1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
CATUITY INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 38-3518829
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2711 E. Jefferson Ave.
Detroit, Michigan, USA 48207
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(Address of Principal Executive Offices) (Zip Code)
313-567-4348
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None.
Securities to be registered pursuant to Section 12(g) of the Act:
Title Of Each Class Name of Each Exchange On Which
To Be Registered Each Class Is To Be Registered
Common Stock, par value $.001 per share Nasdaq National Market
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TABLE OF CONTENTS
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ITEM 1 BUSINESS............................................................. 1
RISK FACTORS......................................................... 13
ITEM 2. FINANCIAL INFORMATION................................................ 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 28
ITEM 3. PROPERTIES........................................................... 34
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................... 35
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS..................................... 37
ITEM 6. EXECUTIVE COMPENSATION............................................... 40
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 49
ITEM 8. LEGAL PROCEEDINGS.................................................... 52
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS............................... 53
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.............................. 55
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.............. 59
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................ 60
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 61
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 62
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.................................... 63
Our website is www.catuity.com. The information on our website is not
incorporated by reference into this registration statement.
Unless otherwise indicated, all information in this registration statement
gives effect to the one-for-ten reverse stock split of our outstanding capital
stock that occurred in November 1999.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This registration statement contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outline under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievement. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this registration statement to conform such statements to
actual results or to changes in our expectations.
SPECIAL NOTE REGARDING FOREIGN CURRENCY AND EXCHANGE RATES
All dollar figures contained in this registration statement are set forth
in United States dollars (US$), except as otherwise indicated. All Australian
dollars (A$) translated into US$ have been translated at the following rates per
A$, except as otherwise indicated:
Exchange Rate per Australian Dollar
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For Revenues For Dec. 31 Assets
Year and Expenses(1) and Liabilities(2)
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1999 $0.6455 $0.6571
1998 $0.6290 $0.6126
1997 $0.7430 $0.6503
1996 $0.7830 $0.7943
1995 $0.7402 $0.7437
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(1) These exchange rates represent average exchange rates during the
year.
(2) These exchange rates represent December 31 exchange rates.
When the above rates do not apply, an exchange rate of US$0.65 for each A$ has
been applied, unless otherwise indicated.
ITEM 1. BUSINESS
OVERVIEW
We are a provider of software that allows retailers to establish and
administer customer incentive and loyalty programs. Our software is targeted to
a broad range of sellers of goods and services -- including retailers with store
locations and retailers who sell their products over
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the Internet. Our software is especially useful for retailers who sell both
through store locations and over the Internet.
Our software supports the establishment and administration of a variety of
customer incentive and loyalty programs. Using our software, the retailer may
reward its customers with valuable benefits, hoping to attract and retain
customers and to encourage increased purchases. Due to the flexibility of our
software, rewards may be easily established, targeted and changed. In addition,
the retailer may select from a wide variety of reward options. Our software
directly connects the retailer and its customer so that the customer recognizes
the retailer as the provider of the reward.
Our technology was created and tested in Australia in a company named Chip
Application Technologies Limited, or CAT, which is now our wholly owned
subsidiary. CAT commenced development of the technology in 1992. Initial trials
of a product that incorporated our technology commenced in 1995. CAT was listed
on the Australian Stock Exchange from July 1997 through November 1999, the date
that it became our subsidiary. We were recently incorporated as Catuity Inc. in
Delaware as part of our strategy to launch our product in the US market and
through our US based relationship partners. Catuity's shares have been listed on
the Australian Stock Exchange since November 1999. Catuity's listing on Nasdaq,
under the trading symbol "CTTY," will commence with effectiveness of this
registration statement. All references to "we," "our," the "Company" or the
"company" in this registration statement refer to Catuity Inc., including our
subsidiary, CAT.
INDUSTRY BACKGROUND
CUSTOMER INCENTIVE AND LOYALTY PROGRAMS
Customer incentive and loyalty programs traditionally are used by retailers
to attract and retain customers and to encourage purchases. Examples of typical
customer incentive and loyalty programs are:
- paper coupons;
- airline frequent flyer programs;
- supermarket programs that provide discounts and other special offers at
the check stand to members of the supermarket's club; and
- programs of online retailers that reward customers with cash rebates,
airline mileage and other benefits.
Customer incentive and loyalty programs at retail stores frequently are
tied to presenting a coupon, holding a membership card or providing a personal
identification number or customer registration. In the online world, rewards
frequently are tied to an account number or credit card.
There are few programs that offer multiple reward options or that work both
for retail stores and for the Internet environment interactively. Many programs
are linked to a particular payment card and few can provide multiple programs,
such as a short term incentive program
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and a long term loyalty program, based on a single transaction. Many programs
require paper statements and redemption forms, and few provide instant rewards
based on particular patterns of transactions. Additionally, many existing
programs operate on hardware provided by only one supplier or rewards from only
one source.
According to the AC Nielson Homescan Consumer Panel conducted in December,
1998, approximately 66% of all US households hold a frequent shopper program
card. Based on a 1999 study, Banc Boston Robertson Stephens estimates that $8
billion per year was spent using frequent shopper cards.
According to NCH NuWorld Marketing Ltd, in excess of 160 billion grocery
coupons were distributed in the US in 1998 and approximately 3.5 billion were
redeemed. Based on a 1999 study, Banc Boston Robertson Stephens estimates that
the consumer packaged goods industry spends $20 billion on promotions of which
$6.4 billion was spent on coupons and $4 billion on incentives.
From 1997 to 1998, US merchants selling on the web or planning to do so in
the short term increased from 37% to 76%, as reported in a combined study by
Ernst and Young and the National Retail Federation.
THE MARKET OPPORTUNITY
We believe that many retailers have found it to be difficult and cost
inefficient to create and administer customer incentive and loyalty programs
where the retailer controls the program and customizes the reward. As a result,
we believe that many retailers have:
- either avoided or introduced very simple, single-reward customer
incentive and loyalty programs;
- developed or had developed for them customized solutions that are
expensive to develop and maintain; or
- participated as one of many companies in customer incentive and loyalty
programs created and controlled by the sponsoring company. In these
cases, the rewards may not easily be recognized as having been provided
by the retailer and the programs do not typically offer the option of
using the retailer's own goods and services as rewards.
We believe that there is a significant opportunity for a flexible and easy
to use software tool that permits a retailer to create, target and easily change
customer incentive and loyalty programs that are controlled entirely by that
retailer; can apply to purchases using any payment system at retail stores, over
the Internet or interactively over both; can use the retailer's own goods and
services as rewards; can provide instant rewards; and accommodates all payment
methods. There is also a significant opportunity in providing retailers the
tools to operate customer incentive and loyalty programs cooperatively with
other complimentary retailers, allowing the retailer to provide cross selling
programs that share customers and expand its customer base.
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OUR SOLUTION
We provide retailers with the software tools to establish and administer
customer loyalty and incentive programs, whether the customer's purchases occur
at a retail store location or over the Internet. Our product may be used by a
wide variety of businesses, including retail stores, Internet merchants, banks
and financial institutions, credit card issuers, sporting and entertainment
venues, public transport providers and membership organizations. Our software
provides a single solution for the creation and administration of customer
incentive and loyalty programs that span retail store and Internet sales for
those retailers who operate in both arenas. This single solution also helps the
retailer establish programs that encourage loyalty of customers who shop both at
retail stores and over the Internet.
The combination of incentives and loyalty programs incorporated into our
solution offers a powerful customer acquisition and customer retention solution
for retailers. Incentives are used as short-term, tactical marketing programs to
win new customers and loyalty programs are used as long-term, strategic
marketing programs to retain customers. These programs and rewards, operating
simultaneously, can provide retailers (and others such as payment card issuers
and product suppliers) an important marketing tool.
Customer incentive and loyalty programs created with our software are
entirely controlled by the retailer. Our product provides a software solution
that is easy to use and is flexible. The retailer can reward its customers in
ways that permit the customer to easily recognize the retailer as the provider
of the reward. Retailers can either operate the programs themselves or use one
of our value added resellers on an out-sourced basis, but still retain control
of the programs themselves. In addition, retailers can establish programs with
other complementary retailers that create incentives for one retailer's
customers to purchase goods from the other retailer. Rewards may be provided in
the retailer's own goods and services, or through rewards provided by third
parties. The retailer can select from a variety of program and reward options.
Our solution is not dependent upon one type of customer identification or
method of verification. Customers can use existing cards or a membership number
with a personal identification number, or PIN, and programs can operate with
various payment methods. Customers and retailers can receive on-line reporting
and information services via the Internet.
OUR STRATEGY
Our strategy is to focus on helping the retailer create customer incentive
and loyalty programs that the retailer can control, easily customize and use on
different platforms. We support the retailer's desire to acquire new customers
and to retain existing customers. Our objective is to provide a solution that:
- provides an easy entry, low cost, powerful marketing solution for the
retailer;
- supports customer incentive and loyalty programs whether the customer
purchases at a retail store location or over the Internet; and
- provides the retailer with timely data collection, analysis and customer
information, and provides the customer easily accessible and timely
program information and reports.
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We sell our product indirectly through value added resellers and directly
through our own sales team. These two channels allow us to increase our product
exposure and market coverage. We believe a number of our competitors are also
potential value added resellers for us because our product adds value to their
products.
OUR PRODUCT
Our product is a software tool that provides a retailer the infrastructure
to establish and administer customer incentive and loyalty programs. Our
product's features include:
- multiple customized reward options to meet the needs of a wide range of
retailers;
- the ability to provide programs that offer instant or delayed rewards;
- the ability of the retailer to provide its own goods and services as
rewards or use third party goods and services as rewards;
- the ability of multiple retailers to determine eligibility for rewards
based on purchases from one or multiple retailers;
- an easy to operate, complete, off-the-shelf solution;
- applicability for sales through retail stores and for purchases online;
- on-demand data collection, analysis, customer profiling and behavioral
reporting;
- capacity to change or add incentive and loyalty programs overnight;
- support of a broad range of payment methods;
- scalability for upgrade to larger systems;
- the choice of online or offline processing operations;
- a completely paperless operation;
- security and monitoring systems; and
- support of multi-lingual operations.
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Our product permits the retailer to offer a broad range of reward
eligibility, including rewards that are:
- triggered by reaching preset spending levels or conducting specified
activities based on the value or the frequency of the activities;
- based upon short or long term activity;
- triggered by conducting specified activities at one or a range of
retailers;
- tiered based upon one or a range of activities or activity levels;
- increased based on achieving certain activity levels;
- randomly allocated; and
- triggered by using a particular payment method or particular membership.
The types of rewards that the retailer may choose to offer the customer
include:
- fixed or percentage discounts on the immediate transaction or on the
next transaction;
- rewards comprising goods and services provided by the retailer or by a
complementary retailer at another retail store or over the Internet; and
- multiple rewards such as:
- simultaneously offering an immediate incentive for the next
purchase and a long term loyalty program incentive for repeat
purchases;
- simultaneously offering participation in a local retail store
incentive program, a national chain loyalty program and a
complementary retailer's Internet program; or
- simultaneously offering participation in different programs
offered by a retailer, a payment card issuer and a product
supplier based on the same activity.
In addition to our target market of customer incentive and loyalty
programs, our product also is designed to support other applications. For
example, our product already supports ticketing for travel, entertainment and
sporting venues; issuing and tracking memberships in an organization; and
controlling access to facilities.
SALES AND MARKETING
We sell our product through value added resellers (VARs) and directly
through our own sales force. Because we are at the early stages of
commercializing our product, we currently are dependent on a limited number of
VARs and sales personnel.
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Some VARs integrate or bundle our product with their products, such as an
e-commerce product or a payment product. Certain VARs install our product in
their facilities and offer retailers services that include the functionality
provided by our product. VARs include software providers, integrators and
transaction processors. As of December 31, 1999, six VARs were offering our
product for sale to customers. By selling through VARs, we seek to obtain wide
market coverage of our business customers and obtain access to existing VAR
customers. Our VARs include IBM, Data Pro Accounting Software, Schlumberger,
Global Transaction Company (a subsidiary of Battelle) and Intellect.
We also sell our product directly through our own sales force. As of
December 31, 1999, we employed three persons in our direct sales efforts. In
certain cases, we use the services offered by the VARs to support the sale. We
also use our own sales force to support and train the VAR sales teams.
We are focusing on the US market because of its size, the rapid development
of US on-line businesses and the important role US companies play in the
development of payment systems. We expect to hire additional sales and marketing
staff in the US to increase our US marketing presence.
BUSINESS MODEL
We sell our product to retailers who provide goods and services to their
customers. Our business model is to receive transaction fees paid either by our
VARs or by the retailer. This model is designed to create a recurring revenue
stream, protected by a minimum annual fee, and offers a low initial cost
purchase decision for our customers. In certain markets, we may license
commercialization of our product and technology exclusively to a third party. In
certain situations, we may offer incentive and loyalty program services, based
on our product, to retailers.
We also expect to earn revenue from program customization and
implementation fees paid by our customers. We may also obtain revenue from
sources such as transaction interchange and provision of third-party equipment.
The revenues for these items are expected to be based on time-and-materials or
cost-plus arrangements and are not regarded as significant profit centers.
REVENUE AND ASSETS BY GEOGRAPHIC LOCATION
The product is currently being launched in the US market and 1999 was the
first year US based product license and services revenues were received. All
prior year revenues were based on product sales and services related to trials
or other early stage developments in Australia and New Zealand, research and
development grants and other income. In 1997 and 1998, 100% of our revenues were
generated in Australia and New Zealand and 100% of our assets were located in
Australia and New Zealand. For 1999, 73.6% of our revenues were produced in
Australia and New Zealand and 26.4% of our revenues were produced in North
America. In 1999, 98% of our non-cash assets were located in Australia.
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RELATIONSHIPS AND CUSTOMERS
We have established important relationships with IBM, Visa U.S.A. and Visa
International. Under a software remarketing agreement, IBM sells our product in
the North American market and provides maintenance support. We have installed
our product demonstration systems in most of IBM's e-commerce demonstration
centers in North America and in the IBM development center in Salt Lake City,
Utah. We have completed the demonstration phase of the integration of our
product with the IBM net.commerce product. IBM has a strong market presence in
e-commerce, multi-lane retail and banking.
We are a participant in a seven member working group, organized by Visa
U.S.A. and Visa International Services Association (Visa International), to
define technical specifications to integrate Visa payment systems with loyalty
programs. Under a Partner Program Loyalty Services Agreement with Visa
International, we are one of several suppliers that may offer Visa International
approved loyalty program applications to Visa members.
We have cooperative relationships with hardware and software suppliers
under which we receive technical information and development systems in support
of our development efforts to deploy our software on their hardware and software
platforms. Such relationships exist with Sun Microsystems, Schlumberger,
Verifone, Ingenico, Gemplus, Maosco, De La Rue Cartes et Systemes and Geisecke
and Devrient. Smart Dynamics provides technical support in the US for
implementation of our product at certain customer sites.
As of March 10, 2000, we have appointed six value added resellers in the
US. In addition, we have completed nine demonstration site installations and
have performed two commercial installations in the US in support of two
different groups of retailers and a service provider.
TECHNOLOGY AND INFRASTRUCTURE
Our product is an end to end, software package that allows retailers to
operate a range of powerful incentive and loyalty marketing programs in their
retail stores and in connection with sales over the Internet. Our product offers
a variety of programs and reward options in one product. Features of our
product include:
- integrated modules providing a complete end to end solution;
- the ability to apply multiple programs to an individual customer based
on a single transaction;
- the ability to coexist with traditional (e.g., cash/credit/debit/check)
and emerging (e.g., electronic purse) payment systems;
- the ability to operate loyalty and incentive programs across a variety
of hardware and software platforms;
- comprehensive reporting, program analysis and customer profiling
capability;
- strong system security and multi-lingual support; and
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- online (e-commerce) and in-store (POS) integration.
Our product architecture is based on the following four modules:
CUSTOMER PROFILE
The Customer Profile module is a platform-independent data format which
stores information about a customer's credits toward achieving rewards and about
particular vendor rewards programs. A customer's profile can be stored securely
in online or offline systems. Online systems typically use a magnetic stripe
card or a customer identification number for access from an online device that
permits access to a Web site or through a point of sale terminal. An offline
system could include a smart card or other data storage method.
Each customer is assigned a unique identification number by the system.
Customers may enroll and obtain their identification number over the web or at a
retail store. They may then link their participation in the incentive or loyalty
program to existing credit cards or membership cards. As a result, a credit card
or membership card can be linked to many incentive and loyalty programs. The
smart card form of the Customer Profile is platform independent, meaning that it
has been designed to function on a range of smart card operating systems,
including G&D StarCOS, Multos, Mifare and Java Cards.
PROGRAM ENGINE
The Program Engine module is a platform-independent software module that
implements the eligibility and reward rules for customer incentive and loyalty
programs. The Program Engine may be implemented in a point of sale device, an
online server for in-store transactions or at an online, e-commerce web server.
The Program Engine interprets the program rules sent to it from the Program
Manager, reviews the current status of the program on the Customer Profile and
applies the program rules accordingly. It also records all customer transactions
for transmission to the Program Manager.
PROGRAM MANAGER
At the heart of our product lies the Program Manager, an easy-to-use yet
powerful information management tool. It allows retailers to create and maintain
their customer loyalty and incentive programs. It also supports marketing and
financial analysis, and customer transaction history reports to assist retailers
in establishing dynamic customer loyalty and incentive programs.
Customer loyalty and incentive programs are established by the retailer and
maintained in the Program Manager. These programs are automatically downloaded
to Program Engines at the same time that transaction information is uploaded for
processing and analysis. The Program Manager incorporates analytical and
reporting tools for analysis of the effectiveness of customer loyalty and
incentive programs.
The Program Manager consists of a central server, database management
system and a communications infrastructure. The Program Manager can be installed
on any Microsoft
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Windows NT 4.0 (or higher) compatible server. The Program Manager has been
developed to use the Sybase Adaptive Server Enterprise (ASE) for Microsoft
Windows NT as its database engine and can be configured to use other relational
database management systems. A network of modems, telephone lines, annexes, hubs
and other components are required to allow terminals and remote client PCs to
connect and gain access to the system.
