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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2000
Commission File Number: 0-30320
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TRINTECH GROUP PLC
(Exact name of Registrant as specified in its charter)
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Not Applicable
(Translation of Registrant's Name into English)
Republic of Ireland
(Jurisdiction of Incorporation or Organization)
Trintech Group PLC
Trintech Building
South County Business Park
Leopardstown
Dublin 18, Ireland
011-353-1-207-4000
(Address and telephone number of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the
Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the
Act:
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<CAPTION>
Name of Each Exchange
Title of Each on
Class Which Registered
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<S> <C>
Ordinary Shares Nasdaq National Market
Neuer Markt (Germany)
</TABLE>
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
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The number of outstanding shares of each of the issuer's classes of capital
or common stock as of the close of the period ended January 31, 2000 covered
by the annual report was 25,140,722 ordinary shares, $.0027 par value,
represented by 50,281,444 American Depositary Shares after taking into account
a two-for-one ADS stock split effected on March 21, 2000.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [_] No [X]
Indicate by check mark which financial statement item the registrant
elected to follow.
Item 17 [_] Item 18 [X]
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TABLE OF CONTENTS
PART I
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Item 1. Description of Business................................................................ 3
Item 2. Description of Property................................................................ 25
Item 3. Legal Proceedings...................................................................... 26
Item 4. Control of Registrant.................................................................. 26
Item 5. Nature of Trading Market............................................................... 27
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..................... 29
Item 7. Taxation............................................................................... 31
Item 8. Selected Financial Data................................................................ 37
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 39
Item 9A. Qualitative and Quantitative Disclosure About Market Price............................. 48
Item 10. Directors and Officers of Registrant................................................... 49
Item 11. Compensation of Directors and Officers................................................. 53
Item 12. Options to Purchase Securities From Registrant or Subsidiaries......................... 53
Item 13. Interest of Management in Certain Transactions......................................... 53
PART II
Item 14. Description of Securities to be Registered............................................. 56
PART III
Item 15. Defaults Upon Senior Securities........................................................ 56
Item 16. Changes in Securities and Changes in Security for Registered Securities................ 56
PART IV
Item 17. Financial Statements................................................................... 56
Item 18. Financial Statements................................................................... 57
Item 19. Financial Statements and Exhibits...................................................... 58
Signatures............................................................................. 59
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In this document, unless otherwise indicated, references to the "Company",
"Trintech" or "we" are to Trintech Group PLC, its consolidated subsidiaries and
predecessor entities. In addition, references to "ADSs" are to the American
Depositary Shares of Trintech Group PLC, each representing one-half of one
ordinary share.
Unless otherwise specified, all reference to U.S. dollars, dollars or $ are
to United States dollars, the legal currency of the United States of America.
All references to euro or (Euro) are to the euro, the legal currency of the
Republic of Ireland and the Federal Republic of Germany. All references to
IR(Pounds) are to Irish pounds, and all references to the Deutsche mark or the
DM are to the Deutsche mark. All references to sterling or U.K. pound sterling
are to the pound sterling, the legal currency of the United Kingdom. Unless
otherwise indicated, U.S. dollars have been converted from euro at the noon
buying rate for cable transfers in New York in foreign currencies certified by
the Federal Reserve Bank of New York on April 27, 2000, which was US$1.00
equals (Euro)1.101.
PayGate Acquirer(TM), PayGate NetIssuer(TM), PayWare PurchaseCard(TM),
PayWare SmartCard(TM), PayWare ERP(TM), PayWare Net(TM), PayWare NetHost(TM),
NetWallet(TM), EzCard(TM), Compact 9000(TM), Compact 9002(TM), S/PAY(TM) and
Trintech(TM) and our logo are our trademarks and PayGate(R), PayWare(R) and
PayPurse(R) are our registered trademarks. SAP R/3(R) is a registered trademark
of SAP AG. This Form 20-F also includes product names and other trade names and
trademarks of other organizations.
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PART I
Item 1. Description of Business
The following discussion set forth in this section and in other sections of
this Form 20-F contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Predictions of future events are inherently uncertain.
Actual events could differ materially from those predicted in the forward
looking statements as a result of the risks set forth in the following
discussion, including the subsection "Additional Risk Factors That May Affect
Future Performance" in this Item 1. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performances and
involve certain risks and uncertainties which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements in
this Form 20-F report.
