosecuting or dealing
with such dispute, for a period of 5 years after the Completion
Date;
(b) in the case of a dispute in relation to any Tax or revenue related
matters, for the statutory period during which such a matter may
arise; and
(c) in all other cases, for a period of 5 years after the Completion
Date.
13.2 PURCHASER'S ACCESS TO RECORDS
At any time after the Completion Date, the Vendors will, upon request of
the Purchaser, give the Purchaser reasonable access (at the Purchaser's
expense) to the books, records and other documents relating to the Group
Entities required to be kept or maintained by the Vendors which relate to
the period before the Completion Date:
(a) subject to clause 13.2(b) in the case of a dispute with a statutory
or Government Agency and for the purpose of prosecuting or dealing
with such dispute, for a period of 5 years after the Completion
Date;
(b) in the case of a dispute in relation to any Tax or revenue related
matters, for the statutory period during which such a matter may
arise; and
(c) in all other cases, for a period of 5 years after the Completion
Date.
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14 PROTECTIVE COVENANTS
14.1 RESTRICTION
In consideration of the Purchaser entering into this agreement each Major
Vendor agrees and undertakes that it will not and will procure that none
of the other Vendors nor any Vendor's respective Related Bodies Corporate
or Related Director will:
(a) directly or indirectly;
(b) by themselves or jointly with or on behalf of any other person,
corporation or trust;
(c) through an agent, independent contractor or employee; or
(d) on any account or pretext or by any means whatsoever,
conduct any of the Restricted Activities within the Restriction Area for
the Restriction Period.
14.2 RESTRICTED ACTIVITIES
The Restricted Activities are:
(a) carrying on, assisting, promoting or otherwise being engaged or
concerned in any business or activity which is or may be competitive
with the Business (whether as a member, shareholder, optionholder,
unitholder, director, adviser, financier, contractor, manager,
employee, associate, proprietor, landlord, trustee, beneficiary,
servant, agent, principal, partner or in any other capacity
whatsoever);
(b) engaging or employing any person who at any time during the 12
months immediately preceding the Completion Date was employed or
engaged in the Business;
(c) interfering with the relationship between the Purchaser and its
employees, contractors, suppliers or customers; and
(d) using or disclosing to any third party any Confidential Information.
14.3 RESTRICTION AREA
Subject to clause 14.5, the Restriction Area is any of the following
areas:
(a) United States of America, Australia and Canada;
(b) United States of America and Australia;
(c) Australia;
(d) Victoria and New South Wales;
(e) Victoria; and
(f) Melbourne.
14.4 RESTRICTION PERIOD
Subject to clause 14.5, the Restriction Period is any of the following
periods:
(a) 1 year from the Completion Date; and
(b) 6 months from the Completion Date.
14.5 EFFECTIVE RESTRICTION AREA AND RESTRICTION PERIOD
Unless the resulting covenants and restrictions are or become invalid or
unenforceable for any reason, the Restriction Area and Restriction Period
that will be effective between the parties in relation to any Restricted
Activity will be those referred to in clauses 14.3(a) and 14.4. If a
covenant and restriction is or becomes invalid or unenforceable because
the Restriction Area or
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 38
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Restriction Period applying to a Restricted Activity is considered
unreasonably large or long, the Restriction Area or Restriction Period
will be reduced to the subsequent area or period listed in clause 14.3 or
14.4.
14.6 SEVERABILITY
In this clause 14:
(a) each of the restrictions resulting from the various combinations of
a Restricted Activity, Restriction Area and Restriction Period has
effect as a separate and independent covenant and restriction;
(b) the Vendor agrees and acknowledges that each covenant and
restriction is reasonable in the circumstances and necessary to
protect the goodwill of the Business; and
(c) if any of those covenants and restrictions are or become invalid or
unenforceable for any reason, they will be severed from this
agreement without effecting the validity or enforceability of any
other covenant and restriction.
14.7 INJUNCTION
The Major Vendors acknowledge that monetary damages alone would not be
adequate compensation to the Purchaser for the Major Vendor's breach
(including breach of a procurement obligation) of this clause 14 and that
the Purchaser is entitled to seek an injunction from a court of competent
jurisdiction if:
(a) a Major Vendor fails to comply or threatens to fail to comply with
this clause 14; or
(b) the Purchaser or the Company has reasonable grounds to believe that
the Major Vendor will not comply with this clause 14.
14.8 SURVIVAL
The Vendors' obligations under this clause 14 survive the Completion of
this agreement.
14.9 EXCEPTIONS
(a) Nothing in this clause 14 will prevent a Vendor and its respective
Related Bodies Corporate (each a " RESTRICTED PARTY") from
collectively holding:
(i) any number of shares or other securities in the Purchaser; or
(ii) up to 20% (in aggregate) of the issued share capital or any
debentures or other securities of any company or other entity
the securities of which are listed on the ASX or NASDAQ.
(b) Nothing in this clause 14 will prevent:
(i) A&B Venture Fund Company Pty Ltd (as trustee for Allen &
Buckeridge II trust), Warana Grange Pty Ltd, Navon Pty Ltd and
their respective Related Bodies Corporate from conducting any
of the Restricted Activities in the Restricted Area in
relation to the companies listed in schedule 13; or
(ii) any of the companies listed in schedule 13 and their
respective Related Bodies Corporate from conducting any of the
Restricted Activities in the Restricted Area.
(c) Nothing in this clause 14 will prevent Navon Pty Ltd or Brian
Meltzer nor any of their Related Bodies Corporate (the "Advisor")
from:
(i) providing any advisory services to any company, trust, entity
or person of the kind that it has provided to other companies
in the past; or
(ii) from taking fee or any equity interest (in lieu of a fee) in
such company, trust, entity or person,
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 39
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if any such company, trust, entity or person is a Competitor, except
in the circumstances described in the next paragraph.