System security is controlled by the Program Manager. First, the system is
protected by means of complex cryptographic techniques (using Triple-DES or
3DES) that seek to prevent unauthorized tampering with the files that are
transmitted between the Program Manager and the Program Engines. Second, access
to the data stored in smart card or other chip devices (where used) is also
secured using cryptographic techniques. User access to the Program Manager also
is controlled by the Program Manager.
INQUIRY SERVER
The Inquiry Server module is a web site which allows retailers and
customers to review the available customer loyalty and incentive programs, check
their current program status, obtain reports and view their transaction history
at their leisure from any web browser. The customer or retailer simply inputs
their identification number (and password if applicable) in order to gain
access. The Inquiry Server program and transaction database is updated regularly
from the Program Manager.
RESEARCH, DEVELOPMENT AND TESTING
We have developed the technology used in our product in our research and
development facility in Sydney, Australia over the last 8 years. We continue to
develop the product by adding new product capabilities and applications. Our
Australian development team is experienced and provides a relatively low cost
development capability. We have tested our product in our facilities and in
field tests in western Sydney. Our expenditures for research, development and
testing were $1,415,837, $1,309,784 and $1,398,489, respectively, for 1997, 1998
and 1999.
Current development plans include creating further enhancements to our
product. We expect to hire additional research and development staff to
accommodate that work.
COMPETITION
Our product faces competition at two levels. First, we compete with
companies that provide software for customer incentive and loyalty programs for
retail store locations and/or Internet retailers. Second, our resellers who
provide services to retailers, compete with providers of incentive and loyalty
programs to retailers. We believe that the principal factors upon which we and
our resellers compete in the marketplace include:
- product functionality;
- product compatibility;
- price;
- service and training;
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- reputation and financial strength; and
- ability to provide other products and services.
Certain suppliers to retail stores of point of purchase terminals and card
and host systems offer software that is useful for incentive and loyalty
programs. Competitors include Cyperpro, with cash based incentive marketing
programs; Smart Card Solutions, with customized smart card incentive programs;
Prio, with credit card based cash back programs; and Welcome Real Time, with a
range of marketing programs for retail stores. Software providers for
e-commerce, such as Yantra Corporation, Talisma Corporation and Symix, are
potential competitors.
Competitors to the services provided by our resellers to retail stores
include the operators of the airline frequent flyer programs and marketing and
ad agencies operating traditional incentive and loyalty programs. Competitors to
the services provided by our resellers to on-line retailers include Netcentives,
with frequent flyer points; MyPoints.com, with targeted on-line incentive
programs; Webstakes, with sweepstakes; Cybergold, with cash back for credit card
transactions; E-centives, with personalized coupons; RewardsPlus with employee
benefit programs and companies such as E-piphany, Datasage and Verbind that
provide customer profiled targeted marketing programs.
We expect competition to increase as companies expand their offerings in
customer incentive and loyalty programs and provide software for retail stores
and the Internet.
Our ability to compete depends upon many factors, including:
- our ability to successfully market our product's features;
- the sales and marketing efforts by us and our competitors;
- the effectiveness of our solution relative to the product offerings of
our competitors;
- our ability to establish the credibility of our product in the
marketplace;
- our ability to effectively reach and sell to target retailers;
- our ability to attract and retain VARs who will sell our product; and
- our ability to timely succeed in our product development efforts.
INTELLECTUAL PROPERTY
We have filed certain patent applications in a number of countries
including the United States. These patent applications relate to the use of
customer profiles and systems for the operation of multiple reward programs in
retail shops and on the Internet in a single solution. We also rely in our
business on the protections afforded our intellectual property under copyright,
trademark and trade secret laws.
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PRODUCT WARRANTIES
In our agreements with VARs and customers, we typically will provide
certain warranties concerning our product. Those warranties may include such
matters as non-infringement of third party rights and our product meeting
certain specifications.
OUR HISTORY
We were incorporated in Delaware in June 1999 as Novatec Inc. and have
since changed our name to Catuity Inc. In November 1999, we acquired 100% of the
stock of Chip Application Technologies Limited, an Australian public company
(CAT). That transaction was approved by the Supreme Court of New South Wales,
Australia and by more than 75% in interest of CAT's shareholders present and
voting at a meeting held in November 1999. From July 1997 through November 1999,
CAT was listed on the Australian Stock Exchange. Since our acquisition of CAT in
November 1999, our shares have been listed on the Australian Stock Exchange.
CAT was incorporated in New South Wales in 1992. In 1995, it commenced
trials of early versions of our product in Western Sydney, Australia, under the
brand name Transcard. Since that time the product has been upgraded and tested
at that location. CAT, which licenses its technology to Catuity Inc., owns all
of the intellectual property rights to our product and employs the research and
development team that continues to develop and support the product at our
development center in Sydney.
EMPLOYEES
As of December 31, 1999, we had 37 full time employees and full time
consultants, comprised of 4 in sales and marketing in North America, 25 in
technology and product development in Australia, 1 in implementation support in
North America and 7 in finance and administration in Australia. None of our
employees is represented by a collective bargaining agreement. We consider our
relations with our employees to be good.
FACILITIES
We have established our corporate headquarters in Detroit, Michigan. Our
technology and product development facilities are in Sydney, Australia. We have
no other material foreign operations. See Item 3, Properties, below.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation concerning claims
arising in the ordinary course of our business. We are not presently a party to
any material legal proceedings.
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RISK FACTORS
You should carefully consider the risks described below and the other
information in this registration statement before making an investment decision.
If any of the following risks occur, our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS PROSPECTS
DIFFICULT.
Catuity was formed in June 1999. In November 1999, Catuity acquired all of
Chip Application Technologies Limited, which was formed in Australia in November
1992. We have only a limited operating history upon which we can be evaluated.
Any investment in the Company must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development of their business, including the risks described below. There can be
no assurance that we will be successful in addressing those risks.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE SIGNIFICANT FUTURE LOSSES.
We incurred net losses of $3,516,840 for the year ended December 31, 1997,
$2,384,148 for the year ended December 31, 1998 and $6,210,084 for the year
ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit
of $19,606,637. To date, we have not achieved profitability, and we expect to
incur significant and increasing net losses for at least the next two years. We
intend to continue to invest significantly in sales and marketing, customer
support, product development and administrative expenses, and as a result, will
need to generate significant revenues to achieve and maintain profitability.
There can be no assurance that any of our business strategies will be successful
or that significant revenues or profitability will ever be achieved. If we do
achieve profitability, we cannot be certain that we can sustain or increase
profitability on an ongoing basis. See "Selected Consolidated Financial Data."
FLUCTUATIONS IN OUR QUARTERLY REVENUE AND OPERATING RESULTS MAY AFFECT
THE PRICE OF OUR COMMON STOCK.
Fluctuations in our quarterly revenue could adversely affect the market
price of our common stock. Any shortfall in our revenue would have a direct
impact on our operating results for a particular quarter.
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside of our control. These factors
include:
- changes in the level of demand for our product;
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- changes in the growth rate of Internet usage;
- changes in the sales, marketing and general business policies and
strategies of our resellers;
- the amount and timing of our operating costs and capital expenditures
relating to the expansion of our business and operations;
- the timing of the introduction of new products or product
enhancements by us, our resellers or our competitors;
- customer order deferrals in anticipation of upgrades and new products
from us, our resellers or our competitors;
- our ability to anticipate and effectively adapt to developing markets
and rapidly changing technologies;
- changes in the mix of international and U.S. revenues and in foreign
currency exchange rates; and
- general economic conditions and specific economic conditions in online
and offline related industries.
We expect that our revenue in the future will be based primarily on a fee
per customer transaction that utilizes our software, subject to a minimum fee
per period. Accordingly, our fees will be dependent on the success of retailers
in implementing customer incentive and loyalty programs. Even when successful,
fees to us will be delayed until customer usage increases. We do not have any
substantial historical basis for predicting the volume of transactions that may
be generated by customers and retailers. A low level of usage by customers or
the cancellation or deferral of retailer contracts could have a material adverse
effect on our quarterly financial performance. In addition, there are no
assurances that retailers will be willing to pay for our software based on a fee
per customer transaction.
WE WILL BE ADVERSELY AFFECTED IF OUR PRODUCT DOES NOT ACHIEVE MARKET
ACCEPTANCE.
To date, our product has not been installed in a large-scale, commercial
deployment, and there can be no assurance that our product will perform desired
functions, offer sufficient price/performance benefits or meet the technical or
other requirements of customers. Despite testing of our product prior to its
commercial release, there can be no assurance that all performance errors or
deficiencies have been discovered and remedied, that additional errors or
deficiencies will not occur, or if they occur, that we will be able to correct
such errors and deficiencies.
In addition, we believe that the time required to deploy our product will
vary significantly depending on a number of factors, including the needs and
skills set of the customer, the size of the deployment, the complexity of the
customer's network environment and any integration required, the quantity of
hardware and degree of hardware configuration necessary to deploy the product
and the customer's installation schedule. We believe that the use of our product
by customers will involve an enterprise wide decision-making process, and that
we or our reseller
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partners will need to provide a significant level of education and information
to prospective customers regarding the uses and benefits of the product. For
these and other reasons, the use and deployment of our product may be
characterized by lengthy sales and implementation cycles. Failure of our product
to achieve market acceptance for these or any other reasons would have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO EXPAND OUR SALES AND SUPPORT
ORGANIZATIONS.
Our sales are conducted through resellers and our sales team. Our reseller
strategy is currently being implemented. We believe that our future success is
dependent upon supporting our resellers and further establishing our direct
sales and sales support capability. Competition for such sales and support
personnel is intense, and there can be no assurance that we will be able to
attract, assimilate or retain additional qualified marketing, sales and sales
support personnel on a timely basis in the future, or at all. In addition, we
believe that our success is dependent upon establishing relationships with a
variety of reseller partners, including original equipment manufacturers,
systems integrators and value added resellers. There can be no assurance that we
will be able to enter into agreements or establish relationships with additional
desired reseller partners on a timely basis or at all, or that such resellers
will devote adequate resources to selling our products. Our failure to
successfully expand the size of our marketing, sales and sales support
organization or establish and maintain appropriate reseller channels for our
products would have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR WORKING CAPITAL REQUIREMENTS.
In order to support our future operating requirements, we will need to
obtain additional funding either by increasing our lines of credit or by raising
additional debt or equity from the public or private capital markets. There can
be no assurance that such additional funding will be available on terms
attractive to us, or at all. Failure by us to raise additional funding when
needed could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through the
issuance of equity securities, the ownership percentages of our stockholders
would be reduced. Furthermore, such equity securities might have rights,
preferences or privileges senior to those of our common stock.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO DEVELOP AND MAINTAIN STRATEGIC
RELATIONSHIPS.
We believe that success in marketing our product will depend in part on our
ability to develop and maintain strategic relationships with key hardware and
software vendors, reseller partners and retailers. We further believe that such
relationships will be important in order to validate our technology, facilitate
broad market acceptance of our products, and enhance our sales, marketing and
distribution capabilities. Our inability to develop and continue strategic
relationships, or the termination of one or more of our current relationships
could have a material adverse effect on our business, financial condition and
results of operations.
We rely on hardware and operating systems provided by third parties as the
platforms on which to operate our product. Failure of such third parties to
maintain or enhance their
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products could impair the functionality of our product. Such failure or our
failure to successfully integrate our product with third party supplier products
could require us to obtain alternative products from other sources or to develop
such hardware and software internally, either of which could involve costs and
delays as well as diversion of our engineering resources.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO ATTRACT AND RETAIN KEY
PERSONNEL.
Our operations will depend to a great extent on our ability to attract new
key personnel and retain existing key personnel in the future. Competition for
employees is intense, particularly for personnel with technical training and
experience in incentive and loyalty programs. We have from time to time in the
past experienced, and we expect to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
If we are unable to hire or retain key employees, our business, results of
operations and financial condition will be harmed.
MANY OF OUR KEY PERSONNEL ARE NEW TO US AND MAY NOT WORK TOGETHER
SUCCESSFULLY.
We are dependent upon the efforts and abilities of our management team,
particularly David L. Mac. Smith, our Chairman, Michael V. Howe, our President
and Chief Executive Officer, and Benjamin Garton, our Vice President of Product
Management and Development. A number of members of the management team,
including Mr. Howe, have joined us in recent months and we are continuing to
recruit new senior managers in North America. Our future performance will
depend, in part, on our ability to integrate successfully our newly hired
executive officers into our management team, and our ability to develop
effective working relationships among management. If our key personnel are
unable to work together successfully, our business, results of operations and
financial condition could be harmed.
WE MAY BE UNABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS.
Our success will depend in part on our ability to manage our operations
successfully, particularly in light of our expansion in the United States. We
have recently established a United States presence and appointed a United States
based president and chief executive officer. In addition, we are in the process
of establishing a United States based senior management team and increasing the
scope of our operations in the United States. Our anticipated future operations
will continue to place a significant strain on our management systems and
resources.
We expect that we will be required to continue to improve our financial and
managerial controls and reporting systems and procedures, and will need to
expand, train and manage our work force. Furthermore, we expect that we will be
required to manage multiple relationships with various resellers, customers and
other third parties. There can be no assurance that we will be able to
effectively manage these tasks, and the failure to do so could have a material
adverse effect on our business, financial condition and results of operations.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES FOR ESSENTIAL PRODUCTS AND
SERVICES.
We rely on services furnished to us by a limited number of third parties,
including our resellers, suppliers of point of sale hardware and operating
systems, and suppliers of customer
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devices, such as magnetic stripe cards and smart cards. Although we can operate
our product on a range of platforms, any interruption, deterioration or
termination of these third-party services could be disruptive to our business.
In the event that any of our agreements with any of these third parties is
terminated, we may not be able to find an alternative source of support on a
timely or commercially reasonable basis, if at all. As a result, any such
interruption, deterioration or termination could have a material adverse effect
on our results of operations and financial condition.
WE DEPEND UPON INDEPENDENT RESELLERS TO SELL OUR PRODUCT.
We have adopted a strategy of selling our product primarily through a
limited number of value added resellers. There can be no assurance that we will
generate sales and revenues through our resellers and any failure to do so, or
any termination or interruption of our relationships with a major reseller or a
significant number of our resellers, would have a material adverse effect on our
business, financial condition and results of operations. There can be no
assurance that our resellers will not price the product at a level that will
adversely affect our product's competitive position. Such pricing would have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY FACE RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
Although we currently conduct most of our technology and product
development operations in Australia, we intend to enter into various
international markets. CAT, our wholly owned Australian subsidiary, currently
conducts product development and trial operations in Australia. We expect that
we will become a primarily North American based entity with North American based
senior management and that we will attempt to market and sell our product in the
UK, Europe, Asia and other selected international markets, including Australia
and New Zealand. Our entry into international markets will require significant
management attention and financial resources. If international revenue is not
adequate to offset the expense of establishing and maintaining foreign
operations, our business, financial condition and results of operations could be
materially adversely affected.
To date, we have only limited experience in developing trial versions of
our product and marketing and distributing our products. There can be no
assurance we will be able to successfully market, sell and deliver our product
in international markets. International operations are subject to inherent
risks, including:
- the impact of possible recession in economies outside the United States;
- the cost of localizing products for foreign markets;
- longer receivables collection periods and greater difficulty in accounts
receivable collection;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- fluctuations in currency exchange rates;
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- tariffs, export controls and other trade barriers;
- potentially adverse tax consequences; and
- political and economic instability.
There can be no assurance that we or our resellers will be able to obtain,
sustain or increase international revenues, or that the foregoing factors will
not have a material adverse effect on our future international revenues and,
consequently, on our business, financial condition and results of operations.
International revenues are generally denominated in local currencies. We do not
currently engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on revenues from international sales and thus our business,
financial condition and results of operations.
OUR OPERATIONS ARE SUSCEPTIBLE TO COMPUTER VIRUSES, SECURITY BREACHES AND
OTHER DISRUPTIONS AND FAILURES.
We currently locate our data center at our development center in Sydney,
Australia and take certain precautions to protect our source code for our
software against loss from fire, earthquakes, floods, power and
telecommunications failures, sabotage, intentional acts of vandalism and similar
events. Despite such precautions, the occurrence of a natural disaster or other
unanticipated problems at current and future data centers could result in
interruptions in the services provided by us. Such interruptions could result in
reduction in, or termination of, service provided to our customers, which could
have a material adverse effect on our business, financial condition and results
of operations.
In addition, our systems may be vulnerable to unauthorized access and
computer viruses. Eliminating computer viruses and other security problems may
require interruptions, delays or cessation of service to users, which could have
a material adverse effect on our business, financial condition and results of
operations. We may be required to expend significant capital or other resources
to protect against the threat of security breaches or to alleviate problems
caused by breaches. Although we intend to continue to implement security
measures, we cannot be certain that measures implemented by us will not be
circumvented.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY IN OUR PRODUCT'S
MARKET ACCEPTANCE.
Our application software is internally complex and may contain defects. If
we are not able to detect and correct errors in our product before commencing
commercial shipments, we may experience loss of revenue or delays in market
acceptance. We continually evaluate our product and its enhancements for errors
and receive information from customers regarding errors they detect. However, we
may encounter product liability claims in the future. Product liability claims
brought against us could divert the attention of management and key personnel,
could be expensive to defend and may result in adverse settlements and
judgments.
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RISKS RELATED TO OUR INDUSTRY
INTENSE AND INCREASING COMPETITION IN THE APPLICATION SOFTWARE INDUSTRY
COULD HARM OUR BUSINESS.
The application software industry is highly competitive, rapidly developing
and subject to constant innovation and change. Numerous other companies operate
incentive marketing programs using both electronic and paper based systems, both
for retail stores and the Internet. Many of these companies have significantly
longer operating histories, greater name recognition, larger customer bases and
greater financial, technical and marketing resources than we do.