Company History and Structure
We were incorporated as a limited liability company under the laws of the
Republic of Ireland in 1987. On August 23, 1999, our shareholders resolved by
special resolution to re-register us as a public limited company. The following
is a list and brief description of our significant subsidiaries:
Trintech Technologies Limited, a wholly-owned subsidiary, is a limited
liability company having a share capital incorporated under the laws of the
Republic of Ireland. The principal activity of Trintech Technologies Limited is
the sale of electronic PoS system products and e-payment software.
Trintech Limited is a limited liability company having a share capital
incorporated under the laws of the Republic of Ireland. All of the voting
securities of Trintech Limited are owned by us. The principal activity of
Trintech Limited is research and development.
Trintech GmbH, a wholly-owned subsidiary, is a limited liability company
incorporated in the Federal Republic of Germany. The principal activity of
Trintech GmbH is the sale of electronic PoS system products and e-payment
software.
Trintech Inc., a wholly-owned subsidiary, is a California corporation. The
principal activity of Trintech Inc. is the sale of e-payment software.
Overview
We are a leading provider of secure e-payment infrastructure solutions for
payment card transactions. We develop, market and sell a comprehensive suite of
software and electronic PoS systems that enable card-based electronic payments
in the physical world and over the Internet. We offer vendor-neutral, open
software solutions that provide a highly secure e-payment solution for our
customers. Our customers include banks, card associations, financial
transaction processors and Internet service providers in major markets
including Germany, the United States, Scandinavia, the United Kingdom and South
America. Through our portfolio of feature-rich software products and electronic
PoS systems, we offer solutions for each of the parties to an e-payment
transaction--the bank or other financial transaction processor, the merchant
and the cardholder. Our comprehensive suite of software and electronic PoS
system products enables secure end-to-end payment solutions to automate the
entire e-payment transaction process.
The E-Payment Industry
The e-payment industry has rapidly grown throughout the world since the
1970s when banks and merchants began to encourage widespread use of credit
cards by consumers. Use of these cards has increased significantly in
traditional commerce channels, first at the countertop in a merchant's store,
and later through mail order and telephone order. More recently, the
introduction of new payment card alternatives, such as chip-based smart cards,
stored value cards, purchase cards and debit cards, has further fueled the use
of payment cards and the growth of the e-payment industry. According to The
Nilson Report, the volume of payment card
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transactions at the merchant in the United States alone is expected to increase
from 16 billion in 1997 to 39 billion in 2005. The growth of payment card
transactions, in conjunction with increased payment card fraud, has driven the
need for more comprehensive, secure and effective hardware and software payment
products to process these transactions. In particular, financial institutions
and merchants have broadly adopted electronic PoS systems and secure software
solutions to mitigate fraud and to improve the efficiency of payment card
transaction processing.
With the emergence of e-commerce, the Internet has developed as a new and
significant sales channel for goods and services. Payment cards have emerged as
the predominant means of making purchases over the Internet, further driving
the demand for comprehensive and effective solutions for secure e-payment
transactions. According to International Data Corporation, the number of people
with access to the world wide web will rise from 159 million in 1998 to
approximately 510 million in 2003. The growing base of users, combined with the
convenience of the Internet as a medium for commerce, helps drive the growth of
e-commerce. International Data Corporation estimates that global business-to-
consumer e-commerce revenue will grow from $15 billion in 1998 to $117 billion
in 2002. International Data Corporation additionally estimates that the number
of on-line shoppers will increase from 30.8 million in 1998 to 133.9 million in
2002. Merchants are increasingly seeking to participate in e-commerce due to
the global reach of the Internet, combined with the lower transaction costs
compared to the traditional retail market place and the increasing use of the
Internet for a broad range of business-to-business and business-to-consumer
activities. Emerging channels for Internet access, such as mobile phones for
wireless Internet access, are expected to further fuel the growth of e-
commerce.
E-Payment Transactions
Each of the participants in an e-payment transaction operates within a
framework of policies and standards established by card associations such as
VISA and MasterCard and card companies like American Express and Discover
Financial Services. They have established the network and processing
infrastructures required to authorize payments and transfer funds, and have
implemented large-scale marketing programs to promote consumer and merchant
acceptance of existing card brands and new card-related products.
Through the use of payment cards, cardholders traditionally have had the
flexibility to purchase goods and services either in person at a merchant's
physical store or conveniently in their own homes or offices through telephone
or mail order. These traditional distribution channels have been broadened by
the emergence of the Internet as a medium for commerce. The global acceptance
of payment cards and the convenience they provide facilitate business-to-
consumer and business-to-business commerce in the physical world and over the
Internet.