If the Advisor wishes to provide advisory services to a Competitor
that the Advisor (acting reasonably) considers conducts a business
that is a strategic fit with the Business, the Advisor must
introduce that Competitor to the Purchaser on an exclusive basis
(which exclusivity shall continue for as long as the Purchaser and
the Competitor are in active negotiation) before introducing the
Competitor to any other person and if the Purchaser acquires an
equity interest in or provides a loan to or enters into an alliance
or commercial arrangement with that Competitor, then the Advisor
shall be entitled to retain any fee and/or equity interest from that
Competitor that the Advisor may have negotiated with that
Competitor. If the Purchaser does not acquire an equity interest in
or provide a loan to or enters into an alliance or commercial
arrangement with that Competitor during the exclusivity period
referred to above, then the Purchaser may by notice in writing to
the Advisor require the Advisor to refund the fee or have its equity
cancelled for a nominal consideration. The Advisor shall be entitled
to recover any such fee or have its equity interest restored if the
Purchaser subsequently acquires an equity interest in or provides a
loan to or enters into an alliance or commercial arrangement with
that Competitor.
For the purposes of this clause (c), a "Competitor" is a company,
trust, entity or person that develops, sells, licences, provides or
supports loyalty software for use other than in the course of its
own business of providing other goods or services.
(d) Nothing in this clause 14 will prevent Advisor from continuing to
employ Brad Wren and Michelle Benson on substantially the same terms
as they have been employed prior to the date of this Agreement by
Advisor or entities to whom they have been introduced by Advisor.
15 CONFIDENTIALITY
15.1 CONFIDENTIALITY
Subject to clauses 15.2 and 15.3;
(a) no party may disclose the provisions of this agreement or any
transactions the subject of this agreement unless the other parties
have first agreed in writing;
(b) each party must keep secret and confidential all confidential
information obtained from any other party or any Group Entity in
connection with this agreement or any transactions the subject of
this agreement and use its best endeavours to ensure that
information remains secret and confidential; and
(c) each party must ensure that its directors, officers, employees,
agents and advisers comply in all respects with this clause 15 as if
they were parties to this agreement.
15.2 LEGAL REQUIREMENTS
A party may disclose anything in respect of this agreement as required by:
(a) an applicable law; or
(b) the ASX or any other recognised stock exchange on which its shares
or the shares of any Related Body Corporate is listed.
15.3 PERMITTED DISCLOSURE TO OFFICERS AND PROFESSIONAL ADVISERS
A party may disclose anything in respect of this agreement or the terms of
the sale of the Shares to its officers, employees and professional
advisers on a "need to know" and confidential basis.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 40
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15.4 DAMAGES INADEQUATE
The parties each acknowledge that damages may be inadequate compensation
for breach of this clause 15, and that each of the other parties are
entitled to specific performance or injunctive relief as a remedy for any
conduct or threatened conduct that is or will be a breach of this clause
15 in addition to any other remedies available at law or in equity to the
other parties.
15.5 AFTER TERMINATION
On termination of this agreement for any reason, each party must stop, and
must ensure that its permitted disclosees stop, using confidential
information of another party and, at the other party's option:
(a) return to the other party;
(b) destroy and certify in writing to the other party the destruction
of; or
(c) destroy and permit a representative of the other party to witness
the destruction of,
all confidential information in its possession or control.
15.6 CONFIDENTIALITY SURVIVES TERMINATION
The provisions of this clause 15 apply without time limitation and survive
termination of this agreement, regardless of whether termination occurs
before or after Completion.
16 PUBLICITY
16.1 NO PUBLIC ANNOUNCEMENTS
No party may make any press or other announcement or release relating to
this agreement or any transaction the subject of this agreement without
the prior written approval of the other parties as to the form and manner
of the announcement or release, unless and to the extent that the
announcement or release is required to be made by the party by law or by
the ASX or NASDAQ.
16.2 JOINT STATEMENT
The parties will make a joint public statement on or after the Completion
Date in relation to the sale of the Shares in a form approved in writing
by the Purchaser and the Managing Director of the Company.
17 COSTS AND STAMP DUTY
17.1 COSTS
Subject to clause 17.2, the parties will each bear their own legal,
accounting and other costs and expenses in connection with the preparation
and execution of this agreement and the transactions contemplated under
this agreement. The Vendors will collectively use one legal counsel of the
Company and those legal costs and expenses will not exceed $25,000
exclusive of GST and will be borne by the Company to that amount.
17.2 STAMP DUTY
The Purchaser will bear all stamp duty payable or assessed in connection
with this agreement and any accounting or legal expenses of preparing or
restating Company or Group Entity accounts to comply with Generally
Accepted Accounting Principles of the United States of America.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 41
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18 GST
18.1 DEFINITIONS
Terms defined in the A New Tax System (Goods and Services Tax) Act 1999
(Cth) have the same meaning in this clause 18 unless provided otherwise.
18.2 GST ON CLAIMS
(a) If a payment to satisfy a claim or a right to claim under or in
connection with this agreement gives rise to a liability to pay GST,
the payer must pay, and indemnify the payee on demand against, the
amount of that GST.
(b) The payment of any amounts in respect of GST is subject to the
receipt of a valid tax invoice.
(c) If a party has a claim under or in connection with this agreement
for a cost on which that party must pay GST, the claim is for the
cost plus all GST (except any GST for which that party is entitled
to an input tax credit).