Our competitors may respond more quickly than we can to changing
technologies and customer requirements. For example, these competitors may:
- conduct more extensive marketing campaigns to capture market share;
- provide more attractive incentive and pricing packages to customers;
- negotiate more favorable contracts with existing and potential employees
and strategic partners;
- establish cooperative relationships among themselves or with third
parties, including large Internet participants, to increase the ability
of their products and services to address the needs of prospective
customers;
- bundle their products with other software or hardware, including
operating systems and browsers, in a manner that may discourage users
from purchasing products offered by us;
- establish cooperative relationships with our current or potential
competitors, thereby limiting our ability to sell our products through
particular reseller channels; or
- more quickly develop new products and services or enhance existing
products and services.
Our ability, and the ability of our resellers, to compete effectively in
the market for application software for incentive and loyalty marketing programs
will depend upon a variety of factors, including our ability to provide high
quality products and services at prices generally competitive with, or lower
than, those charged by our competitors. There can be no assurance that we will
be able to compete successfully. Moreover, there can be no assurance that
certain of our competitors will not be better situated to negotiate contracts
with retailers and resellers that are more favorable than contracts we
negotiate. In addition, there can be no assurance that the competition from
existing or new competitors or a decrease in the rates charged for products and
services by our competitors will not materially and adversely affect us.
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NEW TECHNOLOGIES COULD RENDER OUR PRODUCT OBSOLETE.
The application software business is characterized by rapid technological
change, new product introduction and evolving industry standards. Advances in
applications software or the development of entirely new technologies to replace
existing applications software could render our product obsolete and
unmarketable. Our success will depend, in significant part, on our ability to
make timely and cost-effective enhancements and additions to our technology and
to introduce new products and services that meet customer demands. There can be
no assurance that we will be successful in developing new products, services and
enhancements. Delay in the introduction of new products, enhancements or
services, the inability to develop such new products, enhancements or services
or their failure to achieve market acceptance could have a material adverse
effect on us.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET COMMERCE.
Our future success depends heavily on the overall continued growth and
acceptance of the Internet, including its use in electronic commerce. Although
our product operates in the offline environment, one of its main competitive
advantages is its capacity to provide programs across both the online and
offline channels. If Internet usage or commerce does not continue to grow or
grows more slowly than expected, our business, operating results and financial
condition could be adversely affected. Customers and businesses may reject the
Internet as a viable medium for a number of reasons. These include potentially
inadequate network infrastructure, slow development of enabling technologies,
security concerns, inadequate customer support and insufficient commercial
support. In addition, delays in the development or adoption of new standards and
procedures required to handle increased levels of Internet activity, or
increased government regulation, could cause the Internet to lose its viability
as a commercial medium. Any government regulation or taxing of the Internet may
result in adverse financial consequences. Even if the required infrastructure,
standards, procedures or related products, services and facilities are
developed, we may incur substantial expenses adapting our solutions to changing
or emerging technologies.
WE MAY FACE RISKS RELATED TO THE STORAGE OR PROVISION OF INACCURATE OR
CONFIDENTIAL INFORMATION.
It is possible that information provided through the use of our product or
information that is copied and stored by customers that have deployed our
product may contain errors. In such event, third parties could make claims
against us for losses incurred in reliance on such information. Although we
carry general liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to indemnify us for all liability that may
be imposed. Any imposition of liability or legal defense expenses that is not
covered by insurance or that is in excess of insurance coverage could have a
material adverse effect on our business, financial condition and results of
operations.
In addition, from time to time, persons may unlawfully obtain information
concerning a customer's or retailer's program by unlawfully utilizing our access
numbers, passwords and personal identification numbers. No assurance can be
given that future losses due to claims by third parties for unauthorized use
will not be material. We maintain no reserves for such risks.
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There can be no assurance that our risk management practices will be sufficient
to protect us from unauthorized thefts of information that could have a material
adverse effect on us.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR USE OR MISUSE OF OUR
PRODUCT.
Retailers rely, and will continue to rely, on our product in connection
with providing promotions that have a direct financial impact on their
businesses and their customers. Use or misuse of our product, whether due to
accident, employee fraud, or otherwise, may result in unintended or undesirable
consequences that could result in financial or other damages to our customers
and to our customers' customers. A product liability claim brought against us,
even if not successful, would likely be time consuming and costly and could have
a material adverse effect on us.
WE MAY FACE RISKS RELATED TO THE USE OF ELECTRONIC PAYMENT CARDS.
Portions of our software may be integrated with or co-reside with a range
of third party payment and other software. For example, our product may be added
to existing or new electronic payment cards, either by the addition of software
to a chip or by using the payment card number as an identifier with our product.
Alternatively, a portion of the software comprising our product may be added to
existing or new payment devices, so that such software co-resides with payment
programs. On the Internet and in other environments, a portion of our software
may be integrated with a third party supplied e-commerce program. There can be
no assurances that such integration or co-residence will not adversely affect
the payment system, potentially giving rise to a claim that may have a material
adverse effect on our business, financial condition and results of operations.
In addition, if our customers experience problems with a payment system, it may
be difficult to determine if those problems originate from our product or other
products with which ours co-reside. Such difficulty may delay resolution of any
such problem and prove costly to us.
WE MAY BE AFFECTED BY POTENTIAL PRIVACY REGULATION.
The Federal Trade Commission is considering the adoption of regulations
regarding the collection and use of personal information obtained from
individuals, especially children, when accessing Internet sites. These
regulations could restrict our ability to provide demographic data to retailers.
At the international level, the European Union has adopted a directive that will
impose restrictions on the collection and use of personal data. These
developments could have an adverse effect on our business, results of operations
and financial condition.
WE MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.
There are currently few laws or regulations directly applicable to the use
of our product, either online or offline, other than laws that specifically
regulate lotteries and sweepstakes, two programs that our product could offer.
However, due to the increasing popularity and use of programs similar to those
offered in our product, it is possible that a number of laws and regulations may
be adopted at the local, state, national or international levels with respect to
such programs, covering issues such as user privacy, pricing, advertising,
intellectual property rights, information security or the convergence of
traditional communications services. Changes to such laws or adoption of
additional laws or regulations intended to address these issues could create
uncertainty in the marketplace which could reduce demand for our product,
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could increase our cost of doing business as a result of compliance, could
result in litigation or could in some other manner have a material adverse
effect on our business, financial condition and results of operations.
Congress has held hearings on whether to regulate providers of services and
transactions in the electronic commerce market. Other nations, including those
in the European Union, have taken actions to restrict the free flow of data and
information deemed to potentially be a breach of personal privacy. Any
restrictions on the collection and use of customer information over the Internet
could adversely affect the use of our product. Furthermore, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these companies. This
could increase the cost of transmitting data over the Internet and thereby
reduce the demand for our product.
WE MAY FACE DIFFICULTIES PROTECTING AND ENFORCING OUR INTELLECTUAL
PROPERTY RIGHTS.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyrights, trade secret and trademark laws as well as
confidentiality procedures and contractual provisions. However, any steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive, and there can be no assurance that the steps taken by us will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as do the laws of the
United States. In addition, we may infringe upon the intellectual property
rights of third parties, including third party rights in patents that have not
yet been issued. We expect that third-party infringement claims involving
Internet technologies and software products will increase. Any claims regarding
the rights of third parties, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms favorable to us, if at all. We have agreed, and may agree
in the future, to indemnify certain of our customers against claims that our
products infringe the intellectual property rights of others. We could incur
substantial costs in defending our sellers and our customers against
infringement claims. A successful claim of product infringement against us and
our failure or inability to license the infringed or similar technology could
have a material adverse effect on our business, financial condition and results
of operations.
We have applied for patents in relation to the method of operation of
incentive marketing programs using electronic means. We cannot assure you that
our patent applications will be approved. Moreover, even if approved, they may
not provide us with any competitive advantages or may be challenged by third
parties. In recent times a number of patents have been granted in this area.
Although we are not aware of any issued patent that our product would infringe,
legal standards relating to the validity, enforceability and scope of
intellectual property rights in Internet-related industries and use of
electronic data for granting of benefits and rewards are uncertain and still
evolving, and the future viability or value of any of our intellectual property
rights is uncertain.
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CORPORATE AND MARKET RISKS
OUR PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL STOCKHOLDER
VOTES AND OUR MANAGEMENT AND AFFAIRS.
Our executive officers and directors, and entities affiliated with them, as
at December 31, 1999, beneficially owned, in the aggregate, common stock
representing approximately 11.1% of our voting securities (assuming the exercise
of all outstanding options held by them). As a result, they could act together
to control all matters submitted to stockholders for approval (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets). In addition, their large ownership position
could enable them to effectively control our management and affairs.
Accordingly, such concentration of ownership may delay, defer or prevent a
change in control, impede a merger, consolidation, takeover or other business
combination involving us or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us. This could, in turn, have
an adverse effect on the market price of our common stock.
OUR TRADING VOLUME MAY BE LOW AND OUR STOCK PRICE MAY BE VOLATILE.
There can be no assurance that an active trading market will be maintained
for our common stock. Prior to Catuity's acquisition of CAT in November 1999,
CAT shares were listed on the Australian Stock Exchange (ASX) and since the
acquisition, Catuity's common stock has been listed on the ASX. Trading in CAT
shares from January 1, 1999 to November 22, 1999 averaged 73,995 shares per day
for an average daily value of A$844,427 (US$548,878) and trading in Catuity's
shares for the period November 23, 1999 to March 10, 2000 averaged 32,351 shares
per day for an average daily value of A$559,869 (US$363,915). There can be no
assurance that an adequate volume of trading in our shares will be maintained in
order to provide liquidity for our investors.
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of Internet software or loyalty program
companies;
- announcements by us of significant contracts, reseller arrangements,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock or termination of stock transfer restrictions; and
- fluctuations in stock market price and volume, which are particularly
common among securities of Internet companies.
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The market prices and volumes of the common stock of many publicly held
technology based companies and Internet or Internet related companies have in
the past been, and can in the future be expected to be, especially volatile. The
market price for CAT shares listed on the ASX for the period from January 1,
1999 to November 22, 1999 ranged from A$2.40 (US$1.56) to A$22.00 (US$14.30) per
share, and the market price for Catuity shares on the ASX for the period
November 23, 1999 to March 10, 2000 ranged from A$14.16 (US$9.20) to A$19.98
(US$12.99).
In the past, following a period of volatility in the market price of a
company's securities, securities class action litigation often has been
instituted against such a company. Any such litigation could result in
substantial costs and a diversion of management's attention and our resources.
WE MAY BE SUBJECT TO ARBITRAGE RISKS.
Following registration of our securities in the United States, we expect
that our common stock will be listed on both the ASX, in Australia, and the
Nasdaq National Market, in the United States. Investors may seek to profit by
exploiting the difference, if any, in the price of our stock in these two
markets. Such arbitraging activities could cause our stock price in the market
with the higher value to decrease to the price set by the market with the lower
value.
CERTAIN DELAWARE ANTI-TAKEOVER PROVISIONS MAY PRODUCE RESULTS DISFAVORED BY
OUR STOCKHOLDERS.
Provisions of Delaware law could make it more difficult for a third party
to acquire control of us without the consent of our board of directors, even if
such a change were favored by our stockholders. We are subject to Section 203 of
the Delaware General Corporation Law, which, subject to certain exceptions,
prohibits a publicly held Delaware corporation from engaging in any "business
combination" with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless:
- prior to such date, the board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of our voting stock outstanding at the time the
transaction commenced; and
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least 66% of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines "business combination" to include:
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- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of
our assets involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by us of any of our stock to the interested
stockholder;
- any transaction involving us that has the effect of increasing the
proportionate share of the stock of any class or series beneficially
owned by the interested stockholder; and
- the receipt by the "interested stockholder" of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by us or through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and the notes thereto included
elsewhere in this registration statement.
The selected financial data has been prepared on a consolidated basis so
that our financial data as of and for the year ended December 31, 1999 includes
the financial data as of and for the year ended December 31, 1999 of Chip
Application Technologies Limited ("CAT"), our wholly owned subsidiary acquired
on November 22, 1999 and so that our financial data as of and for the years
ended December 31, 1998, 1997, 1996 and 1995 entirely reflect CAT's historical
financial data. CAT has been operating since November 12, 1992 (having changed
its name from Card Technologies Australia Limited in October, 1997) and has been
the primary operating entity. Our selected financial information as of and for
the year ended December 31, 1999 and the selected historical financial
information of CAT as of and for the years ended December 31, 1998, and 1997,
are derived from audited financial statements of CAT included elsewhere in this
registration statement, which have been audited by Ernst & Young, independent
accountants. The selected financial data set forth below for CAT as of and for
the years ended December 31, 1996 and 1995 are derived from audited financial
statements of CAT not included in this registration statement.
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SELECTED FINANCIAL DATA
CATUITY INC. (INCLUDING CHIP APPLICATION TECHNOLOGIES LIMITED)
YEARS ENDED DECEMBER 31
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Income Statement Data:
Operating Revenue $ 1,210,903 $ 702,289 $ 888,092 $ 441,322 $ 379,557
Operating Expenses 7,380,307 2,909,758 4,190,050 3,740,354 3,091,505
------------ ------------ ------------ ------------ ------------
Operating (loss) income (6,169,404) (2,207,469) (3,301,958) (3,299,032) (2,711,948)
Other (expense) income (40,680) (176,679) (214,882) (362,721) 16,577
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (6,210,084) $ (2,384,148) $ (3,516,840) $ (3,661,753) $ (2,695,371)
============ ============ ============ ============ ============
Net (loss) income per share
Basic $ (1.05) $ (0.53) $ (1.15) $ (2.81) $ (12.03)
Diluted $ (1.05) $ (0.53) $ (1.05) $ (2.01) $ (12.03)
Weighted average number of
outstanding shares
Basic 5,913,613 4,473,257 3,065,840 1,300,906 223,992
Diluted 5,913,613 4,473,257 3,342,839 1,819,395 223,992
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Balance Sheet Data
Total assets $ 6,254,324 $ 638,866 $ 1,336,385 $ 495,032 $ 598,318
Short-term debt including
current portion of
long-term debt 1,138,275 656,274 924,307 2,445,937 1,160,955
Long-term debt 874,818 1,593,549 1,691,618 2,028,169 0
Shareholders Equity/
(Capital deficit) 4,241,231 (1,610,957) (1,279,540) (3,979,074) (562,637)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Form 10.
OVERVIEW
Card Technologies Australia Limited was incorporated on November 12, 1992
and changed its name to Chip Applications Technologies Limited ("CAT") on
October 21, 1997.
NovaTec Inc. ("NovaTec") was incorporated in Delaware on June 23, 1999 as a
special purpose company to facilitate a plan to acquire the outstanding capital
stock and business activities of CAT. Effective November 22, 1999, NovaTec
amended its certificate of incorporation to change the corporation's name to
Catuity Inc. (which we refer to in this registration statement as "Catuity, we,
us, our or the Company"). Following a one-for-ten reverse stock split of the
outstanding capital stock of CAT, Catuity acquired all of the outstanding shares
of CAT pursuant to a plan approved by the Supreme Court of New South Wales and
approved by more than 75% of the stockholders and optionholders present and
voting in person or by proxy at meetings held on November 3, 1999. This
transaction was part of our strategy to launch our product through the US market
and our US based relationship partners including IBM and Visa USA.
Catuity Inc. will continue CAT's existing business as described in this
registration statement. We develop and market software that allows retailers to
establish and administer customer incentive and loyalty programs. Our software
is targeted to a broad range of sellers of goods and services, including
retailers with store locations and retailers who sell their products over the
Internet. Our software is especially useful for retailers who sell both through
store locations and over the Internet.
Our software supports the establishment and administration of a variety of
customer incentive and loyalty programs (and a range of other programs such as
ticketing, memberships and access controls). With our software, the retailer may
reward its customers with valuable benefits, hoping to attract and retain
customers and to encourage increased purchases. Because of the flexibility of
our software, rewards may be easily established, targeted and changed. In
addition, a wide variety of rewards may be used by the retailer. Our software
directly connects the retailer and the retailer's customer so that the customer
recognizes the retailer as the provider of the reward. Our software operates
with all payment systems and allows the retailer to simply and easily offer its
goods and services as a reward, in preference to buying rewards from third
parties, such as air miles from an airline.
A major element of our marketing strategy has been to forge key
international strategic alliances with organizations that provide market access,
and organizations that incorporate our software into their products. We have
structured our role in these partnering arrangements as an independent third
party supplier of system software. To date, we have formed relationships
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with a number of international companies including IBM, VISA, Sun Microsystems,
Smart Dynamics, Data Pro and a range of hardware and operation system suppliers
such as Schlumberger, Verifone and Ingenico.
RESULTS OF OPERATIONS
The following table sets forth the composition of our revenues and selected
statements of operations data:
Years ended December 31
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues:
Product License & Services $ 638,382 $ 291,533 $ 761,039
Research, Development & 572,521 410,756 127,053
Grants
---------- ---------- ----------
Total Net Operating Revenues 1,210,903 702,289 888,092
Costs and Expenses:
Research, Development & 1,398,489 1,309,784 1,415,837
Testing
Selling & Relationship 956,911 914,622 708,921
Development
General and Administrative 1,255,096 693,979 998,061
Stock Compensation 2,475,175 (8,627) 218,646
Non Recurring Charges 1,294,636 -- 848,585
---------- ---------- ----------
Total Costs and Expenses 7,380,307 2,909,758 4,190,050
---------- ---------- ----------
Operating Loss (6,169,404) (2,207,469) (3,301,958)
Other Income (Expense) 40,680 176,679 214,882
---------- ---------- ----------
Net loss (6,210,084) (2,384,148) (3,516,840)
REVENUES
Our product is currently being launched in the US market and 1999 was the
first year US-based product license revenues were received. All prior year
revenues were based on product license and services related to trials or other
early stage developments in Australia and New Zealand.
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In 1999, operating revenues were $1,210,903. These revenues were derived
from $638,382 in product licenses and services, $572,521 in research and
development grants. In addition, interest received in the amount of $115,631 is
included in Other income (expenses). Comparatively, 1998 revenues totaled
$702,289, which was derived from $291,533 in product licenses and services and
$410,756 in research and development grants, with interest received in the
amount of $20,186 included in income (expense). In 1997, operating revenues were
$888,092, which was derived from $761,039 in product licenses and services and
$127,053 in research and development grants, with interest of $57,601 included
in income (expense).