To initiate a typical payment card transaction, the merchant receives the
cardholder's payment card information through a variety of means, including
physical presentation of the actual card, mail order, telephone order or over
the Internet. The e-payment system at the merchant location captures the card
and transaction information and forwards this information to the merchant's
bank or a third-party financial transaction processor. Through its payment
software system, the merchant's bank or processor requests authorization from
the cardholder's bank. The cardholder's bank receives the information, confirms
that the cardholder has sufficient funds or credit available and approves or
declines the transaction. If the transaction is approved, the cardholder's bank
charges the cardholder's account while the merchant's bank or processor
transfers funds to the merchant's account.
E-Commerce Transactions
In an Internet transaction, the payment card information must first be
entered by the cardholder either directly on the merchant's web site or into an
electronic wallet resident on the cardholder's computer or mobile phone.
Typically, software resident on the cardholder's computer or mobile phone
encrypts and then transmits the information to the merchant over the Internet.
The e-commerce payment software resident on the merchant's server receives the
card information and forwards this information to the merchant's bank or
financial transaction processor. The merchant's bank's or processor's e-payment
system captures and processes the payment information and, together with the
cardholder's bank, settles the transaction.
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Software is required by each participant at each stage of an e-commerce
payment transaction. Banks, financial transaction processors, merchants and
cardholders are interdependent, and therefore the e-payment systems that link
them must interoperate to efficiently and securely complete payment card
transactions. It is also necessary for e-commerce software payment systems to
integrate with existing hardware and software payment systems, particularly
mainframe systems that continue to be operated by banks and financial
transaction processors. Additionally, the increased globalization of e-commerce
presents payment challenges, such as translation adjustments for multi-currency
transactions and the ability to bill cardholders in the currency of their
choice.
The Need for Security and Authentication
Losses incurred as a result of payment card fraud are typically borne
primarily by the card companies or member banks of card associations, and to a
lesser extent by merchants and cardholders. In addition, card companies and
member banks incur significant administration costs to verify the authenticity
of charges that cardholders have repudiated. This repudiation can occur when
the name of the merchant for a particular charge presented on the cardholder's
monthly bill is unrelated to the name of the merchant from whom the cardholder
made the purchase or when the cardholder believes that their card has been used
fraudulently. To minimize fraud and repudiation in the physical world, card
associations and card companies have encouraged merchants to use electronic PoS
systems and e-payment software solutions, often in conjunction with enhanced
encryption and other embedded security technology.
The emergence of the Internet as a medium for commerce has significantly
increased the risk that payment card fraud and repudiation can occur. According
to a recent study conducted by VISA International, several member banks in its
European region were experiencing repudiation and discovered fraud rates as
high as 50% for Internet transactions while transactions originating on the
Internet represent only 1% to 2% of total transaction volumes. In addition,
according to Jupiter Communications, Internet merchants report a repudiation
level ranging from 25% to 30% of their total revenue. We believe that the
higher incidence of fraud and repudiation in Internet transactions is primarily
caused by:
. an inability to effectively verify the identity of, or authenticate, the
cardholder
. an inability to confirm the legitimacy of, or authenticate, the merchant
. theft of cardholder information that resides unencrypted on a merchant's
server
. inadequate encryption technology
. the aggregation of merchant transactions on the Internet by
intermediaries, such as commerce service providers, resulting in
confusion regarding the name of the merchant for a particular charge
presented on the cardholder's monthly bill
Netscape developed a standard for the transmission of information over the
Internet known as SSL. SSL is currently the most prevalent Internet security
solution as a result of being embedded in the Netscape and Microsoft web-
browsers. The SSL standard provides a limited level of encryption security and
only generic digital certificates for users.
Digital certificates are specially prepared software files that uniquely
identify an on-line entity such as a cardholder, payment card, merchant, bank
or e-mail account. However, the digital certificates embedded in the Microsoft
and Netscape web browsers are generic and thus do not provide a unique
identification of each individual user. We believe that the lack of unique
digital certificates has resulted in a high level of repudiated e-payment
transactions.
In a typical SSL transaction, a cardholder's payment card number and other
payment information is encrypted and transferred to the merchant who, in turn,
decrypts this information to process the transaction. The decrypted payment
card number is stored on the merchant's computer, where it is vulnerable to
theft by either a merchant's employee or an outside computer user who
infiltrates the merchant's computer. The stolen payment card number may then be
fraudulently used. This is one of the recognized security limitations of the
SSL standard when used for e-payment transactions over the Internet.