19 SURVIVAL OF REPRESENTATIONS AND INDEMNITIES
19.1 REPRESENTATIONS AND WARRANTIES
All representations and warranties in this agreement:
(a) will survive the execution and delivery of this agreement;
(b) will remain in full force and effect for the term of this agreement
(subject to the limitations on time on the ability to make a Claim
on the warranties); and
(c) are and will be given with the intent that liability under the
representations and warranties will not be confined to breaches
discovered prior to the date of this agreement.
19.2 INDEMNITIES
Each indemnity in this agreement:
(a) constitutes a separate and independent obligation of the party
giving the indemnity from its other obligations under this
agreement; and
(b) will survive termination of this agreement.
20 OBSERVER AND INFORMATION RIGHTS
(a) While they hold Consideration Securities, A&B Venture Fund Company
Pty Ltd are entitled to nominate one observer to attend all meetings
of the board of any of Purchaser's Group Entities and all committees
of the board of the Purchaser's Group Entities at their own cost and
in a non-voting observer capacity.
(b) The A&B Observer must be sent all communications sent to the board
of any of the Purchaser's Group Entities at the same time and in the
same manner as they are sent to the applicable board.
(c) The A&B Observer has the right to access, inspect and copy:
(i) all written communications tabled to the board of any of
Purchaser's Group Entities including, without limitation, all
accounts, budgets, plans, forecasts, reports, presentations,
contracts and all minutes of meetings; and
(ii) the financial books and financial records of the Purchaser's
Group Entities,
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 42
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at any time during usual business hours.
21 NOTICES
21.1 METHOD
All notices, requests, demands, consents, approvals, offers, agreements or
other communications (" NOTICES") given by a party under or in connection
with this agreement must be:
(a) in writing;
(b) signed by a person duly authorised by the sending party;
(c) directed to the recipient's address (as specified in clause 21.4 or
as varied by any notice); and
(d) hand delivered, sent by prepaid post or transmitted by facsimile to
that address.
21.2 RECEIPT
A notice given in accordance with this clause is taken as having been
given and received:
(a) if hand delivered at or before 4.30pm on a Business Day, on
delivery, otherwise at 9.30am on the next Business Day;
(b) if sent by prepaid post:
(i) within Australia, on the second Business Day after the date of
posting;
(ii) to or from a place outside Australia, on the seventh Business
Day after the date of posting;
(c) if transmitted by facsimile at or before 4.30pm on a Business Day,
at the time recorded on the transmission report indicating
successful transmission of the entire notice, otherwise at 9.30am on
the next Business Day.
21.3 NOTICE TO/FROM VENDORS
(a) Notice to a Vendor must be given to the Managing Director of the Company
with a copy to A&B Venture Fund Company Pty Ltd. A notice to the Vendors
in accordance with this clause 21 will be deemed to be validly given to
all Vendors.
(b) Notice from a Vendor must be given jointly by all Vendors. Notice given by
the Majority Vendors must be given by such number of Major Vendors that
comprise the Majority Vendors. Notice given by the Major Vendors must be
given by the Major Vendors. A notice to the Purchaser in accordance with
this clause 21 will be deemed to be validly given if expressed to be given
by all Vendors, the Majority Vendors or the Major Vendors (as the case may
be).
21.4 ADDRESS OF PARTIES
Unless varied by notice in accordance with this clause 21, the parties'
addresses and other details are:
Party: Vendors
Details: As set out in Schedule 12
Party: Purchaser
Attention: President, CEO and Director
Address: Suite 37 (Level 2), 89-97 Jones St. Ultimo NSW 2007
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 43
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Facsimile: +61 2 8080 8332
With a copy to: 2711 E. Jefferson, Detroit, MI 48207
Facsimile: 0011 1 313 567 4734
22 SUPERVENING LEGISLATION
Any present or future legislation which operates to vary the obligations
of a party in connection with this agreement with the result that another
party's rights, powers or remedies are adversely affected (including, by
way of delay or postponement) is excluded except to the extent that its
exclusion is prohibited or rendered ineffective by law.
23 GENERAL
23.1 ENTIRE AGREEMENT
This agreement constitutes the entire agreement between the parties in
relation to its subject matter. All prior discussions, undertakings,
agreements, representations, warranties and indemnities in relation to
that subject matter are replaced by this agreement and have no further
effect.
23.2 PARAMOUNTCY OF AGREEMENT
If this agreement conflicts with any other document, agreement or
arrangement, this agreement prevails to the extent of the inconsistency.
23.3 NO MERGER
The provisions of this agreement will not merge on completion of any
transaction contemplated in this agreement and, to the extent any
provision has not been fulfilled, will remain in force.
23.4 ATTORNEYS
Each person who executes this agreement on behalf of a party under a power
of attorney warrants that he or she has no notice of the revocation of
that power or of any fact or circumstance that might affect his or her
authority to execute this agreement under that power.
23.5 AMENDMENT
This agreement may not be amended or varied unless the amendment or
variation is in writing signed by all parties.
23.6 ASSIGNMENT
No party may assign, transfer or otherwise deal with this agreement or any
right or obligation under this agreement without the prior written consent
of each other party which consent must not be unreasonably withheld.
23.7 SEVERABILITY
Part or all of any provision of this agreement that is illegal or
unenforceable will be severed from this agreement and will not affect the
continued operation of the remaining provisions of this agreement.
23.8 WAIVER
(a) The failure, delay or omission by a party to exercise any power or
right under this agreement does not operate as a waiver of that
power or right.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 44
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(b) The single or partial exercise by a party of any power or right
under this agreement does not preclude any other or future exercise
of that or any other power or right under this agreement.
(c) Waiver of any power or right under this agreement:
(i) must be in writing signed by the party entitled to the benefit
of that power or right; and
(ii) is effective only to the extent set out in that written
waiver.