Our current research and development grant, granted to us by the
Commonwealth of Australia, covers a project running from July 23, 1999 to
December 31, 2000. Under certain circumstances, including a change in control of
CAT or an attempt by us to assign the intellectual property created under the
grant, the Commonwealth has a right to require repayment of the grant amount. We
anticipate that we may seek additional research and development grants from the
Commonwealth and/or other sources in the future.
FISCAL YEAR ENDED 1999 COMPARED TO 1998
Operating revenues increased by $508,614, or 72%, from $702,289 for the
year ended December 31, 1998 to $1,210,903 for the year ended December 31, 1999.
The increase arose as a result of increased product licenses and services
revenue to $638,382 for the year ended December 31, 1999 from $291,533 for the
year ended December 31, 1998, an increase of 119%. Research and development
grant revenue increased to $572,521 for the year ended December 31, 1999 from
$410,756 for the year ended December 31, 1998, an increase of 39%.
Research and development and testing expenses increased $88,705, or 7%, to
$1,398,489 for the year ended December 31, 1999 from $1,309,784 for the year
ended December 31, 1998. This increase was due to increased research and
development expenses which was partially offset by the lower cost and use of
resources to support testing of our product.
Selling and relationship development expenses increased $42,289, or 5%,
from $914,622 for the year ended December 31, 1998 to $956,911 for the year
ended December 31, 1999. Selling and relationship development expenses were
primarily attributable to continued overseas strategic relationship development
and support. As a percentage of net revenue, these amounts represented 130% for
1998 as compared to 79% for 1999, which reflects increased sales rather than
increased selling and relationship development expenditure. Selling and
relationship development expenditure in the U.S. significantly increased as US
sales and marketing activities increased, while expenditure in other markets was
minimal.
General and administrative expenses increased $561,117, or 81%, from
$693,979 for the year ended December 31, 1998 to $1,255,096 for the year ended
December 31, 1999. The expense increase partially relates to the increased
resources required to implement the restructuring of CAT and Catuity and
increased compliance costs related to the increase in our issued capital stock
and in our number of stockholders to 4,380 at December 31, 1999, compared to 955
at December 31, 1998. During the year ended December 31, 1999, an additional
provision of $104,929 was made
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against assets related to testing of our product, compared to a provision of
$30,669 made for the year ended December 31, 1998. Depreciation and amortization
expense increased $23,383 from $78,426 for the year ended December 31, 1998 to
$101,809 for the year ended December 31, 1999.
Stock compensation is charged in relation to a limited recourse loan to a
Mr. Mac. Smith in the amount of $2,475,175 for the year ended December 31, 1999,
compared to ($8,627) for the year ended December 31, 1998. This difference
reflects changes in our share price to $11.37 (reflecting a per share price of
A$17.30 converted at US$/A$ rate of 0.6571) at December 31, 1999 from $1.50
(reflecting a per share price of A$2.45 converted at US$/A$ rate of 0.6126) at
December 31, 1998.
Non-recurring charges have been incurred in the amount of $1,294,636 and
relate to our efforts to relocate our domicile to the US under the restructure.
Included in this amount were stock transfer taxes of $244,785. The balance of
costs related primarily to legal, accounting and financial advisors and court
costs.
Other income (expense) decreased by $135,999, or 77%, to $40,680 for the
year ended December 31, 1999 from $176,679 for the year ended December 31, 1998.
This decrease was attributable to a reduction in borrowings during 1999 and an
increase in interest income on cash reserves of $95,445.
Principally as a result of the factors described above, we incurred a net
loss of $6,210,084 for the year ended December 31, 1999 as compared to a net
loss of $2,384,148 for the year ended December 31, 1998.
FISCAL YEAR ENDED 1998 COMPARED TO 1997
Operating revenue decreased by $185,803, or 21%, to $702,289 for the year
ended December 31, 1998 from $888,092 for the year ended December 31, 1997. Of
this decrease, $279,276 was due to termination of a trial license agreement with
a local Australian bank that assisted with our Western Sydney pilot tests. An
increase in Research and Development Grants of $283,703 from $127,053 for the
year ended December 31, 1997, to $410,756 for the year ended December 31, 1998
served to offset the effect of our reduced product license revenue. Other
product license and services revenue decreased as the Western Sydney pilot was
consolidated.
Research and development and testing expenses decreased $106,053, or 7%, to
$1,309,784 for the year ended December 31, 1998 from $1,415,837 for the year
ended December 31, 1997. This decrease was due to a consolidation and reduction
in product testing activities and reflected in a reduction in business inputs
including staffing and field testing operating expenses.
Selling and relationship development expenses increased $205,701, or 29%,
to $914,622 for the year ended December 31, 1998 from $708,921 for the year
ended December 31, 1997. This increase represents increased overseas market
development and research efforts. Significant expenditure occurred in Asia,
Europe and the U.S., but following the Asian financial crisis, all Asian
expenditure ceased.
General and administrative expenses decreased $304,082, or 30%, to $693,979
for the year ended December 31, 1998 from $998,061 for the year ended December
31, 1997. The decrease in general and administrative expenses was primarily
attributable to reorganizing the
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finance staff following a reduction in our product testing activities and
completion of the initial listing of CAT on the Australian Stock Exchange in
July 1997. Depreciation and amortization expense increased $22,702 or 41%, to
$78,426 for the year ended December 31, 1998 from $55,724 for the year ended
December 31, 1997. The increase was attributable to additional capital
expenditure on primarily research and development and was in accordance with our
management's expectations.
Stock compensation in relation to a limited recourse loan to a director was
credited in the amount of $8,627 for the year ended December 31, 1998 compared
to a cost of $218,646 for the year ended December 31, 1997. This difference
reflects changes in our share price to $1.50 (reflecting a per share price of
A$2.42 converted at US$/A$ rate of 0.6126) at December 31, 1998 from $2.44
(reflecting a per share price of A$3.30 converted at US$/A$ rate of 0.7430) at
December 31, 1997.
Other income (expense) decreased by $38,203, or 18%, to $176,679 for the
year ended December 31, 1998 from $214,882 for the year ended December 31, 1997.
This decrease was due to higher interest income on cash reserves.
Principally as a result of the factors described above, we incurred a net
loss of $2,384,148 for the year ended December 31, 1998 as compared to a net
loss of $3,516,840 for the year ended December 31, 1997.
LEASE OBLIGATIONS
We have obligations under non-cancellable operating leases in relation to
office equipment expiring June 28, 2000 and an office lease expiring December
14, 2003. Minimum future annual lease payments under these leases as of December
31, 1999 was $372,139.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations through debt and equity
investment from our founders, private share placements to institutional
investors, a public issuance of shares to non-US citizens and operating cash
flows.
In 1999, our net loss was $6,210,084. The net cash used in operating
activities was $3,524,804 after adjustments for stock-based compensation of
$2,504,224, an increase in accounts receivable of $576,072, amortization and
depreciation of $101,809 and minor adjustments to accrued expenses, provisions,
accounts payable and inventory. The net cash used in operating activities
includes non-recurring expenditure of $1,294,636 related to the costs of the
restructure and move to the US. We obtained an exchange rate benefit of
$100,097. Cash reserves increased from $148,789 to $5,269,757 during this
period. Net cash provided from the issuance of shares of common stock was
$9,521,278.
In 1998, our net loss was $2,384,148. The net cash used in operating
activities was $1,749,495 after adjustments for stock-based compensation credit
of $8,627, a decrease in accounts receivable of $193,015, amortization and
depreciation of $150,744 and minor adjustment to accrued expenses, provisions,
accounts payable and inventory. The net cash used in operating activities
includes no non-recurring expenditures. We incurred capital expenditures on
equipment of $175,951 and incurred an exchange rate loss of $23,411. Cash
reserves
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decreased from $593,196 to $148,789 during the period. Net cash provided from
the issuance of shares of common stock was $1,504,570.
In 1997, our net loss was $3,516,840. The net cash used in operating
activities was $3,604,850 after adjustments for stock-based compensation of
$218,646, an increase in accounts receivable of $214,500, amortization and
depreciation of $55,724 and minor adjustment to accrued expenses, provisions,
accounts payable and inventory. The net cash used in operating activities
includes non-recurring expenditures of $848,585. We incurred capital
expenditures on equipment of $156,540 and incurred an exchange rate loss of
$88,193. Cash reserves increased from $48,807 to 593,196 during the period. Net
cash provided from the issuance of shares of common stock was $4,291,287.
MARKET RISK
To date, we have not utilized any foreign currency hedging or other
derivative financial instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. Following
registration of our securities in the United States, investors may seek to
profit by exploiting the difference, if any, in the price of our stock on the
ASX, in Australia, and the Nasdaq National Market, in the United States. Such
arbitraging activities could cause our stock price in the market with the higher
value to decrease to the price set by the market with the lower value. We cannot
estimate the amount or extent of this type of market risk.
We currently invest our cash and cash equivalents in interest bearing term
deposits with Australian banks. We believe these investments are subject to
minimal credit and market risk.
FUTURE ADOPTION OF NEW ACCOUNTING STATEMENTS
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2" ("SOP
98-9"), which amends certain provisions of Statement of Position 97-2 "Software
Revenue Recognition with Respect to Certain Transactions" ("SOP 97-2") and
extends the deferral of the application of certain passages of SOP 97-2 provided
by Statement of Position 98-4 ("Deferral of Effective Date of SOP 97-2") until
the beginning of our fiscal year 2000. We do not expect the adoption of this
standard to have a material effect on our consolidated operating results or
financial position.
YEAR 2000 COMPLIANCE
As scheduled, we have completed our testing related to the year 2000
phenomenon including the impact, if any, of the recent change in the century on
our internally developed software as well as on computer technology and other
services provided to us by third-party vendors. Our testing included addressing
leap year calendar date calculation concerns. The possibility of significant
interruptions of normal operations has been reduced. As of March 15, 2000, we
have operated without significant or material year 2000-related problems. We
believe that all of our critical systems are year 2000 ready. However, there is
no guarantee that we have discovered all possible failure points.
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We are fairly dependent on third party vendors to provide us services and
equipment. A significant year 2000-related disruption of services or equipment
that third party vendors provide to us could harm our business. We are not aware
that any of our third party vendors have experienced significant year
2000-related problems.
To date, we have incurred a minimal amount of expenses on the year 2000
phenomenon because we developed our systems and technology in light of the
phenomenon. All of our expenses have related to the operating costs associated
with time spent by employees and consultants in the evaluation process for year
2000 readiness matters.
ITEM 3. PROPERTIES
Our corporate headquarters and principal executive offices in North America
are located in leased facilities in Detroit, Michigan consisting of
approximately 1000 square feet of office space. Our lease expires in March 1,
2001, but can be renewed for a further one year period. Our current facilities
in the United States will not be sufficient to meet our anticipated growth.
Our offices and development center in Australia are located in leased
facilities in Sydney, New South Wales, Australia consisting of approximately
2,060 square feet. Our lease agreement expires on December 14, 2003. We believe
that our Australia facilities are sufficient to meet our immediate foreseeable
operating needs in Australia.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of our capital stock as of December 31, 1999 by:
- each person who is known by us to beneficially own more than five
percent of our common stock;
- our Chief Executive Officer and each of our executive officers for the
year ended December 31, 1999;
- each of our directors; and
- all of our directors and executive officers as a group.
Number of Percentage of
Shares of Common
Common Stock Stock
Beneficially Beneficially
Name and Address of Beneficial Owner Owned(1) Owned(2)
- ------------------------------------ ------------ ------------
Lance D. O'Connor(3)
6-8 Kangaroo Point Road
Kangaroo Point, NSW 2224 794,564 11.34%
Australia
Alexander S. Dawson(4)
52 St Marks Road
Randwick, NSW 2031 201,484 2.99%
Australia
David L. Mac. Smith(5)
58 View Street
Woollahra, NSW 2025 276,667 4.05%
Australia
Duncan P.F. Mount(6)
9 Ithica Road
Elizabeth Bay, NSW 2011 200,000 2.97%
Australia
John M. Weihen(7)
17 Bayswater Road
Lindfield, NSW 2070 34,200 *
Australia
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Number of Percentage of
Shares of Common
Common Stock Stock
Beneficially Beneficially
Name and Address of Beneficial Owner Owned(1) Owned(2)
- ------------------------------------ ------------ ------------
Benjamin A. Garton(8)
65 Wilson Street
Newtown, NSW 2042 21,384 *
Australia
Jonathan R.E. Adams(9)
10 Willows Lane
Walingford, Pennsylvania 19806 1,500 *
Carl H. Fisher(10)
1607 Damon Way
Salt Lake City, Utah 84117 2,500 *
Justin C.A. Wescombe(11)
14/339 Edgecliff Road
Edgecliff NSW 2027 76,107 1.12%
Australia
All directors and executive
officers as a group 813,842 11.71%
(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 December 31, 1999 are deemed 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.
(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 13-d3 (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 December 31, 1999.
An asterisk indicates beneficial ownership of less than 1% of the common stock
outstanding.
(3) Includes 222,134 vested but unexercised options held by Mr. O'Connor.
Also includes 55,000 vested but unexercised options held by Jenolan Pty Limited
of which Mr. O'Connor is a shareholder and director.
(4) Includes 16,484 vested but unexercised options held by Mr. Dawson. Also
includes 25,000 shares held by Glomore Pty Limited, a family investment company
of which Mr. Dawson is a shareholder and director.
(5) Includes 100,000 vested but unexercised options.
(6) Includes 178,087 shares held by Boom Australia Pty Limited which is the
Trustee of the Mount Family Trust, the directors of which are Mr. Mount and his
wife.
(7) Includes 30,000 vested but unexercised options.
(8) Includes 16,111 vested but unexercised options.
(9) Includes 1,500 vested but unexercised options.
(10) Includes 2,500 vested but unexercised options.
(11) Includes 50,000 vested but unexercised options.
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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, and their ages as of January 1, 2000,
are as follows:
Name Age Position(s)
- ---- --- -----------
David L. Mac. Smith 49 Director and Chairman
Michael V. Howe 51 Director, President and Chief Executive Officer
Alexander S. Dawson 56 Director(1)
Duncan P.F. Mount 52 Director(1)
John M. Weihen 53 Vice President -- Finance and Administration, Treasurer and Secretary
Benjamin A. Garton 33 Vice President -- Product Development
Jonathan R.E. Adams 37 Vice President -- Implementation and Technical Support
Carl H. Fisher 45 Vice President -- Business Development
Justin C.A. Wescombe 37 Vice President -- Sales and Marketing
(1) Member, Audit Committee
David L. Mac. Smith is our founder and currently our Chairman of the Board.
He has been the Chief Executive Officer and Managing Director of CAT, our wholly
owned subsidiary, since November 1992. In December 1999, he became our President
and CEO pending the appointment of a new President and CEO. In January 2000, he
resigned as our President and CEO and became our Chairman. He was the founder
and, from 1982 to 1991, CEO of Technology Investment Management Limited, a funds
management company with specific focus on technology related businesses. He has
a Bachelor of Law degree from the Australian National University.
Michael V. Howe has served as our President and Chief Executive Officer
since January 2000. From 1995 through 1999, he was the Director of Marketing
Communications for United Airlines, responsible for the United Mileage Plus
loyalty rewards program and the United partnership program. Prior to joining
United Airlines, he served as the Chief Executive Officer of Young and Rubicam
Advertising in Detroit, Michigan from 1990 to 1995. He has a Bachelor of
Business Administration from John Carroll University and a Master of Business
Administration from Michigan State University.
Alexander S. Dawson is currently one of our non-employee Directors. He
served as our Chairman of CAT, our wholly owned subsidiary, from November 1992
to December 1999. From 1987 to 1990, he was Chief Executive Officer of Arnotts
Ltd., Australia's largest biscuit and snack food manufacturing company. From
1988 to 1990, he was a member of the Business
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Council of Australia. He served as Chairman of United Distillers (Australasia)
Limited from 1994 to 1996. He has a Bachelor of Commerce degree from the
University of New South Wales and a Master of Business Administration from
Columbia University.
Duncan P.F. Mount is currently one of our non-employee Directors. He served
as a non-employee Director of CAT, our wholly owned subsidiary, from March 1999
to December 1999. From 1990 to 1998, 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 1980 to 1988 and as managing
director of CEF Investment Management Limited from 1988 to 1996, entities which
are fund management and investment companies. From 1996 to 1999 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.
John Weihen is currently our Vice President--Finance and Administration and
Secretary. He served in the same role in CAT, our wholly owned subsidiary, from
November 1998 to December 1999. From October 1995 to November 1998, he served as
General Manager Operations and Business Development for CAT. From 1993 to 1995,
he was Senior General Manager Northeast Asia for the Australian Shipping Line,
and from 1991 to 1993, he was Chief Operating Officer for Intag Limited, a
proximity card technology company based in Sydney, Australia. From 1988 to 1991,
he was an investment manager for Technology Investment Management Limited, a
venture capital funds management group. Mr. Weihen holds a Diploma in
Accountancy.
Benjamin A. Garton is currently Vice President--Product Management &
Development. He served in the same role with CAT, our wholly owned subsidiary,
from March 1999 to December 1999. From November 1996 to February 1999 he was
Manager Development for CAT and from September 1994 to October 1996 he was a
Senior Systems Analyst for CAT. From October 1992 to August 1994, he was
Development Manager at Citibank Australia with responsibilities for electronic
funds transfer switching systems.
Jonathan R.E. Adams is our Vice President--North American Implementation
and Technical Services. From 1996 to 1998 he was the Director, Financial
Markets, for Schlumberger Smart Cards and Systems based in New Jersey. From 1994
to 1996 he worked with MBNA America Corporation in strategic planning, involved
with card system implementation and electronic commerce. He holds a Bachelor of
Arts degree from Washington College and Master of Business Administration from
Georgetown University.
Carl H. Fisher is our Vice President--Business Development. From 1997
to 1998, he was a director and Vice President, Finance of ICOne, a smart card
loyalty program company based in Salt Lake City, Utah. From 1995 to 1997, he was
Chief Financial Officer and Chief Information Officer for Morinda Inc., a $100
million per year revenue wholesale sales company, From 1987 to 1995, he was
founder and President of a financial consulting firm, Fisher Associates,
assisting clients in areas of financial and computerized accounting systems.
Prior to establishing his own business, for eight years he worked with Arthur
Andersen and Price Waterhouse, specializing in areas of financial consulting
with high growth technology companies in the Silicon Valley. He holds a Bachelor
of Economics degree from Westminster College and a Bachelor of Accounting degree
from the University of Utah.
Justin C.A. Wescombe is our Vice President-Sales and Marketing, but will be
leaving our employ in April, 2000. He served in the same role with CAT, our
wholly owned subsidiary from 1997 to 1999. From 1994 to 1997, he was Vice
President Sales and Marketing for International Financial Systems of Ireland, a
provider of financial services software.
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Each of our directors holds office until the next annual meeting of
stockholders or until his successor has been duly elected or qualified or until
his earlier death, resignation or removal. Executive Officers are appointed by,
and serve at the discretion of, our board of directors.
Our board of directors has an audit committee. The audit committee, among
other things, makes recommendations to the board of directors concerning the
engagement of independent public accountants, monitors and reviews the quality
and activities of our internal audit functions, and monitors the results of our
operating and internal controls as reported by management and the independent
public accountants. We expect to add a third member to the audit committee in
the future in order to meet NASDAQ audit committee rules.
Our board of directors does not have a compensation committee. Compensation
for our Chief Executive Officer is determined by our board as a whole.
Compensation for all of our other senior executives is recommended by our CEO to
our board, which reviews all senior executive employment agreements. In
recommending and determining compensation, our CEO and our board consider
independent studies of comparable remuneration packages. Incentives in the form
of stock options are generally offered.
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ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the last three fiscal years, all
compensation of our executive officers who were serving as executive officers at
the end of 1999 and in addition the compensation of our President and CEO, who
commenced employment on January 4, 2000.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------------------------------
Other Annual
Name and Compensation
Principal Position Year Salary($) Bonus($) ($)(1)
- ------------------ ---- --------- -------- -------------
Michael V. Howe
President and CEO 2000 240,000 60,000
David L. Mac. Smith
Director and Chairman 1999 172,640 0 4,425
1998 163,275 0 25,041(2)
1997 185,750 0 4,214
John M. Weihen
Vice President -
Finance and
Administration,
Secretary 1999 129,100 0 4,425
1998 125,800 0 4,311
1997 148,600 0 4,214
Benjamin A. Garton
Vice President - Product
Development 1999 88,936 0 11,969(3)
1998 64,783 0 11,611(3)
1997 85,148 0 4,214
Jonathan R.E. Adams
Vice President --
Implementation and
Technical Services 1999 125,000 0 0
Carl H. Fisher
Vice President --
Business Development 1999 150,000 0 0
Justin C.A. Wescombe
Vice President - Sales and
Marketing 1999 92,400 0 36,700(4)
1998 90,039 0 35,761(4)
1997 107,236 0 41,364(4)
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(1) Includes Australian Superannuation Guarantee Levy, a compulsory
payment that funds retirement benefits.
(2) Also includes payout of unused vacation.
(3) Also includes motor vehicle lease payments.
(4) Includes shares of common stock issued in accordance with Mr.
Wescombe's employment agreement valued as follows: 1999 - $32,275;
1998 - $31,450; 1997 - $37,150.
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to each of our
executive officers for the year ended December 31, 1999.
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Individual Grants Potential Realizable
----------------------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of
Securities Total Options Stock Price Appreciation
Underlying Granted to Exercise for Option Term(4)
Options Employees in Price Per Expiration ------------------------
Name Granted(1) Fiscal Year(2) Share(3) Date 5% 10%
- ---- ----------- ------------- --------- ------------ -------- --------
David L. Mac. Smith 50,000 14.20% $ 6.50 Jun 24, 2000 $ 16,250 $ 32,500
50,000 14.20 $ 7.48 Jun 24, 2001 $ 38,335 $ 78,540
50,000 14.20 $ 7.80 Jun 24, 2003 $ 84,047 $180,999
50,000 14.20 $10.40 Jun 24, 2004 $143,666 $317,465
------- -------
200,000 56.80%
John M. Weihen 5,000 1.42% $ 6.18 Sep 30, 2001 $ 3,167 $ 6,489
5,000 1.42 $ 6.18 Jun 30, 2002 $ 3,167 $ 6,489
5,000 1.42 $ 1.95 Mar 31, 2001 $ 1,526 $ 3,227
------- -------
15,000 4.26%
Benjamin A. Garton 15,000 4.26% $ 6.18 Jun 30, 2001 $ 9,502 $ 19,467
7,500 2.13 $ 6.18 Jun 30, 2002 $ 4,751 $ 9,733
7,500 2.13 $ 6.18 Jun 30, 2003 $ 4,751 $ 9,733
20,000 5.68 $ 6.18 Jun 30, 2004 $ 12,669 $ 25,956
------- -------
50,000 14.20%
Jonathan R.E. Adams 1,500 0.43% $ 6.18 Jun 30, 2001 $ 706 $ 1,436
2,500 0.71 $ 6.18 Jun 30, 2001 $ 772 $ 1,544
3,500 0.99 $ 6.18 Jun 30, 2002 $ 1,648 $ 3,350
3,500 0.99 $ 6.18 Jun 30, 2002 $ 2,215 $ 4,539
------- ------
11,000 3.12%
Carl H. Fisher 1,250 0.36% $ 6.18 Jun 30, 2001 $ 759 $ 1,553
1,250 0.36 $ 6.18 Jun 30, 2001 $ 657 $ 1,341
1,250 0.36 $ 6.18 Jun 30, 2001 $ 556 $ 1,128
1,250 0.36 $ 6.18 Jun 30, 2001 $ 455 $ 916
------- ------
5,000 1.44%
Justin C. A. Wescombe -- -- -- -- -- --
- ----------
(1) Each such option will become fully vested as follows:
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Individual Grants
-------------------------------------------------------------
Number of
Securities
Underlying Exercise
Options Vesting Price Per Expiration
Name Granted(1) Date Share $ Date
- ---- ---------- ----------- --------- ------------
David L. Mac. Smith 50,000 Jul 1, 1999 6.50 Jun 24, 2000
50,000 Jul 1, 2000 7.48 Jun 24, 2001
50,000 Jul 1, 2001 7.80 Jun 24, 2003
50,000 Jul 1, 1999 10.40 Jun 24, 2004
John M. Weihen 5,000 Sep 30, 1999 6.18 Sep 30, 2001
5,000 Jun 30, 2000 6.18 Jun 30, 2002
5,000 Mar 10, 1999 1.95 Mar 31, 2001
Benjamin A. Garton 15,000 Jul 1, 1999 6.18 Jun 30, 2001
7,500 Jul 1, 2000 6.18 Jun 30, 2002
7,500 Jun 30, 2001 6.18 Jun 30, 2003
20,000 Jun 30, 2002 6.18 Jun 30, 2004
Jonathan R.E. Adams 1,500 Dec 31, 1999 6.18 Jun 30, 2001
2,500 Jun 30, 2000 6.18 Jun 30, 2001
3,500 Dec 31, 2000 6.18 Jun 30, 2002
3,500 Jun 30, 2001 6.18 Jun 30, 2002
Carl H. Fisher 1,250 Jul 31, 1999 6.18 Jun 30, 2001
1,250 Oct 31, 1999 6.18 Jun 30, 2001
1,250 Jan 31, 2000 6.18 Jun 30, 2001
1,250 Apr 30, 2000 6.18 Jun 30, 2001
(2) Based on a total of 352,254 option shares granted to our employees
during fiscal year 1999.
(3) The exercise price per share of each option was equal to or greater
than the fair market value of the common stock on the date of grant as
determined by the board of directors. The exercise price may be paid in cash, or
in shares of our common stock valued at the market value of such stock on the
exercise date.
(4) The potential realizable value is calculated based on the term of the
option at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and does
not represent our predictions of our future stock price performance. The
potential realizable value at 5% and 10% appreciation is calculated by assuming
that the exercise price on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated price.
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FISCAL YEAR END-OPTION VALUES
The following table sets forth, for each of our executive officers, the
number and value of securities underlying options that were held by such
executive officers as of December 31, 1999. In 1999, 14,172 options were
exercised by such executive officers.
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At December 31, 1999(1) at December 31, 1999(2)
----------------------- -------------------------
Name Vested Unvested Vested Unvested
- ---- ------- -------- -------- --------
David L. Mac. Smith 100,000 100,000 $280,000 $361,000
John M. Weihen 30,000 5,000 $257,850 $ 25,350
Benjamin A. Garton 16,111 35,000 $121,152 $139,425
Jonathan R.E. Adams 1,500 9,500 $ 7,605 $ 48,165
Carl H. Fisher 2,500 2,500 $ 12,675 $ 12,675
Justin C. A. Wescombe 50,000 25,000(3) $401,500 $120,250
(1) The heading "Vested" refers to shares that were exercisable as of
December 31, 1999; the heading "Unvested" refers to shares that were
unexercisable as of December 31, 1999.
(2) Based on a fair market value of our common stock as of December 31,
1999 of $11.25 per share.
(3) Will not vest due to termination of employment as of April 30, 2000.
POST FISCAL YEAR END-OPTION GRANTS
Since the end of our last fiscal year, we retained a new President and
Chief Executive Officer, Mr. Michael Howe. Associated with his employment, we
are committed to issue options to Mr. Howe to purchase 315,000 shares of common
stock. Of the shares underlying those options, 75,000 shares vested with the
grant of the option and the balance vests quarterly over a five year period
ending December 31, 2004. The expiration date of the options generally is
December 31, 2008, or six months after cessation of employment, if earlier. The
option exercise price will be the lowest of the volume-weighted average trading
price of our shares on the Australian Stock Exchange for 30 days prior to
listing on the Nasdaq National Market (converted to US$ at 0.65 per A$); the
volume-weighted average trading price of our shares on the Nasdaq National
Market for the 30 days immediately following listing on such Nasdaq Market; and
the volume-weighted average trading price of Catuity shares on the Australian
Stock Exchange for the month of January, 2000 (converted to US$ at 0.65 per A$).
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives an annual director's fee of
$16,138. Our Chairman and our President and CEO, who are executives and
directors, receive only the executive compensation referred to above.
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EMPLOYMENT AGREEMENTS
MICHAEL V. HOWE. We entered into a five year employment agreement with our
President and Chief Executive Officer, Michael Howe, effective January, 2000.
Under the agreement, Mr. Howe is entitled to receive a base salary of $240,000,
which is subject to annual review for possible increase by the Board in
conjunction with performance. Mr. Howe is also entitled to receive a performance
based bonus which will be determined by the Board each year as part of the
budget review. For the first year, the bonus is fixed at $60,000 to be paid in
four equal installments on March 31; June 30; September 30 and December 31,
2000. Mr. Howe received options to purchase up to 315,000 shares of common
stock, which will vest 75,000 on commencement of employment and 12,000 at the
end of each calendar quarter through the quarter ending December 31, 2004
contingent upon his continued employment at the quarter end. The option exercise
price will be the lowest of the weighted average trading price of our shares on
the Australian Stock Exchange for 30 days prior to listing on the Nasdaq
National Market (converted to US$ at 0.65 per A$); the weighted average trading
price of our shares on NASDAQ for the 30 days immediately following listing on
NASDAQ; and the weighted average trading price of Catuity shares on the
Australian Stock Exchange for the month of January, 2000 (converted to US$ at
0.65 per A$), but in no event less than 85% of the fair market value of our
shares on date of grant. All options expire on the earlier of December 31, 2008
or the date six months after cessation of employment.
If the agreement is terminated by us without cause, Mr. Howe is entitled
to one year's written notice. We have the right to pay one year's base salary
and accelerate 50% of the stock options scheduled to vest for that year to
effect immediate termination. Mr. Howe may voluntarily terminate the agreement
at any time provided we are given 6 months' advance written notice.
DAVID L. MAC. SMITH. We entered into a three year employment agreement
with our Chairman, David L. Mac. Smith, effective June 1, 1999. Under the
agreement, Mr. Mac. Smith is entitled to receive a base salary of $174,282,
subject to annual review for possible increase based on consideration of cost of
living, level of responsibility, competitive remuneration, performance and
increases awarded to our other employees. Mr. Mac. Smith is also entitled to
payment by us of certain required Australian withholding amounts. During the
term of his employment agreement and for various periods thereafter, Mr. Mac.
Smith will have the right to purchase up to 200,000 shares of common stock as
detailed above.
The agreement may be terminated by Mr. Mac. Smith by giving six months'
notice in writing. If a person or party gives notice of its intention to
acquire, or acquires, more than 30% of the issued capital of the Company or any
parent of the Company, all unvested shares and options will vest and Mr. Mac.
Smith may terminate the agreement at any time within a period of six months
following such event by giving three months' notice. We may terminate the
agreement for cause or if Mr. Mac. Smith becomes unable to perform his duties or
agreement has not been reached prior to June 1, 2001 on continued employment
after the term. On termination of the agreement by either party for any reason,
we shall pay Mr. Mac. Smith the then prevailing basic salary package for 12
months from the effective date of termination, payable monthly in arrears in
equal installments secured by a bank guarantee or such other installments and
security as may be mutually agreed. If the agreement is terminated by us, Mr.
Mac. Smith must resign as a Director.
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Under Mr. Mac. Smith's previous employment contract, entered into on
May 1, 1995, he was entitled to the equivalent of 10% of any shares issued
until the time we became listed on the ASX. A loan from us was made
available to acquire these shares. At December 31,1999, this non-interest
bearing loan to Mr. Mac. Smith amounted to $593,043. Our recourse for
repayment of the loan is limited to dividends and share sale proceeds. Mr.
Mac. Smith may transfer shares subject to the loan to members of his family
or entities controlled by one or more members of his family without any
obligation to repay the loan. However, the sale or any transfer or any
disposal of the shares to any other person will trigger repayment of the loan
applicable to such shares.
JOHN WEIHEN. We entered into an employment agreement with the Vice
President - Finance and Administration, Treasurer and Secretary, Mr. J. Weihen,
effective November 1, 1996. The employment agreement was extended through June
30, 2001. Under the agreement, Mr. Weihen is entitled to receive annual
remuneration of $130,000, subject to annual CPI increases. During the term of
his employment and for various periods thereafter, Mr. Weihen will have the
right to purchase 35,000 shares of common stock as detailed above at $6.18 and
$1.95 per share. If the agreement is terminated by us without cause, Mr. Weihen
is entitled to a minimum of 9 months written notice. Mr. Weihen may terminate
the agreement for significant and serious personal or family reasons upon 4
months written notice.
BENJAMIN GARTON. We entered into a two year employment agreement with our
Vice President - Product Development, Mr. B. Garton, effective April 1, 1999.
Under the agreement, Mr. Garton is entitled to receive annual remuneration of
$107,250 subject to annual CPI increases. Mr. Garton will have the right to
purchase 51,111 shares of common stock as detailed above. If the agreement is
terminated by us without cause, Mr. Garton is entitled to a minimum of 9 months
written notice. Mr. Garton may terminate the agreement for significant and
serious personal or family reasons upon 6 months written notice.
JONATHAN R.E. ADAMS. We entered into a one year employment agreement
year with our Vice President - Implementation and Technical Services, Mr. J.
Adams, effective August 9, 1999. Under the agreement, Mr. Adams is entitled to
receive annual remuneration of $125,000. During the term of his employment and
for various periods thereafter, Mr. Adams will have the right to purchase 11,000
shares of common stock as detailed above at $6.18 per share. If the agreement is
terminated by us without cause, Mr. Adams is entitled to a minimum of 2 months
written notice. Mr. Adams may voluntarily terminate the agreement at any time
provided we are given 2 months written notice.
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CARL H. FISHER. We entered into a one year employment agreement with
our Vice President - Business Development, Mr. C. Fisher, effective May 1, 1999.
Under the agreement, Mr. Fisher is entitled to receive annual remuneration of
$150,000. During the term of his employment and for various periods thereafter,
Mr. Fisher will have the right to purchase 5,000 shares of common stock as
detailed above at $6.18 per share. If the agreement is terminated by us without
cause, Mr. Fisher is entitled to a minimum of 2 months written notice. Mr.
Fisher may voluntarily terminate the agreement at any time provided we are given
2 months written notice.
JUSTIN WESCOMBE. We entered into a three year employment agreement with
our Vice President - Sales and Marketing, Mr. J. Wescombe, effective August 1,
1998. Under the agreement, Mr. Wescombe is entitled to receive annual
remuneration of $130,000, subject to annual CPI increases. That remuneration
includes shares in us valued at $2,690 per month issued at the end of each
quarter at the last sale price on the ASX at the end of each month. During the
term of his employment and for various periods thereafter, Mr. Wescombe will
have the right to purchase 75,000 shares of common stock as detailed above.
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We and Mr. Wescombe have mutually agreed to terminate his employment
agreement, effective April 30, 2000 as a result of Mr. Wescombe being unable to
relocate to the US due to family reasons. As a result of the termination, Mr.
Wescombe's 25,000 unvested shares will not vest.
Catuity, Inc. Stock Option Plan
In March 2000, the Board adopted, and the stockholders approved, our
Catuity Inc. Stock Option Plan. The plan provides for the grant of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and of nonstatutory stock options to employees,
non-employee directors and consultants. The plan is administered and
interpreted by the Board or a committee designated by the Board. It will
terminate in 2010.
As of March 10, 2000, the plan authorized the issuance of options to
purchase up to 750,000 shares of common stock, and no options were outstanding.