23.9 RIGHTS, REMEDIES ADDITIONAL
Any rights and remedies that a person may have under this agreement are in
addition to and do not replace or limit any other rights or remedies that
the person may have.
23.10 FURTHER ASSURANCES
Each party must do or cause to be done all things necessary or reasonably
desirable to give full effect to this agreement and the transactions
contemplated by it (including, but not limited to, the execution of
documents).
23.11 GOVERNING LAW
This agreement will be governed by and construed in accordance with the
laws in force in the State of Victoria.
23.12 JURISDICTION
Each party:
(a) submits to the exclusive jurisdiction of the courts of Victoria and
any court that may hear appeals from those courts; and
(b) waives any right it might have to object to an action being brought
in those courts including, but not limited to, that those courts are
an inconvenient forum.
ARNOLD BLOCH LEIBLER SHARE SALE AGREEMENT - PAGE 45
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SCHEDULE 3 - WARRANTIES
PART A
1 VENDOR'S QUALIFICATIONS
1.1 (TITLE) Vendor is the legal holder of the Shares as set out beside its
name in schedule 1.
1.2 (NO ENCUMBRANCE) There is no Encumbrance over its Shares (excluding any
encumbrance created by or on behalf of the Purchaser).
1.3 (POWER) Vendor has the power, without any further consents of any other
person, to enter into and perform its obligations under this agreement.
1.4 (AUTHORITY) Vendor has taken all action necessary to authorise the entry
into and performance of its obligation under this agreement.
1.5 (NO BREACH) The transfer of the Shares does not breach any obligation or
agreement binding on the Vendor.
1.6 (FINANCIAL STANDING) Vendor is not affected by and is not the subject of
any Insolvency Event and it is able to pay its debts as and when they fall
due.
PART B
2 CORPORATE STANDING AND AUTHORITY
2.1 (INCORPORATION AND POWER) Each Group Entity which is a company:
(a) has been validly incorporated as a company limited by shares;
(b) so far as each Major Vendor is aware, has done everything necessary
to do business lawfully; and
(c) has the power to own its assets and conduct its business activities
as presently conducted.
2.2 (PROPORTION OF CAPITAL) The Shares comprise all of the issued capital of
the Company and are fully paid.
2.3 (NOT INSOLVENT) Each Group Entity is able to pay its debts as and when
they fall due.
2.4 (OWNERSHIP OF GROUP COMPANIES) The Company is the legal and beneficial
owner of the shares and units in each of the Group Companies (other than
the Company).
2.5 (ACQUISITION OF SUBSIDIARIES) No Group Entity has any Liability (actual
or contingent) in respect of the acquisition of shares in any other Group
Entity.
2.6 (FULLY PAID) All shares in the capital of each Group Entity which is a
company are fully paid up.
2.7 (OBLIGATIONS TO ISSUE SHARES) No Group Entity is under any obligation,
whether or not subject to any condition, to:
(a) issue, allot, create, sell, transfer or otherwise dispose of any
Securities;
(b) enter into any agreement in respect of the rights to vote which are
conferred in respect of any Securities; or
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(c) grant any option or right of first refusal or offer in respect of
any Securities,
3 FINANCIAL POSITION
3.1 (PREPARATION OF ACCOUNTS) The Last Accounts:
(a) were prepared in accordance with:
(i) the Accounting Standards, the Corporations Act and all other
applicable laws; and
(ii) except as disclosed in the Accounts, the same accounting
policies as were applied in the corresponding accounts for the
previous financial year;
(b) give a true and fair view of:
(i) the assets and liabilities (including contingent liabilities),
financial position and state of affairs of each Group Entity
and the Business as at its balance date of the Last Accounts;
and
(ii) the profit of each Group Entity and the Business and the
operation of the relevant Group Entity for the twelve month
period ended on its balance date of the Last Accounts; and
4 FINANCIAL WARRANTIES
4.1 (OUTSTANDING LIABILITIES) No Group Entity owes any money or has any
outstanding liabilities to any of its directors, or any of its existing or
former shareholders and no director or any existing or former shareholder
of the Company will owe any money to or have any outstanding liability to
the Company.
4.2 (NO GUARANTEE) No Group Entity is directly or indirectly obliged in any
way to guarantee, assume or provide funds to satisfy any obligation of any
person.
4.3 (GUARANTEE TO A GROUP ENTITY) No person has given or entered into any
guarantee, indemnity or letter of comfort in respect of a Group Entity.
4.4 (BANK ACCOUNTS) The names and locations of all banks in which a Group
Entity has an account and the names of all persons authorised to sign on
the accounts are listed in schedule 7.
4.5 (BILLS OF EXCHANGE) There is no promissory note or bill of exchange
outstanding which has been drawn, accepted or endorsed by the Major
Vendors or a Group Entity other than cheques drawn in favour of creditors
in respect of obligations incurred in relation to a Group Entity in the
ordinary course of business.
5 BUSINESS
5.1 (OWNERSHIP OF ASSETS) Each Group Entity is the sole beneficial owner of
its Assets.
5.2 (NO BREACH OF CONSTITUENT DOCUMENT) So far as each Major Vendor is aware,
there has not been any breach of or default by any Group Entity of any
term or provision of its respective constitution or trust deed (as
relevant).
5.3 (NO THIRD PARTY RIGHTS) No third party, has any right to use a Group
Entity's Asset.
5.4 (APPLICABLE LAWS) The Business has been and is conducted in accordance
with all applicable laws, the conduct of the Business by any Group Entity
does not contravene any laws and no
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allegation of any contravention of any applicable laws is known to a Major
Vendor or a Group Entity.
6 RECORDS
6.1 (MAINTENANCE AND ACCURACY OF RECORDS)
(a) The Company has prepared and maintained adequate, suitable,
materially complete and materially accurate and up to date records
regarding the transactions conducted by it, its assets, liabilities,
finances, operations and activities.
(b) Where applicable, as far as necessary, the Records have been
prepared in accordance with the requirements of the Corporations Act
and the Accounting Standards.
6.2 (TAX RECORDS) Each Group Entity maintains and has retained for the period
required by law all records that the Group Entity is required to maintain
under any law relating to Taxes.
6.3 (POSSESSION OF RECORDS) The originals of all material Records which ought
to be in the possession of a Group Entity are in its possession and
control.
7 LITIGATION
7.1 (NO LITIGATION) No Group Entity is involved in any prosecution,
litigation or arbitration proceedings relating to the Business, there are
no such proceedings pending or, to the best of the Major Vendors'
knowledge and belief, threatened and, to the best of the Major Vendors'
knowledge and belief, there are no facts likely to give rise to any such
proceedings.
7.2 (UNSATISFIED JUDGMENTS, ETC) The operation of the Business is not subject
to any unsatisfied judgment or any order, award or decision handed down in
any litigation or arbitration proceedings.
8 INSURANCE
8.1 (DISCLOSURE) The Company has disclosed complete and accurate particulars
of all insurance policies taken out by or for the benefit of each Group
Entity, and a claims history of all claims made under those insurance
policies.
8.2 (CURRENCY) Each insurance policy held by a Group Entity is currently in
full force and effect and all applicable premiums have been paid. To the
best of each Major Vendors' knowledge and belief, nothing has been done or
omitted to be done which would make any policy of insurance void or
voidable or which would permit an insurer to cancel the policy or refuse
or reduce a claim or materially increase the premiums payable under the
policies.
8.3 (NO OUTSTANDING CLAIMS) No claim has been made in the past 3 years which
is outstanding under any contract of insurance and, to the best of the
Major Vendors' knowledge and belief, no fact or circumstance exists which
might give rise to a claim under a contract of insurance.
8.4 (PREMIUM INCREASES) To the best of the Major Vendors' knowledge and
belief, no Group Entity has done or omitted to do anything which might
result in an increase in the premium payable under any contract of
insurance.
9 INTELLECTUAL PROPERTY
9.1 (OWNERSHIP) The Company beneficially owns or has an enforceable right to
use all the Company Intellectual Property Rights listed in Part A of
Schedule 6.
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9.2 (NO INFRINGEMENT OF THIRD PARTY RIGHTS) So far as each Major Vendor is
aware, neither the carrying on of the Business by a Group Entity, nor the
use of the Company Intellectual Property Rights:
(a) infringes, or is alleged to infringe, the Intellectual Property
Rights of any third party; or
(b) is, or is alleged to be, in breach of any obligation of confidence
owed to any third party.
9.3 (NO INFRINGEMENT) So far as each Major Vendor is aware, there has not
been:
(a) any infringement of any of the Company Intellectual Property Rights;
(b) any misuse or unauthorised disclosure of the Confidential
Information; or
(c) any other act which may affect the validity or enforceability of the
Intellectual Property.
9.4 (LIST COMPLETE) The Company does not own, use, or require in its Business
any Intellectual Property Rights other than those listed in Schedule 6.
9.5 (NO CLAIMS) Neither the Company nor the Major Vendors have made any
claims or commenced or threatened to commence proceedings or settled any
claims or proceedings alleging infringement of the Intellectual Property
Rights listed in Part A of Schedule 6.
10 SOFTWARE
10.1 (OWNERSHIP) Part B of Schedule 6 sets out a complete and accurate list of
all Software which was developed by each Group Entity and what Software is
owned, licensed, or leased by that Group Entity as the case may be.
10.2 (NO DEFECTS) Other than errors through data entry or coding or
communication protocols that may be faulty at the time, all information,
statements and representations made or which appear in the Software
developed and licensed to clients by the Group Entity are true, correct,
accurate and are not misleading or deceptive.
10.3 (NO VIRUS) The Software and the information technology developed by each
Group Entity and licensed to clients by that Group Entity has not been
infected by any virus.
10.4 (VALID AND BINDING) All software licences entered into by a Group Entity
are valid, binding and enforceable against the parties to it in accordance
with their terms.
10.5 (COMPUTERS) All the computers, servers and computer systems owned or used
by or on behalf of a Group Entity are, except for any software licensed to
the Group Entity, owned by the Group Entity, are under its sole control
and are not shared with or used by or on behalf of or accessible by any
other person.
10.6 (COMPUTER SYSTEM) The computer systems and servers used by a Group Entity
to operate its Business:
(a) so far as each Major Vendor is aware, are sufficient for its
Business and has operated to a level acceptable for the adequate
operation of the Business; and
(b) can be run without undue reliance on persons other than employees of
the Group Entity.
11 PLANT AND EQUIPMENT
11.1 (MATERIAL PLANT & EQUIPMENT) The Last Accounts includes all items of
plant and equipment owned by a Group Entity with a written down value in
excess of $10,000.
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11.2 (CONDITION) So far as each Major Vendor is aware, each item of plant and
equipment owned or used by a Group Entity:
(a) is in reasonable condition taking into account normal wear and tear;
(b) is in satisfactory working condition and capable of doing the work
for which it is designed subject to unknown possible breakdowns; and
(d) has been maintained in a manner that does not prejudice any rights
under any maintenance contract in connection with any of that plant
and equipment.