The plan administrator has discretion, within the limits of the plan, to
select optionees and to determine the number of shares to be subject to each
option and the exercise price and vesting schedule of each option. The exercise
price of incentive stock options granted under the plan must at least be equal
to the fair market value per share of the common stock on the date of grant and
the exercise price of nonstatutory stock options granted under the plan must be
greater than or equal to 85% of the fair market value per share of the common
stock on the date of grant. With respect to any participant who is a 10%
stockholder, the per share exercise price of any stock option granted under the
plan must equal at least 110% of the fair market value of the common stock on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the plan may not exceed ten years.
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 6 "EXECUTIVE COMPENSATION" sets forth the details of employment
agreements with our executive officers, Messrs. Howe, Mac. Smith, Weihen,
Wescombe, Garton, Adams and Fisher. ITEM 6 also sets forth details concerning
the grant of options to those executive officers.
In September, 1999 we entered into a three year Service Contract with Mr.
Lance O'Connor, who was a director of CAT at that time, to provide assistance
and management of our advisors in the United States. The services related to
establishment of the US office, general management of our affairs in the United
States, development of administration and financial reporting systems,
preparation of budgets and accounting reporting procedures and capital markets.
On March 1, 2000, the arrangement with Mr. O'Connor was terminated as a result
of our decision to establish our principal U.S. office in Detroit, rather than
San Francisco (where Mr. O'Connor is located) and completion of certain
projects. Under the contract, Mr. O'Connor received an annual service fee
(including Australian fringe benefits tax) of $20,000 plus an annual
accommodation allowance of $40,000 and an accountable expense allowance of
$40,000.
In January 1999 we entered into a share placement agreement with BNP
Equities (Australia) Limited, (BNP) to place 300,000 shares at $2.71 per share
to institutional clients of BNP, raising $813,333. One of the sub-underwriters
in the placement was Boom Australia Pty Limited, which subscribed for 25,000
shares or 8.33% of the shares placed. Boom Australia Limited is an investment
company of which Mr. Mount is a Director. At that time Mr. Mount was not a
Director of Catuity or CAT.
On March 19, 1999, Mr. Mount became a Director of CAT and in December 1999
became a Director of Catuity. On March, 26 1999, we entered into an agreement
with BNP to underwrite the exercise of up to 941,088 options due to expire June
30, 1999 and exercisable at $4.84 each and the placement of 150,000 shares at
$4.84 per share to clients of BNP,
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$726,188. Boom Australia Limited subscribed for 100,000 shares, or 66.67% of
the shares placed and received a sub-underwriting fee for sub-underwriting the
exercise of the options.
In September 1999, CAT requested approval from The Supreme Court of New
South Wales, Australia, to hold shareholder and optionholder meetings to
consider, and if thought fit approve arrangements to restructure CAT's share
capital. Under the restructure shareholders and optionholders in CAT would
exchange their securities and entitlements (following a reverse stock split of 1
for 10) for an equal number of securities and entitlements in a newly formed
Delaware company (NovaTec Inc, which subsequently changed its name to Catuity
Inc.). The restructure was approved at Court-ordered meetings of shareholders
and optionholders and implemented in November, 1999. Implementation of the
restructure has resulted in Catuity Inc. acquiring all CAT shares for an
equivalent number of shares in Catuity. All employees holding options in CAT
received an equivalent number of options, with the same terms and conditions, in
Catuity. Non-employee options were restructured differently, but with the
resulting effect that they were placed in the same position as all other
optionholders. Mr. O'Connor and Mr. Dawson, two directors of CAT, were part of
the non-employee optionholder arrangements under share option and put and call
share deeds.
In August 1996, Heath Fielding Australia Pty Limited, Jenolan Pty Limited
and Krislan Pty Limited entered into a loan agreement with CAT which loan was
secured by the assets of CAT. At the time of the agreement, Len Hanning was a
director of CAT and a director of Heath Fielding Australia Pty Limited. Mr.
Hanning resigned as a director of CAT in March 1998. At the time, Mr. O'Connor
was a director of CAT and a director and shareholder in both Jenolan Pty Limited
and Krislan Pty Limited. In March 1997, Jenolan and Krislan agreed to release
the security and convert their outstanding loan balance of $1,004,556 into
450,675 shares of CAT at $2.23 per share. Heath became the sole security holder
for their loan of $1,691,618. In May 1999, CAT entered into an agreement with
Heath Group Australasia Pty Limited (HGA) (formerly Heath Fielding Australia Pty
Limited) and Industrial Superannuation Administrative Services Limited (ISAS)
whereby HGA and ISAS agreed to grant CAT an option to buy-back 332,588 shares at
$5.50 per share any time up to July 18, 2000. The buy-back option was contingent
upon CAT undertaking to immediately repay $839,981 of the outstanding loan
amount of $1,593,549 and the balance pro rata to the percentage of shares
purchased under the option. In addition HGA and ISAS undertook to exercise all
their June 30, 1999 options and to sell the 263,233 shares resulting from the
option exercise together with the balance of 220,921 shares they held by June
30, 1999. All these transactions were completed. The buy back option now applies
to Catuity shares. CAT can exercise the option to buy-back shares in a maximum
of three payments subject to making pro rata repayments of the outstanding
balance of the loan. At the end of the option exercise period any balance of the
loan remaining outstanding will be subject to the terms and conditions of the
original loan agreement which provides for repayment when in the opinion of the
directors of CAT, CAT has sufficient surplus fund available to permit repayment
of the loan balance. The
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outstanding loan balance after July 18, 2000 may be called by HGA in the event
of default by CAT in performance of the loan terms.
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ITEM 8. LEGAL PROCEEDINGS
There is no action, suit, proceeding or investigation pending or, to our
knowledge, threatened against us, including any investigation of any
governmental authority or body.
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ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
CAT was listed on the Australian Stock Exchange (ASX) under the trading
symbol "CAT" from July 11, 1997 to November 22, 1999. On November 23, 1999, upon
our acquisition of CAT, we replaced CAT as the listed entity on the ASX under
the same trading symbol. We continue to be traded on the ASX. We are applying
for listing on the Nasdaq National Market in conjunction with the filing of this
registration statement. There previously has been no United States market for
our common stock.
Our high and low sales prices on the ASX for each quarter within the last
two fiscal years are shown below, both in Australian dollars and in United
States dollars.
As of December 31, 1999, 821,623 shares of our common stock were subject to
outstanding options, warrants or other securities convertible into our common
stock.
High Low High Low
Period (Australian $) (Australian $) (United States $) (United States $)
- ------ -------------- -------------- ----------------- -----------------
Fiscal Year 1998:
First Quarter 1998 $4.50 $3.00 $2.98 $1.99
Second Quarter 1998 $4.40 $2.60 $2.73 $1.62
Third Quarter 1998 $3.50 $2.10 $2.08 $1.25
Fourth Quarter 1998 $2.60 $2.05 $1.59 $1.26
Fiscal Year 1999:
First Quarter 1999 $9.90 $2.40 $6.28 $1.52
Second Quarter 1999 $15.10 $7.60 $9.98 $5.03
Third Quarter 1999 $12.50 $8.00 $8.16 $5.22
Fourth Quarter 1999 $24.40 $11.70 $16.03 $7.69
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Fiscal Year 2000
First Quarter (through
March 10, 2000) $20.00 $14.55 $13.00 $9.46
All currency conversions are based on the prevailing A$ to US$ rate
applicable on the last day of each respective quarter.
As of December 31, 1999, there were approximately 4,380 stockholders of
record of our common stock as reported to us by Computershare Registry Services
Pty Limited, our transfer agent.
To date, we have not paid any dividends on our common stock and do not
expect to do so in the foreseeable future. We expect to retain all earnings to
finance the growth and development of our business.
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ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The sales described in this Item occurred outside of the United States and
were not required to be registered under United States securities laws.
CURRENT FISCAL YEAR TO DATE
In January, 2000, we issued 500 shares at $6.18 per share as a result of
the exercise of stock options. In February, 2000, we issued 1,526 shares at
$8.87 per share in connection with an employment agreement; 500 shares at $6.18
and 2,000 shares at $1.95 as a result of the exercise of stock options; and
6,667 shares of common stock at $4.88 per share as a result of the exercise of
stock options.
On March 2, 2000 Zip/Gun D.O.A. Pty. Limited was issued 610 shares at a
price of $10.66 per share as payment for services rendered under a services
contract which concluded in December, 1999.
FISCAL YEAR ENDED DECEMBER 31, 1999
In December, we issued 340,000 shares at $11.17 per share to institutional
clients of BNP Equities (Australia) Limited, raising $3,798,038 to provide
working capital.
In November, we concluded the Court-approved restructure, which resulted
in the issue of 125 shares by CAT as free bonus shares for the purpose of
rounding following the one-for-ten reverse stock split. This bonus issue was
immediately followed by the issue of 6,389,269 shares in us to CAT's
shareholders under the restructure in exchange for 100% of the shares
outstanding of CAT.
Prior to the restructure, the formation of Catuity and CAT becoming our
wholly owned subsidiary, CAT sold the following unregistered securities in the
fiscal year ended December 31, 1999:
- - In January, CAT issued 300,000 shares at $2.76 per share to clients of
BNP Equities (Australia) Limited, raising $827,946 to be used for
working capital.
- - In March, CAT entered into an underwriting agreement with BNP Equities
(Australia) Limited to underwrite the exercise of 941,088 options. Between
April 1 and June 30, a total of 921,458 options were exercised by option
holders resulting in the issue of 921,458 shares at $4.93 per share. In July,
19,630 shares were issued at a per share price of $4.93 to the underwriters
representing the shortfall in options exercised. As part of the underwriting
agreement there was a placement of 150,000 shares at $4.93 per share to the
sub-underwriters, raising $739,238.
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- - During the year, the following shares of common stock were issued as a result
of the exercise of employee options:
Month Number of Shares Exercise Price
------- ---------------- --------------
January 41,500 $1.97
February 1,500 $1.97
March 6,559 $4.93
May 2,500 $1.97
August 1,500 $1.97
September 4,000 $1.97
October 7,000 $1.97
November 6,500 $1.97
- - In August, CAT issued 6,657 shares to Justin C.A. Wescombe in accordance with
his employment agreement. These shares were issued as follows: 4,082 shares
at $2.04 per share; 1,450 shares at $5.65 per share and 1,125 shares at $7.29
per share.
FISCAL YEAR ENDED DECEMBER 31, 1998
In 1998, CAT issued to Cabcharge Australia Pty Limited shares as
consideration due under an agreement for the purchase of the business and assets
of Transcard Australia Pty Ltd. The consideration was payable in 4 tranches of
shares at a value of $153,150 determined by the average sale price of shares in
the preceding quarter. The first tranche was paid in 1997 (see below). In
January, CAT issued 49,420 shares at $3.12 per share, in April CAT issued 68,177
shares at $2.67 per share and in July CAT issued 69,897 shares at $2.21 per
share to Cabcharge Australia Pty Limited, all under the terms of the purchase
agreement.
In February, CAT issued 3,364 shares at a per share price of $2.28 to
Justin C.A. Wescombe and 11,858 shares at a per share price of $1.84 to M.
Spooner, in accordance with their employment service contracts.
In May, CAT issued 3,363 shares at a per share price of $2.28 to Justin
C.A. Wescombe and 14,294 shares at a per share price of $1.84 to M. Spooner, in
accordance with their employment service contracts.
In August, CAT issued 4,140 shares at a per share price of $1.85 to Justin
C.A. Wescombe and 14,502 shares at a per share price of $2.11 to M. Spooner, in
accordance with their employment service contracts.
In November, CAT issued 5,388 shares at a per share price of $1.42 to
Justin C.A. Wescombe and 19,459 shares at a per share price of $1.57 to M.
Spooner, in accordance with their employment service contracts.
In May, 1,500 shares were issued at $1.84 per share to employees following
the exercise of options.
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59
In May, CAT issued 750,000 shares at $1.84 per share to clients of
Prudential-Bache Securities (Australia) Limited, raising $1,378,350 to be used
for working capital.
FISCAL YEAR ENDED DECEMBER 31, 1997
In March, CAT issued 1,333,333 shares at $1.95 per share to clients of
Prudential-Bache Securities (Australia) Limited, raising $2,601,200 to be used
for working capital.
In May, CAT issued 450,675 shares at $1.95 per share to Jenolan Pty Ltd on
conversion of $879,222 in convertible notes. Also in May, 136,282 shares were
issued at $1.95 per share to Mr. Mac. Smith in accordance with his employment
service agreement. In that purchase, Mr. Mac. Smith executed a non-recourse loan
in the amount of $303,773 repayable from dividends and the sales proceeds of the
shares.
In May, CAT conducted a public offering of shares at $1.95 per share,
underwritten by Prudential-Bache Securities (Australia) Limited. A total of
399,800 shares were issued, raising $779,970 for working capital.
In September, CAT issued 142,858 shares at $4.55 per share which raised
$650,300 to fund initial overseas marketing expenses. Also in September, 6,867
shares were issued to employees at $1.95 per share following the exercise of
employee options.
In October, CAT issued 35,714 shares at $4.55 per share to Cabcharge
Australia Pty Limited, being the first tranche of consideration due under an
agreement for the purchase of the business and assets of Transcard Australia Pty
Ltd. The consideration was payable in 4 tranches of shares to be valued at
$162,575 determined by the average sale price of shares in the preceding quarter
(see above for additional payments).
In October, CAT issued 25,632 shares following the exercise of 5,006
options at $3.12 per share by Alexander S. Dawson; 16,666 options at $3.12 per
share by Heath Fielding Australia Pty Ltd and 3,960 options at $1.95 per share
by employees.
In November, CAT issued 1,669 shares at $4.10 per share to Justin C.A.
Wescombe in accordance with his employment service contract.
Also in November, 1,500 shares were issued to employees following the
exercise of employee options at $1.95 per share.
GENERAL
All of the above CAT shares were exercised for Australian dollars; the
exchange rates used to convert Australian dollars to United States dollars are
the same as those used to
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60
convert balance sheet figures for the respective fiscal years. The respective
exchange rates are US$0.65 for 2000, US$0.6571 for 1999, US$0.6126 for 1998 and
US$0.6503 for 1997 per $A.
All share numbers reflect the impact of the one for ten reverse stock
split completed in November 1999. All share prices have been rounded to the
nearest cent. Where underwriters' fees were paid, the fees have been deducted
from the issued capital in the financial statements, but the gross receipts
before such fees are indicated above.
At December 31, 1999, we had 6,729,269 shares of common stock outstanding.
-58-
61
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our authorized capital consists of 110,000,000 shares, of which 100,000,000
shares are denominated common stock, par value $0.001 per share and of which
10,000,000 shares are denominated preferred stock, par value $0.001 per share. A
total of 6,741,072 shares of common stock were issued and outstanding as of
March 10, 2000. Also outstanding as of that date were options held by third
parties to purchase an aggregate of 821,623 shares of common stock. No preferred
stock has been issued.
Holders of common stock are entitled to one vote for each share standing in
his or her name. The holders of common stock may receive cash dividends as
declared by the Board of Directors out of funds legally available therefor. Each
share of common stock is entitled to share pro rata in distributions upon
liquidation. Holders of common stock are entitled to participate in the election
of all directors. The holders of common stock do not have cumulative voting
rights in the election of directors. The outstanding shares of common stock are
fully paid and non-assessable. Holders of common stock do not have subscription,
redemption, conversion, liquidation or preemptive rights. The rights of the
holders of common stock will also be subject to the rights and preferences of
the holders of the company's preferred stock, as designated by our Board of
Directors.
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ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our Certificate of
Incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws further provide that we must indemnify our directors and
executive officers and may indemnify our other officers and employees and agents
to the fullest extent permitted by Delaware law. We currently maintain liability
insurance for our officers and directors.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents as to which indemnification is being
sought. We are not aware of any pending or threatened litigation or proceeding
that might result in a claim for such indemnification.
We have entered into indemnification agreements with each of our
directors. These agreements require us, among other things, to indemnify each
director for certain expenses (including attorneys' fees), judgments, fines,
penalties and settlement amounts incurred by any such person in any threatened,
pending or completed action, suit or proceeding or by reason of any event or
occurrence arising out of such person's services as a director. Under various
employment agreements, we also have agreed to indemnify various officers for
any cost, loss, damage or liability (including legal fees) incurred in
connection with any action brought against the officer arising from the
performance of his duties.
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63
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
filed as part of this Form 10. See Index to Financial Statement Information at
page F-1 of this Form 10.
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ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-62-
65
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
1. Our financial statements are filed as part of this Registration
Statement on Form 10. See Index to Financial Statement Information at page F-1.
2. The following financial schedules are included for the three years ended
December 31, 1999: Schedule II -- Valuation and Qualifying Accounts, at page
F-22. Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes.
(b) EXHIBITS
2.1++ Implementation Agreement between Chip Application Technologies
Limited and NovaTec Inc.
3.1++ Certificate of Registration of Card Technologies Australia Limited
3.2++ Certificate of Registration on Change of Name from Card
Technologies Australia Limited to Chip Application Technologies
Limited
3.3++ Certificate of Incorporation of NovaTec Inc.
3.4++ Certificate of Amendment to the Certificate of Incorporation of
NovaTec Inc.
3.5++ Bylaws of NovaTec Inc.
10.1++ Put and Call Option Deed of A.S. Dawson in Respect of Shares of
Chip Application Technologies Limited
10.2++ Share Option Deed of A.S. Dawson in Respect of Shares of NovaTec
Inc.
10.3++ Employment Agreement of Michael V. Howe
10.4++ Executive Services Agreement of David L. Machattie Smith
10.5++ Deed of Employment of Benjamin Garton
10.6++ Employment Contract of Justin Wescombe and Employment Contract
Amendment
10.7++ Deed of Employment of John Weihen
10.8++ Services Agreement of Jonathan Adams
10.9++ Services Agreement of Carl H. Fisher
10.10++ Lease for premises located at 68-72 Wentworth Avenue Surry Hills,
New South Wales, Australia
10.11++ Lease for premises located at 2711 East Jefferson Avenue, Detroit,
Michigan
10.12* Research and Development Start Grant for Chip Application
Technologies Limited
10.13 Smart Loyalty Technical Work Group Agreement between Visa U.S.A.
and Chip Application Technologies Limited
10.14 Partner Program Loyalty Services Agreement between Visa
International Service Association and Chip Application
Technologies Limited
10.15* Software Remarketing Agreement between IBM and Chip Application
Technologies Limited
10.16* Marketing Support Plan between IBM and Chip Application
Technologies Limited
10.17++ Operation Reseller Agreement between Catuity Inc. and Data Pro
Accounting Software, Inc.