11.3 (ALL PLANT AND EQUIPMENT LEASES) Schedule 8 accurately describes all of
the Plant and Equipment Leases.
11.4 (NO CLAIM) So far as each Major Vendor is aware there is no claim
outstanding against any supplier of the plant and equipment owned or used
by a Group Entity or of maintenance services for that plant and equipment
in connection with any defect in that plant and equipment.
11.5 (POSSESSION) Each item of plant and equipment owned or used by a Group
Entity, is in the physical possession of that Group Entity or a client of
the Group Entity in the ordinary course of business.
12 BUSINESS PREMISES AND PROPERTY LEASES
12.1 (ALL BUSINESS PREMISES) Schedule 9 accurately describes all the business
premises leased or occupied by each Group Entity in respect of its
Business.
12.2 (EXCLUSIVE OCCUPATION) Each Group Entity has exclusive
occupation of its Business Premises free from all Encumbrances or third
party rights.
12.3 (PERFORMANCE OF COVENANTS) There has been no Claim, breach or circumstance
likely to give rise to any Claim or breach in respect of any material
covenant affecting the Business Premises.
12.4 (NO UNUSUAL RESTRICTIONS) There are no restrictions, stipulations or
outgoings affecting the Business Premises which are of an unusual nature
or conflict with the present use. The use of the Business Premises by each
Group Entity does not constitute a breach of any of the lease or any
applicable law.
12.5 (ALL PROPERTY LEASES) Schedule 10 accurately describes all of the leases
of real property to any Group Entity. Each Group Entity has made all
payments required by and has otherwise complied with the terms of each of
the property leases to which it is a party.
12.6 (NO ALTERATION) So far as each Major Vendor is aware, no development,
alterations or works have been carried out in relation to the Business
Premises which would require any permission or consent under any statute
or regulation which has not been obtained and all conditions attaching to
any such permission or consent have been fully complied with.
12.7 (NO PROPOSALS) So far as each Major Vendor is aware, there are no
proposals by any competent authority or other person which would adversely
affect the Business Premises.
12.8 (NO DISPUTES) So far as each Major Vendor is aware, there are no current
disputes relating to any of the Business Premises or their use.
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13 ENVIRONMENT
13.1 (ENVIRONMENTAL LAWS) So far as each Major Vendor is aware, there has been
no Claim, breach or circumstance likely to give rise to any Claim or
breach in respect of any Environmental Law relating to any Group Entity or
its Business.
14 MATERIAL CONTRACTS
14.1 (LIST OF MATERIAL CONTRACTS) Schedule 11 is a complete list of all
Material Contracts of each Group Entity that are in place as at the
Closing Date.
14.2 (VALID AND BINDING) So far as each Major Vendor is aware:
(e) each Material Contract is valid, binding and enforceable against the
parties to it in accordance with its terms; and
(f) the Company is not in breach of, or in default under, any such
Material Contract, and no fact or circumstance exists which might
give rise to such a breach.
14.3 (NO LOSS) No Material Contract entered into by a Group Entity is known to
any Major Vendor to be likely to result in a loss for any Group Entity's
Business (having regard to the revenue to be generated under the Material
Contract and the costs and expenses required over the period of the
Material Contract in order to generate that revenue).
14.4 (OUTSTANDING OFFERS OR TENDERS) No Group Entity has made any offers,
tenders or quotations which are still outstanding and capable of giving
rise to a contract by the unilateral act of a third party, other than in
the ordinary course of business.
14.5 (UNUSUAL CONTRACTS) No Material Contract entered into by a Group Entity:
(a) was entered into by a Group Entity other than in the usual course of
its Business or by way of a bargain at arm's length;
(b) restricts any Group Entity's freedom to operate the whole or part of
the Business or to use or exploit any of the Assets as it decides;
(c) constitutes a sale or purchase, option or similar arrangement,
arrangement or obligation affecting the Business or any of the
Assets;
(d) is one with which a Group Entity cannot comply on time or otherwise
in accordance with its terms in all material respects which contract
involves expenditure of more than $10,000; or
(e) is one by which a Group Entity is a member of a joint venture,
consortium, partnership or association.
14.6 (RELATED PARTY CONTRACTS) Other than as disclosed in writing to the
Purchaser, no contract has been entered into by a Group Entity with any
`related entity' and no `financial benefit' has been given by a Group
Entity to a `related entity'. For the purpose of this warranty, the terms
`related entity' and `financial benefit' will have the same meaning given
to those terms in sections 228 and 229 of the Corporations Act, but as if
references to `public company' are to `company'. For the avoidance of
doubt, the term `related entity' in respect of a Group Entity does not
include another Group Entity.
14.7 (AMENDMENTS) So far as each Major Vendor is aware as at the date of this
Agreement, no Group Entity has been notified of an actual or intended
material amendment to the prices or other terms of a Material Contract,
other than in the usual course of business.
14.8 (SET OFFS) So far as each Major Vendor is aware no party to a Material
Contract entered into by a Group Entity is entitled to exercise a set off
or counterclaim or delay without payment of any
E-51
money due under that Material Contract or to effect payment to a person
other than the person specified in that Material Contract or otherwise to
perform its obligations in a different manner to that provided in that
Material Contract.
14.9 (MARKETING ADVERTISING AND PROMOTIONAL AGREEMENTS) So far as each Major
Vendor is aware the Group has no current or future commitment under
sponsorship or marketing agreements of an amount in excess of $10,000 for
each commitment.
15 SUPPLIERS AND CUSTOMERS
15.1 (CHANGE OF TRADING RELATIONSHIPS) During the 12 months ending on the date
of this agreement no customer from which the Group has generated revenue
of more than $100,000 (" SUBSTANTIAL CUSTOMER"):
(a) stopped, or indicated an intention to stop, trading with or
supplying the Business;
(b) reduced, or indicated an intention to reduce, substantially its
trading with the Business; or
(c) changed, or indicated an intention to change, substantially the
terms on which it is prepared to trade with or supply the Business
(other than normal price and quota changes).
15.2 (CHANGE OF CONTROL) As far as each Major Vendor is aware, there is no
existing Substantial Customer of any Group Entity Business who will or is
likely to:
(a) cease trading with the Business; or
(b) materially reduce its trading with the Business, as a result of the
acquisition of the shares in the Company by the Purchaser.
16 LITIGATION
16.1 (TRADE PRACTICES) No Group Entity has breached the provisions of the Trade
Practices Act or any equivalent state or territory legislation or the
requirements of any consumer product safety standard or consumer product
information standard prescribed by law.
17 EMPLOYEES
17.1 (EMPLOYEES) The Employees are the only employees of the Company.
17.2 (TERMS OF EMPLOYMENT) All of the contractual terms of employment of the
Employees are set out in the Employment Agreements.
18 SUPERANNUATION
18.1 (CONTRIBUTIONS UP TO DATE) Each Group Entity has made all superannuation
contributions which they are obliged to make in respect of its employees.
18.2 (SUPERANNUATION SUPPORT) Each Group Entity has provided at least the
prescribed minimum level of superannuation support for each of its
employees so as not to incur a shortfall amount under the Superannuation
Guarantee (Administration) Act 1992 (Cth).
E-52
19 INFORMATION
19.1 (ACCURACY) To the best of the Major Vendors' knowledge and belief, all
information disclosed to the Purchaser and the facts set out in the
schedules to this agreement is true and correct in all material respects
and is not, whether by omission of information or otherwise materially
misleading or deceptive or likely to mislead or deceive.
19.2 (ALL INFORMATION): To the best of the knowledge and belief of the Major
Vendors, they have disclosed to the Purchaser all of the information
relating to the Group Entity which a prudent intending purchaser of the
Shares would want to know. So far as the Vendors are aware, there are no
facts or circumstances which might reasonably be expected materially and
adversely to affect the financial position, operations, profitability or
prospects of any Group Entity other than facts and circumstances affecting
as a whole the industry in which the Business is carried on.
19.3 (NO REPRESENTATIONS OR WARRANTIES IN RELATION TO FUTURE MATTERS) The
Major Vendors make no representations or warranties in relation to any
projections or forecasts concerning future matters to the extent that they
are dependant on the future actions of present or prospective customers,
suppliers or other third parties or to the extent that they are based on
disclosed assumptions that prove to be incorrect as a consequence of any
uncertainties and contingencies, which are outside the control of the
Company or not known to the Major Vendors to be incorrect on the date of
this Agreement or likely to become incorrect after that date and in these
circumstances, the Major Vendors are not liable for any discrepancy
between actual (on the one hand) and projected, forecast, or forward
stated (on the other hand) results, performance or achievements. To the
extent that the assumptions are clearly set out in any documents provided
by the Major Vendors or in the business plan set out in Schedule 14 which
will be incorporated into any information memorandum, prospectus or
similar document prepared in connection with the Capital Raising, and are
considered by the Major Vendors on the date of this Agreement to be fair
and reasonable, the Major Vendors are not liable for any discrepancy
between actual (on the one hand) and projected, forecast, or forward
stated (on the other hand) results, performance or achievements.
PART C
20 TAX AND DUTY
20.1 (COMPLIANCE WITH TAX LAWS) Each of the Group Entities has complied with
all Tax laws.
20.2 (NO THIRD PARTY LIABILITY) None of the Group Entities is liable to pay,
reimburse or indemnify any person or Tax Authority in respect of any Tax
liability of a person.
20.3 (RULINGS, DISPUTES AND AUDITS) There are no current disputes between any
Tax Authority and any Group Entity which will or may affect calculation of
the liability to Tax of any Group Entity after Completion. To the best of
the Major Vendors' knowledge and belief, there is no unresolved Tax
dispute or current Tax audit or investigation of any Group Entity by any
Tax Authority and there is no reason why any such investigation may be
initiated, nor has any Group Entity sought or obtained any rulings,
consents, clearance or opinions from any Tax Authority prior to the date
of this agreement which will or may affect calculation of the liability to
Tax of any Group Entity after Completion.
20.4 (DEBT FORGIVENESS) None of the Group Entities has been "forgiven" any
"commercial debts" (as those terms are defined in schedule 2C of the 1936
Act).
20.5 (REPUDIATION ACTION) So far as each Vendor is aware, none of the Group
Entities has done or failed to do any act or thing which has or might
alter or prejudice in a material way any arrangement, agreement or tax
ruling which has previously been negotiated with or obtained from any Tax
Authority or other person under any Tax law.
E-53
20.6 (DISCLOSURE OF TAXES IN LAST ACCOUNTS) The Last Accounts contain
provisions adequate to cover Taxes for or in respect of the Group Entities
for all periods up to the balance date of the relevant accounts. No
additional or other Taxes are or will be payable (whether on, before or
after Completion) by any Group Entity.
20.7 (DEDUCTIONS) Each Group Entity has deducted all Tax required to be
deducted from any payments made by it. When necessary, the Company has
accounted for that Tax in accordance with relevant law.
20.8 (PAYMENT OF TAX) All Taxes which have been or deemed to have been
assessed or imposed on a Group Entity, or have been required to be
withheld from any payment made by a Group Entity to another person:
(a) which are due and payable, have been paid by the final date for
payment by the relevant Group Entity;
(b) which are not yet payable but become payable before Completion, will
be paid in the usual course.