10.18++ Sun Microsystems Computer Company and Chip Application
Technologies Limited Joint Marketing Agreement
10.19++ Cooperative Agreement between Chip Application Technologies
Limited and Global Transaction Company
10.20++ Technology Partnership Agreement between Chip Application
Technologies Limited and Gemplus Technologies Asia Pte Ltd.
10.21++ Memorandum of Understanding between De La Rue Cartes et Systemes
and Chip Application Technologies Limited
10.22++ Loan Repayment and Option Agreement among Chip Application
Technologies Limited, Health Group Australia Pty Limited and
Industrial Superannuation Administration Services Limited
10.23++ Form of Indemnification Agreement
10.24++ Form of Stock Option Plan and Form of Stock Option Agreement under
Plan
27.1++ Financial Data Schedule
* Confidential treatment requested.
+ To be filed by amendment.
++ Previously filed.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
CATUITY INC.
Dated: April 7, 2000
----------------- By: /s/ Michael V. Howe
-----------------------------------
Name: Michael V. Howe
Title: President and Chief
Executive Officer
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67
CATUITY INC
INDEX TO FINANCIAL STATEMENTS(9)
Page
----
Independent Auditors Report................................................................... F-2
Consolidated Balance Sheets as at December 31, 1998 and 1999.................................. F-3
Consolidated Statement of Operations for the years ended December 31, 1997, 1998 and 1999..... F-4
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1998
and 1999...................................................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1998 and 1999..... F-6
Notes to Consolidated Financial Statements.................................................... F-7
F-1
68
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Catuity Inc.
We have audited the accompanying consolidated balance sheets of Catuity
Inc., as at December 31, 1998 and 1999 and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Catuity Inc., at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material aspects to the
information set forth therein.
ERNST & YOUNG
Sydney, Australia
February 18, 2000
F-2
69
CATUITY INC.
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
F-3
70
CATUITY INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS)
DECEMBER 31
-----------------------------
1998 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 148,789 $ 5,269,757
Accounts receivable, less allowance of
nil in 1998 and $157,704 in 1999 10,791 429,159
Inventories, net 151,187 65,781
Prepaid expenses 33,495 67,016
Restricted cash 72,164 178,054
Other 38,234 2,519
------------ ------------
Total current assets 454,660 6,012,286
Non-Current Assets:
Property, plant and equipment, net 170,890 242,038
Other 13,316 --
------------ ------------
Total non-current assets 184,206 242,038
============ ============
Total assets $ 638,866 $ 6,254,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 310,066 $ 560,906
Accounts payable to shareholders 17,650 --
Accrued expenses 116,846 301,630
Deferred income 58,359 --
Accrued compensation 81,189 118,054
Trust liability 72,164 157,685
------------ ------------
Total current liabilities 656,274 1,138,275
Non-Current Liabilities:
Borrowings from shareholders 1,593,549 854,230
Accrued compensation -- 20,588
------------ ------------
Total non-current liabilities 1,593,549 874,818
Commitments and Contingencies (Note 6) -- --
Stockholders' equity:
Ordinary shares - par value nil in 1998 and
$0.001 in 1999
Authorized shares - 100 million in 1998 and 1999
Issued and outstanding shares - 4,920,340 in 1998
and 6,729,269 in 1999 11,969,007 21,519,333
Additional paid-in capital 210,019 2,685,195
Shareholder loans (806,146) (757,733)
Foreign currency translation reserve 412,716 401,073
Accumulated deficit (13,396,553) (19,606,637)
------------ ------------
Total stockholders' equity (1,610,957) 4,241,231
------------ ------------
$ 638,866 $ 6,254,324
============ ============
See accompanying notes
F-4
71
CATUITY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS)
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenues:
Product license revenue $ 581,769 $ 135,235 $ 540,759
Product service revenue 179,270 156,298 97,623
Grant revenue 127,053 410,756 572,521
------------ ------------ ------------
Total revenues 888,092 702,289 1,210,903
Costs and expenses:
Research and development and testing 1,415,837 1,309,784 1,398,489
Selling and relationship development 708,921 914,622 956,911
General and administrative 998,061 693,979 1,255,096
Stock compensation 218,646 (8,627) 2,475,175
Non-recurring charges 848,585 -- 1,294,636
------------ ------------ ------------
Total costs and expenses 4,190,050 2,909,758 7,380,307
------------ ------------ ------------
Operating loss (3,301,958) (2,207,469) (6,169,404)
------------ ------------ ------------
Other income (expense):
Interest income 57,601 20,186 115,631
Interest expense - related party (272,483) (196,865) (156,311)
------------ ------------ ------------
Total other income (expense) (214,882) (176,679) (40,680)
------------ ------------ ------------
Loss before taxes (3,516,840) (2,384,148) (6,210,084)
Provision for Income taxes -- -- --
------------ ------------ ------------
Net Loss $ (3,516,840) $ (2,384,148) $ (6,210,084)
============ ============ ============
Net loss per share - basic $ (1.15) $ (0.53) $ (1.05)
============ ============ ============
Net loss per share - diluted $ (1.05) $ (0.53) $ (1.05)
============ ============ ============
Weighted average shares outstanding - basic 3,065,840 4,473,257 5,913,613
============ ============ ============
Weighted average shares outstanding - diluted 3,342,839 4,473,257 5,913,613
============ ============ ============
See accompanying notes
F-5
72
CATUITY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN U.S. DOLLARS)
ISSUED CAPITAL ADDITIONAL
---------------------- PAID IN SHAREHOLDER
SHARES AMOUNT CAPITAL LOANS
--------- ----------- ----------- -------------
Balances at December 31, 1996 1,370,648 $3,166,463 $ 964,108 $(502,373)
Issuance of common stock 1,877,660 4,209,862 428,640
Shares issued through loans to employees 136,282 303,773
Shareholder loans (303,773)
Exercise of options 33,999 79,509 29,065
Issuance of shares in consideration
for acquisition of Transcard assets 35,714 79,602 106,143
Share issuance costs (379,033)
Conversion of note to common stock 450,675 1,004,555
Stock based compensation 218,646
Comprehensive income
Net loss
Foreign currency translation reserve
Comprehensive income
--------- ----------- ----------- ---------
Balances at December 31, 1997 3,904,978 $8,843,764 $ 1,367,569 $(806,146)
Issuance of common stock 826,368 1,463,999 108,503
Restructure of par value of shares 1,279,258 (1,279,258)
Exercise of options 1,500 2,831
Share issuance costs (70,763)
Issuance of shares in consideration
for acquisition of Transcard assets 187,494 379,155 92,595
Stock based compensation (8,627)
Comprehensive income
Net loss
Foreign currency translation reserve
Comprehensive income
--------- ----------- ----------- ---------
Balances at December 31, 1998 4,920,340 $11,969,007 $ 210,019 $(806,146)
Issuance of common stock 796,782 5,294,713
Exercise of options 1,012,147 4,731,445
Share issuance charges (475,832)
Stock based compensation 2,475,176
Shareholder loans 48,413
Comprehensive income
Net loss
Foreign currency translation reserve
Comprehensive income
--------- ----------- ----------- ---------
Balances at December 31, 1999 6,729,269 $21,519,333 $ 2,685,195 $(757,733)
========= =========== =========== =========
FOREIGN TOTAL
COMPREHENSIVE ACCUMULATED CURRENCY SHAREHOLDERS
INCOME DEFICIT TRANSLATION EQUITY
------------ ------------ ----------- ------------
Balances at December 31, 1996 $(7,495,565) $(111,707) $(3,979,074)
Issuance of common stock 4,638,502
Shares issued through loans to employees 303,773
Shareholder loans (303,773)
Exercise of options 108,574
Issuance of shares in consideration
for acquisition of Transcard assets 185,745
Share issuance costs (379,033)
Conversion of note to common stock 1,004,555
Stock based compensation 218,646
Comprehensive income
Net loss (3,516,840) (3,516,840) (3,516,840)
Foreign currency translation reserve 439,386 439,386 439,386
-----------
Comprehensive income $(3,077,454)
=========== ------------ -------- -----------
Balances at December 31, 1997 $(11,012,405) $327,679 $(1,279,539)
Issuance of common stock 1,572,502
Restructure of par value of shares --
Exercise of options 2,831
Share issuance costs (70,763)
Issuance of shares in consideration
for acquisition of Transcard assets 471,750
Stock based compensation (8,627)
Comprehensive income
Net loss (2,384,148) (2,384,148) (2,384,148)
Foreign currency translation reserve 85,037 85,037 85,037
-----------
Comprehensive income $(2,299,111)
=========== ------------ -------- -----------
Balances at December 31, 1998 $(13,396,553) $412,716 $(1,610,957)
Issuance of common stock 5,294,713
Exercise of options 4,731,445
Share issuance charges (475,832)
Stock based compensation 2,475,176
Shareholder loans 48,413
Comprehensive income
Net loss (6,210,084) (6,210,084) (6,210,084)
Foreign currency translation reserve (11,643) (11,643) (11,643)
-----------
Comprehensive income $(6,221,727)
=========== ------------ -------- -----------
Balances at December 31, 1999 $(19,606,637) $401,073 $ 4,241,231
============ ======== ===========
See accompanying notes
F-6
73
CATUITY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS)
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (3,516,840) $ (2,384,148) $ (6,210,084)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Stock based compensation 218,646 (8,627) 2,504,224
Depreciation and amortization 55,724 78,425 101,809
Amortization of prepaid license fees -- 72,319 --
Provision for doubtful accounts -- -- 157,704
Provision for obsolete inventory -- 30,669 104,929
Changes in assets and liabilities:
Accounts receivable (214,500) 193,015 (576,072)
Inventories (119,756) 104,940 (19,523)
Accounts payable (35,687) 164,585 250,840
Accrued expenses and other liabilities 7,563 12,881 166,229
Other assets, net -- (13,554) (4,860)
------------ ------------ ------------
Net cash used in operating activities (3,604,850) (1,749,495) (3,524,804)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (156,540) (175,951) (135,622)
Net advances to shareholders 88,429 (120) --
Deposits lodged (14,864) -- --
------------ ------------ ------------
Net cash used in investing activities (82,975) (176,071) (135,622)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings from related parties 47,305 -- --
Payments on borrowings from related parties (18,185) -- (839,981)
Issuance of common stock, net of expenses 4,291,287 1,504,570 9,521,278
------------ ------------ ------------
Net cash provided by financing activities 4,320,407 1,504,570 8,681,297
------------ ------------ ------------
Foreign exchange effect on cash (88,193) (23,411) 100,097
------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents
544,389 (444,407) 5,120,968
Cash and cash equivalents, beginning of year 48,807 593,196 148,789
------------ ------------ ------------
Cash and cash equivalents, end of year $ 593,196 $ 148,789 $ 5,269,757
============ ============ ============
Supplemental disclosure of cash flow information
Interest paid during the year $ 252,631 $ 178,241 $ 156,311
============ ============ ============
Common stock issued for purchase of
Transcard assets $ 185,750 $ 471,750 --
============ ============ ============
Conversion of notes to common stock $ 1,018,306 $ -- --
============ ============ ============
See accompanying notes.
F-7
74
NOTE 1. DESCRIPTION OF BUSINESS
Catuity Inc. (the "Company" or "Catuity") is a Delaware Corporation
incorporated in 1999. The Company listed on the Australian Stock Exchange
("ASX") on November 23, 1999. In November 1999, under court approved Schemes of
Arrangement, Catuity acquired all the shares on issue in Chip Application
Technologies Limited ("CAT"), a company which had been listed on the ASX since
July 1997 (Refer Note 7). Catuity is the parent company of the group and will
continue the business activities of CAT. The Company designs, develops, operates
and markets multi-program systems that provide loyalty and incentive marketing
solutions for retail shops and the Internet. These solutions aim to increase
customer retention, increase the customer base and reduce costs for merchants in
the rapidly converging physical and virtual worlds. Catuity provides full
program services and network system software that directly connects the seller
and the buyer across all purchasing channels, irrespective of payment method.
The Company's operations had been predominantly located in Australia but will
now be expanded into North America.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are presented in US dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"), which differ in certain respects from
accounting principles applied by the Company in its local currency financial
statements, which are prepared in accordance with accounting principles
generally accepted in Australia ("Australian GAAP").
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidation of accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the consolidated financial
statement and the reported amount of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash flows, the Company
considers all cash and highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories comprising of validators, keypads and cards used in pilots are
stated at the lower of cost (first in first out method) or market value (net
realizable value) (Refer Note 5).
F-8
75
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the shorter of the estimated
useful lives of the respective assets (which ranges from three to seven years)
or the applicable lease term. Maintenance and repairs are expensed as incurred
and improvements are capitalized. Depreciation expense was $100,703, $75,368 and
$52,634 for the years ended December 31, 1999, 1998, and 1997 respectively.
Amortization expense was $1,106, $3,057, and $3,090 for the years ended December
31, 1999, 1998, and 1997 respectively.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company are translated in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation". The
Company's management has elected to present these consolidated financial
statements in U.S. dollars. The financial statements of the Company and its
subsidiaries are translated from their functional currency into the reporting
currency, the U.S. dollar, utilizing the current rate method. Accordingly the
assets and liabilities are translated at the exchange rates in effect at the end
of the reporting period.
The rates used to translate assets and liabilities were:
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
$0.6571 $0.6126
Revenues and expenses are translated at the average exchange rate during the
year. The rates used to translate revenues and expenses were:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
----------- ----------- -----------
$0.6455 $0.6290 $0.7430
All cumulative translation gains and losses from the translation into the
Company's reporting currency are included as a separate component of
stockholders' equity in the consolidated balance sheets.
Currency transaction gains and losses are recognized in current operations and
have not been significant to the Company's operation results in any period.
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.
F-9
76
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.
REVENUE RECOGNITION
Product Sales Revenue is recognized upon the execution of the sale or license
agreement provided the company has no additional performance criteria. If
significant customization is part of the transaction, such revenues are
recognized over the period of delivery. Product sales payments received which
are related to future performance are deferred and recorded as revenues as they
are earned over specified future performance periods.
Revenues from transaction processing services are recorded at the time the
service is utilized by the customer.
Research and development grants are recorded as revenue when the underlying
performance objective has been attained or services have been provided or costs
incurred as per the grant agreement.
NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128") and Staff Accounting Bulletin No. 98 ("SAB
98") during the year ended December 31, 1997. SFAS 128 replaced the calculation
of primary and fully diluted net loss per share with basic and diluted loss per
share. Under SFAS No. 128, basic net income per share excludes dilutive common
stock equivalents and is calculated by dividing net loss by the weighted average
number of shares outstanding. Diluted net loss per share is calculated by
dividing the net loss by the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period.
Common equivalent shares from stock options are excluded from the calculation of
diluted net loss per share as their effect is anti dilutive. SAB 98 applied to
pre IPO issuances of shares and potential common equivalent shares that are
considered to be nominal issuances. SAB 98 requires nominal issuances of shares
and common equivalent shares to be included in diluted net loss per share for
all years presented even if the impact is antidilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principals 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").
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income," ("SFAS No. 130")
which
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77
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's consolidated financial position, shareholders equity, results of
operation or cash flows. SFAS. No. 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, cash equivalents, accounts
receivable, accounts payable and loans from a related party. The carrying values
of cash, cash equivalents and accounts payable approximate fair value due to
their short-term nature. The fair value of the related party loan is estimated
on current rates available for similar debt with similar maturity and
collateral. The related party loan has a carrying value that is not
significantly different than its estimated fair value.
CONCENTRATIONS OF RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and accounts receivable. The Company
maintains its cash with Australian financial institutions. The company conducts
business with companies throughout Australia and the Australian Government and
with companies throughout Australia and the United States. The Company performs
ongoing credit evaluations of its corporate customers and generally does not
require collateral. As the Company derives its revenue from a limited number of
customers, they are exposed to credit risk if the customers are unable to pay.
For the year ended December 31, 1999, three customers accounted for 26%
($314,757), 16% ($190,222) and 47% ($572,521) of net revenue and accounted for
84% ($491,453) of the accounts receivable balance at year end. In 1998, two
customers accounted for 58% ($410,756) and 19% ($132,090) of net revenue. In
1997, three customers accounted for 66% ($581,769), 14% ($127,053) and 11%
($96,246) of net revenue.
SEGMENT REPORTING
Effective January 1, 1998 the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 superseded SFAS Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. The adoption of SFAS No. 131 did not affect results of
operations, financial position or disclosures of the company.
STOCK SPLIT
At November 22, 1999, the Company completed a one-for-ten reverse stock split of
the outstanding shares of issued capital. All share information and per share
amounts in the accompanying consolidated financial statements has been
retroactively adjusted to reflect the effect of this stock split.
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NEW ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9 "Modification of SOP 97-2" ("SOP
98-9"), which amends certain provisions of Statement of Position 97-2 "Software
Revenue Recognition with Respect to Certain Transactions" ("SOP 97-2") and
extends the deferral of the application of certain passages of SOP 97-2 provided
by Statement of Position 98-4 ("Deferral of Effective Date of SOP 97-2") until
the beginning of the Company's fiscal year 2000. The Company does not expect the
adoption of this standard to have a material effect on its consolidated
operating results or financial position.
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NOTE 3. NON-RECURRING CHARGES
In the year ended December 31, 1999 the Company incurred non recurring charges
of $1,294,636. These costs relate to the scheme of arrangement the Company
undertook to relocate its corporate structure from Australia to the United
States of America. These costs include legal, consulting and stamp duty fees.
In early 1997 the Company acquired the operation of Transcard Australia Pty Ltd
(Transcard) the Company's partner in the pilot of its multi-program software
product, for a fixed price of $743,000. This acquisition was settled in cash and
shares in the Company. This acquisition was part of the Company's
rationalization of its Transcard pilot.
In late 1997 the Company decided not to expand the Western Sydney pilot and, as
a result, the Company recorded charges of $364,813 relating to the write down of
inventory associated with the Transcard pilot and $483,772 in relation to the
goodwill costs incurred and the write-down of its investment in Transcard.
NOTE 4. INVENTORIES
Inventories consist of:
DECEMBER 31
------------------------
1998 1999
--------- ---------
Finished goods $ 215,478 $ 235,001
Provision for obsolete inventory (64,291) (169,220)
--------- ---------
$ 151,187 $ 65,781
========= =========
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31
------------------------
1998 1999
--------- ---------
Computer equipment $ 235,759 $ 346,666
Buildings and improvements 7,261 63,485
Office furniture and equipment 50,413 60,566
--------- ---------
$ 293,433 $ 470,717
Less accumulated depreciation
and amortization (122,543) (228,679)
--------- ---------
$ 170,890 $ 242,038
========= =========
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NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has commitments under non-cancelable operating
leases in relation to office equipment expiring June 28, 2000 and an office
lease expiring December 14, 2003. Minimum future annual lease payments under
these leases as of December 31, 1999 are as follows:
2000 $103,497
2001 85,347
2002 89,412
2003 93,883
--------
$372,139
========
Total rent expense on all operating and office leases was $121,701, $126,605 and
$142,422 for 1999, 1998 and 1997 respectively.
Under the terms of a Grant Agreement with the Commonwealth of Australia, the
Company must meet certain obligations with regard to the development and
commercialization of a Multi Card Acceptance Device. In the event that these
obligations are not met the Company may be required to repay all or part of the
grant monies received. The Directors do not believe that any liability will
materialize. Management believe they have complied with and will continue to
comply with the terms of the Grant Agreements. The maximum potential liability
at December 31, 1999 was $222,042.
NOTE 7. STOCKHOLDERS' EQUITY
LIMITED RECOURSE LOANS
The Company has provided limited recourse loans to a director (1999: $593,043
and 1998: $598,826) and related companies (1999: $68,168 and 1998: $63,551) for
the purpose of purchasing shares in the Company. The loans have been offset
against issued capital. The loans will only be repaid from the proceeds of
dividends paid by the Company and from the proceeds from the sale of the shares.
The Company's recourse for repayment of the loan is limited to after-tax
dividends and sale proceeds from the shares. As a result, the recoverability of
the loan is dependent upon the value of the shares. The loans do not have a
specified repayment date. The loans provided are interest-free. Consequently,
the loans have been treated as variable option and variable accounting has been
adopted. Based on the movement in the share price of common stock from the date
of the loan to December 31, 1999, the Company has recorded an expense of
$2,459,523 and $31,713 for the years ended December 31, 1999 and 1997. The
Company has recorded a credit of $26,847 for the year ended December 31, 1998.
ESCROW SHARES
As a prerequisite to the Company's initial public offering in July 1997 the
Australian Stock Exchange requested the Company restrict the trading of 293,848
shares of common stock and 1,174,822 options held by existing shareholders for a
period of two years from the date of the initial public offering. In addition as
a result of negotiations with our underwriter 374,739 shares of common stock
were voluntarily held in escrow until July 2000.
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NOTE 7. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its ordinary shares.
EMPLOYEE STOCK OPTIONS
The Company has provided employees who have worked for more than 12 months share
options at an exercise price as determined by the Board of Directors at the time
of issuance. Option vesting schedules are determined by the Board of Directors
at the time of issuance. Stock options issued by the Company vest at the end of
a specified period of time, which is linked to the employees' continuing
employment, ranging from one to three years. Employees must exercise the options
within three months of terminating their employment with the Company or the
options lapse. The Company has recorded an expense of $15,653, $16,543, and $0
for the years ended December 31, 1999, 1998 and 1997, for the difference between
the exercise price and the issue price of the Company's shares at the date of
the option grant. The number of unissued shares of common stock subject to
options issued to employees at December 31, 1999 was 655,102.
OPTIONS ISSUED TO THIRD PARTIES
The Company granted options to purchase 512,353 shares of common stock to third
parties and outside directors at an exercise price ranging from $2.23 to $5.57
per share during the period January 1, 1997 to December 31, 1999. These options
were issued to encourage investors to invest in the Company now and in the
future. These options were issued at the same terms and conditions as other
options issued to employees. The Company valued these options using the
Black-Scholes option pricing model which amounted to $0, $1,677, and $186,933
for the years ended December 31, 1999, 1998, and 1997 respectively. The expense,
in respect of the options, was charged to the profit and loss in the year they
were granted as they vested immediately. There were 166,521 of options issued to
third parties outstanding at December 31, 1999.
Had compensation costs for these plans been determined consistent with SFAS No.
123, "Accounting for Stock Based Compensation," the Company's net loss and net
loss per share would have been reported as follows:
YEAR ENDED DECEMBER 31
-------------------------------------------
1997 1998 1999
----------- ----------- -----------
Net Loss as Reported $(3,516,840) $(2,384,148) $(6,210,084)
=========== =========== ===========
Pro Forma $(3,529,991) $(2,436,292) $(6,865,434)
=========== =========== ===========
Pro Forma basic earnings per share $ (1.15) $ (0.54) $ (1.16)
=========== =========== ===========
Pro Forma diluted earnings per share $ (1.06) $ (0.54) $ (1.16)
=========== =========== ===========
Because the SFAS No. 123 method of valuation has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation costs may
not be representative of amounts to be expected in future years.
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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 1997, 1998, and 1999 grants:
DECEMBER 31
-----------------------------
1997 1998 1999
------ ------ ------
Risk Free Interest Rate 5.80% 4.65% 5.96%
Expected Dividend Yield -- -- --
Expected Lives (years) 2.45 3.38 3.04
Expected Volatility 0.683 0.749 0.796
Activity in the Plans is as follows:
NUMBER OF WEIGHTED AVERAGE
SHARE OPTIONS EXERCISE PER SHARE
------------- ------------------
Outstanding at December 31, 1996 836,280 $ 5.61
Granted 597,318 5.37
Cancelled/lapsed (3,101) 2.92
Exercised (33,999) 3.08
---------- ------
Outstanding at December 31, 1997 1,396,498 5.57
Granted 125,500 3.59
Cancelled/lapsed (33,000) 1.89
Exercised (1,500) 1.89
---------- ------
Outstanding at December 31, 1998 1,487,498 5.49
Granted 352,254 7.00
Cancelled/lapsed (5,982) 4.76
Exercised (1,012,147) 5.64
---------- ------
Outstanding at December 31, 1999 821,623 $ 5.96
========== ======
The weighted average fair value of options granted during the year ended
December 31, 1999, 1998 and 1997 are $3.19, $1.07, and $0.33 respectively.
The following is additional information relating to options outstanding as of
December 31, 1999:
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OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER EXERCISE
RANGE SHARES PRICE LIFE (YEARS) OF SHARES PRICE
- ------------- --------- --------- ------------ --------- --------
$ 1.95-$ 2.20 64,000 $ 2.05 1.38 56,500 $ 2.06
$ 3.15-$ 4.35 39,668 $ 3.94 2.09 39,668 $ 3.94
$ 4.90-$ 6.50 517,955 $ 5.35 1.28 415,703 $ 5.12
$ 6.55-$ 8.00 150,000 $ 7.34 1.83 50,000 $ 6.57
$10.00-$11.00 50,000 $10.51 4.50 50,000 $10.51
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 10 million shares of
preferred stock, with a par value of $0.001 per share, none of which is issued
or outstanding. The Board of Directors has the authority to issue the preferred
stock in one or more series and to fix rights, preferences, privileges and
restrictions, including dividends, and the number of shares constituting any
series or the designation of such series, without any further vote or action by
the stockholders.
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OPTION AGREEMENT
In May 1999, the Company entered into an Agreement with Heath Group Australasia
Pty Limited ("HGA") (formerly Heath Fielding Australia Pty Limited) and
Industrial Superannuation Administrative Services Limited ("ISAS") whereby HGA
and ISAS agreed to grant the Company an option to buy-back 332,588 shares at
$5.50 per share any time up to July 18, 2000 ("Option Agreement"). The buy-back
option was contingent upon the Company immediately repaying $839,981 of the
outstanding loan amount of $1,593,549.
Under the Option Agreement, the balance of the loan is to be repaid pro rata to
the percentage of shares purchased. The Company can buy-back shares in a maximum
of three tranches, subject to making payments on the loan. Interest will
continue to be payable on any outstanding balance of the loan at a rate of 12
percent. At the end of the option exercise period, any balance of the loan
remaining outstanding will be subject to the terms and conditions of the
original Loan Agreement which provides for:
i) the repayment of the loan when, in the opinion of the Directors, the
Company has sufficient surplus funds available and
ii) a Deed of Charge giving HGA a fixed and floating charge over the
assets of the Company.
As part of the Option Agreement, HFA and ISAS exercised 263,233 options expiring
on June 30, 1999.
SCHEMES OF ARRANGEMENT
In September 1999 the Company sought approval from The Supreme Court of New
South Wales to hold a stockholder and optionholder meeting to consider and
approve schemes of arrangement to restructure the Company. Under the schemes,
stockholders and optionholders would exchange their securities and entitlements
in a newly formed Delaware registered Company (NovaTec Inc.) which would seek
listing on the ASX. As part of the schemes the Company completed a one-for-ten
reverse share and option split. The schemes were approved at Court ordered
meetings of stockholders and optionholders held on November 3, 1999 and
implemented on November 22, 1999 when trading in CAT shares ceased and commenced
the trading in Catuity Inc. (formerly NovaTec Inc.) shares on November 23, 1999.
Implementation of the Restructure has resulted in Catuity becoming the parent
company of the group acquiring all CAT shares on issue and issuing an equivalent
number of shares in Catuity. Options were treated in the same way and
optionholders received an equivalent number of options with the same terms and
conditions, in Catuity.
LOSS OF PAR VALUE
Due to changes in Australia's corporate tax law, effective July 1, 1998,
companies in Australia no longer have par values. Consequently, $1,279,258
previously included in
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85
"Additional Paid In Capital" and relating to share premiums was transferred to
"Issued Capital" on July 1, 1998.
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in dollars, except share and per share data):
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
Net loss $ (3,516,840) $ (2,384,148) $ (6,210,084)
============ ============ ============
Weighted average shares 3,065,840 4,473,257 5,913,613
Effect of dilutive securities:
Employee stock options 276,998 -- --
------------ ------------ ------------
Dilutive potential common shares 3,342,838 4,473,257 5,913,613
------------ ------------ ------------
Net loss per share $ (1.15) $ (0.53) $ (1.05)
============ ============ ============
Net loss per share - assuming dilution $ (1.05) $ (0.53) $ (1.05)
============ ============ ============
NOTE 9. SEGMENT INFORMATION
The Company operates in the computer technology industry. Its major operations
are based in Australia. In June 1999, the Company established operations in the
United States of America (USA). In 1999, 1998 and 1997 all of the Company's
revenues relate to the Australian operations. In 1999 revenues included $314,757
(26%) of export sales to the USA. In 1998 revenues included export sales of
$56,610 (8% of total sales) to New Zealand. No export sales were made in 1997.
In 1999, $462,044 of the operating loss of $6,169,404 is attributable to the
operations in the USA. The costs relating to the operations in the USA represent
direct costs of executives and consultants and their related costs and does not
include costs incurred by non resident personnel in the USA. In 1998, $343,726
of the operating loss of $2,207,758 was attributable to operations in Asia. The
Australian operations accounted for 100 percent of the operating loss in 1997.
All major assets of the Company were held in Australia in 1999, 1998 and 1997.
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NOTE 10. INCOME TAXES
There has been no provision for income taxes for any period as the Company has
incurred operating losses.
The provision for income tax on operating loss is reconciled to the reported
provision for income taxes as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1998 1999
----------- --------- -----------
Net loss at statutory tax rate $(1,266,062) $(858,293) $(2,235,630)
Stock compensation 78,713 (3,106) 891,063
Abnormal item 174,156 -- 466,069
R&D grant 25% deduction (97,002) (56,805) (84,678)
Grant revenue -- (147,872) (206,108)
Over provision of losses -- 313,813 --
Effect of change in corporate tax rate
on loss and FITB not recognized -- -- 336,699
Non-deductible branch costs -- 101,907 --
Other 1,507 44 409
----------- --------- -----------
Valuation allowance $ 1,108,688 $ 650,312 $ 832,176
----------- --------- -----------
Provision for income tax -- -- --
---------- --------- -----------
The statutory tax rate was 36% for the years 1997, 1998 and 1999. The statutory
tax rate will change to 34% effective July 1, 2000.
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:
YEAR ENDED DECEMBER 31
---------------------------
1998 1999
----------- -----------
Deferred tax assets:
Net operating loss carry-forwards $ 4,452,486 $ 5,235,117
Provisions 93,933 143,478
----------- -----------
Total deferred tax assets 4,546,419 5,378,595
----------- -----------
Valuation allowance (4,546,419) (5,378,595)
----------- -----------
Total net deferred tax assets $ -- $ --
=========== ===========
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NOTE 10. INCOME TAXES (CONTINUED)
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance
As of December 31, 1999, the Company had operating loss carry-forwards of
$5,235,117. There can be no assurance that the Company will realize the benefit
of the net operating loss carryforwards.
The valuation allowance increased by $832,176 and $650,312 in 1999 and 1998,
respectively. Management has determined, based on the Company's history of prior
operating losses and its expectations for the future, that a full valuation
allowance for deferred tax assets should be provided.
Utilization of the net operating loss may be subject to an annual limitation due
to the ownership change limitations in accordance with Division 165 and Division
166 of the Australian Income Tax Assessment Act 1997. The limitation may result
in the expiration of net operating losses before utilization.
NOTE 11. PENSION PLANS
On behalf of its employees, the Company contributes to a defined contribution
plan on the basis of varying percentages of employees' salaries. The Company is
only obliged to make contributions while the members remain employees of the
Company. The Company contributed $85,421, $92,235, and $76,915 for the years
ended December 31, 1999, 1998 and 1997 respectively.
NOTE 12. RESTRICTED CASH
The Company is the Trustee of a bank account related to trials of its
multi-program software in the Transcard card system in Western Sydney. When
consumers using the system transfer funds to their cards, the funds are
deposited into this trust account. The funds are debited from the account
electronically and paid to merchants when transaction information relating to
card holder usage is downloaded from merchants through a central host processing
system. The Company is not entitled to the funds other than in specified
circumstances whereas cards are inactive or expired. Consequently, an amount
corresponding to the trust account balance is recorded
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88
as a current liability. The trust account had an ending balance of $72,164 in
1998 and $157,685 in 1999.
In addition, the Company had restricted cash of $20,369 and $0 as of December
31, 1999 and 1998, respectively, related to an amount held as security for an
operating lease.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION (IN THOUSANDS) PERIOD EXPENSES DEDUCTIONS(1) PERIOD
- -------------------------- ------------ ---------- ------------- ----------
Year ended December 31, 1999
Allowance for doubtful debts $0 $158 $0 $158
Year ended December 31, 1998
Allowance for doubtful debts $0 $ 0 $0 $ 0
Year ended December 31, 1997 $0 $ 0 $0 $ 0
- ---------
(1) Write-offs of uncollectible amounts, net of recoveries.
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NOTE 13. SUBSEQUENT EVENTS
There have been no significant events since December 31, 1999.
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90
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1++ Implementation Agreement between Chip Application Technologies
Limited and NovaTec Inc.
3.1++ Certificate of Registration of Card Technologies Australia Limited
3.2++ Certificate of Registration on Change of Name from Card
Technologies Australia Limited to Chip Application Technologies
Limited
3.3++ Certificate of Incorporation of NovaTec Inc.
3.4++ Certificate of Amendment to the Certificate of Incorporation of
NovaTec Inc.
3.5++ Bylaws of NovaTec Inc.
10.1++ Put and Call Option Deed of A.S. Dawson in Respect of Shares of
Chip Application Technologies Limited
10.2++ Share Option Deed of A.S. Dawson in Respect of Shares of NovaTec
Inc.
10.3++ Employment Agreement of Michael V. Howe
10.4++ Executive Services Agreement of David L. Machattie Smith
10.5++ Deed of Employment of Benjamin Garton
10.6++ Employment Contract of Justin Wescombe and Employment Contract
Amendment
10.7++ Deed of Employment of John Weihen
10.8++ Services Agreement of Jonathan Adams
10.9++ Services Agreement of Carl H. Fisher
10.10++ Lease for premises located at 68-72 Wentworth Avenue Surry Hills,
New South Wales, Australia
10.11++ Lease for premises located at 2711 East Jefferson Avenue, Detroit,
Michigan
10.12* Research and Development Start Grant for Chip Application
Technologies Limited
10.13 Smart Loyalty Technical Work Group Agreement between Visa U.S.A.
and Chip Application Technologies Limited
10.14 Partner Program Loyalty Services Agreement between Visa
International Service Association and Chip Application
Technologies Limited
10.15* Software Remarketing Agreement between IBM and Chip Application
Technologies Limited
10.16* Marketing Support Plan between IBM and Chip Application
Technologies Limited
10.17++ Operation Reseller Agreement between Catuity Inc. and Data Pro
Accounting Software, Inc.
10.18++ Sun Microsystems Computer Company and Chip Application
Technologies Limited Joint Marketing Agreement
10.19++ Cooperative Agreement between Chip Application Technologies
Limited and Global Transaction Company
10.20++ Technology Partnership Agreement between Chip Application
Technologies Limited and Gemplus Technologies Asia Pte Ltd.
10.21++ Memorandum of Understanding between De La Rue Cartes et Systemes
and Chip Application Technologies Limited
10.22++ Loan Repayment and Option Agreement among Chip Application
Technologies Limited, Health Group Australia Pty Limited and
Industrial Superannuation Administration Services Limited
10.23++ Form of Indemnification Agreement
10.24++ Form of Stock Option Plan and Form of Stock Option Agreement under
Plan
27.1++ Financial Data Schedule
* Confidential treatment requested.
+ To be filed by amendment.
++ Previously filed.