No Group Entity has entered into any agreement or arrangement which
extends the period for assessment or payment of any Tax.
20.9 (AUSINDUSTRY RESEARCH AND DEVELOPMENT TAX CONCESSION) The AusIndustry
Research and Development Tax Concessions received by the Company prior to
Completion were applied for in accordance with all applicable regulations
and guidelines applicable to the Company and the eligibility of the tax
concessions has been accepted by the auditor of the Company.
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+
(BAR CODE)
(CATUITY LOGO) MMMMMMMMMMMM
(BAR CODE) 000000000.000 ext
000000000.000 ext
MR A SAMPLE 000000000.000 ext
DESIGNATION (IF ANY) 000000000.000 ext
ADD 1 000000000.000 ext
ADD 2 000000000.000 ext
ADD 3 000000000.000 ext
ADD 4
ADD 5
ADD 6 C 1234567890 J N T
!123456564525! (BAR CODE)
[ ] Mark this box with an X if you have
made changes to your name or address
details above.
- --------------------------------------------------------------------------------
ANNUAL MEETING PROXY CARD
- --------------------------------------------------------------------------------
A ELECTION OF DIRECTORS
The Board of Directors recommends a vote FOR the listed nominees.
<Table>
<Caption>
FOR WITHHOLD
1 - Duncan P.F. Mount [ ] [ ]
2 - Alfred H. (John) Racine III [ ] [ ]
3 - Alexander S. Dawson [ ] [ ]
4 - Alan L. Gilman [ ] [ ]
5 - Clifford W. Chapman, Jr. [ ] [ ]
</Table>
B ISSUES
The Board of Directors recommends a vote FOR the following proposals.
<Table>
FOR AGAINST ABSTAIN
6. To approve the acquisition of Loyalty Magic Pty
Ltd pursuant to Australian Stock Exchange Limited [ ] [ ] [ ]
Listing Rules 11.1 and 11.1.2.
FOR AGAINST ABSTAIN
7. To approve the issuance of shares of Catuity
common stock for the purpose of acquiring Loyalty [ ] [ ] [ ]
Magic Pty Ltd and an offering to raise the cash
portion of the proceeds to be paid to Loyalty
Magic and for additional working capital in
accordance with Australian Stock Exchange Limited
Listing Rule 7.1.
FOR AGAINST ABSTAIN
8. To approve the issuance of shares of Catuity
common stock for the purpose of an offering to [ ] [ ] [ ]
raise approximately A$2,000,000 in the event
Proposals 6 and 7 are not approved.
FOR AGAINST ABSTAIN
9. To approve an increase in the number of shares
authorized under the Employee Stock Option Plan [ ] [ ] [ ]
from 63,333 to 300,000 shares.
FOR AGAINST ABSTAIN
10. To approve the grant of options to acquire 77,914
shares of common stock to Mr. Alfred H. (John) [ ] [ ] [ ]
Racine, III in accordance with Australian Stock
Exchange Limited Listing Rule 10.11.
FOR AGAINST ABSTAIN
11. To approve the establishment of an Employee
Restricted Stock Plan. [ ] [ ] [ ]
FOR AGAINST ABSTAIN
12. To approve the payment of $16,500 to Clifford W.
Chapman Jr. for Board of Director service from [ ] [ ] [ ]
October 1, 2004 to June 30, 2005.
FOR AGAINST ABSTAIN
13. To approve an increase in the total annual
compensation that may be paid to the Board of [ ] [ ] [ ]
Directors in accordance with Australian Stock
Exchange Limited Listing Rule 10.17.
FOR AGAINST ABSTAIN
14. To approve an increase in the number of stock
options authorized under the Director Stock Option [ ] [ ] [ ]
Plan.
FOR AGAINST ABSTAIN
15. To approve the establishment of a Director
Restricted Stock Plan. [ ] [ ] [ ]
FOR AGAINST ABSTAIN
16. To approve the issuance of securities to members
of Catuity's Board of Directors in the offering as [ ] [ ] [ ]
required by Australian Stock Exchange Limited
Listing Rule 10.11.1.
</Table>
C AUTHORIZED SIGNATURES -- SIGN HERE -- THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
NOTE: Please sign your name(s) EXACTLY as your name(s) appear(s) on this proxy.
All joint holders must sign. When signing as attorney, trustee, executor,
administrator, guardian or corporate officer, please provide your FULL title.
<Table>
Signature 1 - Please keep signature within the box Signature 2 - Please keep signature within the box Date (mm/dd/yyyy)
- -------------------------------------------------- -------------------------------------------------- --------------------------
/ /
- -------------------------------------------------- -------------------------------------------------- --------------------------
</Table>
1 U P X H H H P P P P 006003 +
- --------------------------------------------------------------------------------
PROXY - CATUITY, INC.
- --------------------------------------------------------------------------------
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 19, 2005
(JULY 18, 2005 IN THE UNITED STATES) IN MELBOURNE, AUSTRALIA
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
The undersigned hereby constitutes and appoints Duncan P.F. Mount with full
power of substitution, for and on behalf of the undersigned to vote as proxy, as
directed and permitted herein, at the Annual Meeting of Shareholders of the
Company to be held at the ASX Theatrette, Level 3, 530 Collins Street,
Melbourne, Victoria 3000 Australia on Tuesday July 19, 2005 at 9:30 a.m.
(Monday, July 18, 2005 at 7:30 p.m. Eastern Daylight Time in the United States),
and at any adjournment thereof, upon matters set forth in the Proxy Statement
and, in his judgement and discretion, upon such other business as may properly
come before the meeting.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
(To be signed on reverse side.)