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In response to the deployment of non-unique certificates and the security
limitations of SSL, VISA and MasterCard developed the SET standard. SET is a
comprehensive security standard which is specifically designed for payment
card transactions over the Internet. In contrast to SSL, the SET standard
increases the security of e-payment transactions by:
. keeping the payment card number encrypted while it is handled by the
merchant by employing multiple levels of encryption between the
cardholder, the merchant and the bank or financial transaction processor
. providing unique digital certificates to all parties to an e-payment
transaction, thus authenticating all parties and reducing repudiation
. providing stronger encryption, further enhancing the security of the
transaction
Using SET, a cardholder's payment card number, unique digital certificate
and other payment information is encrypted and transferred to the merchant.
Because this information is bundled in separate packets, the merchant can only
decrypt the information necessary to process the transaction and cannot
decrypt the cardholder's payment card number. Instead, the encrypted payment
card number is forwarded to the merchant's bank. The merchant's bank decrypts
the payment card number and, together with the transaction information,
requests an authorization from the cardholder's bank. In addition, the
merchant's bank authenticates the digital certificates of both the cardholder
and the merchant, verifies their identities and confirms that the goods the
cardholder has ordered match those that the merchant plans to deliver. Based
on the outcome of these authorizations and authentications, the transaction is
approved and settled.
To encourage use of the SET standard, VISA and MasterCard announced in July
1998 the adoption of the following incentives:
. network transaction fees would not be imposed on the cardholders' or
merchants' banks for SET transactions
. SET transactions would qualify for the lowest offered interchange rates;
in contrast, SSL transactions are charged at a rate equivalent to mail
order and telephone transactions--typically twice that of transactions
in the physical world
. merchants would be relieved of liability if cardholders repudiate
purchases for which they are being billed
We believe that the e-payment industry will continue to be influenced and
shaped by the strategies and initiatives of VISA and MasterCard, along with
other industry and technology leaders. Furthermore, we believe that the
continued growth in number and complexity of e-payment transactions, together
with the emergence of the Internet and wireless networks as a channel for e-
commerce, will continue to drive the need for secure, flexible and trusted
e-payment solutions. Currently the SSL standard remains the predominant
standard for secure e-payment transactions. The SET standard has not yet been
broadly adopted, nor is this adoption certain. We believe that the key
participants in the e-payment industry, such as banks, card associations and
merchants, will continue to demand software solutions and services from
focused, responsive and innovative vendors who are able to deliver products
that support all standards that are adopted by the marketplace over time.
The Trintech Solution
We are a leading provider of secure e-payment solutions for payment card
transactions. We develop, market and sell a comprehensive suite of software
and electronic PoS systems that enable card-based electronic
The following elements of our solution enable us to deliver key competitive
advantages to our customers:
Secure Encryption Technology. Our products have been developed using
innovative, robust, cryptographic technologies. All of our e-commerce software
products support both the SET and SSL standards.
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We were the first software company to implement a SET transaction. Our SET
software products provide 1,024 bit data encryption and handle all of the
cryptographic processing and messaging management required by the SET standard.
Our SSL software products provide up to 128 bit data encryption. Our Internet
software products can incorporate digital certificates to authenticate all
parties to an e-payment transaction, which can reduce fraud and repudiation. We
have also developed software applications to enhance the security of smart card
e-payment transactions. In addition, our electronic PoS system products support
the DES, Triple DES and RSA Security public key security algorithms to meet the
security standards required by our customers.
Flexible Range of Solutions. Our suite of products provides flexible e-
payment solutions for each participant in a transaction: banks and financial
transaction processors, merchants and cardholders. Our products are designed to
be modular, permitting them to interoperate with e-payment products of other
vendors. Alternatively, by offering our products as an integrated end-to-end
payment solution, we also provide a complete solution for our customers.
Comprehensive Functionality. Our software products have been designed for
scalability and operate in multi-currency, multi-taxation, multi-payment
protocol and complex communication environments. We are one of the few vendors
to offer integrated secure e-payment solutions that allow customers to process
transactions in the physical world and over the Internet.
Open Systems Architecture. Our open architecture design supports a wide
variety of operating systems, databases and merchant commerce servers. Our
software solutions for banks, financial transaction processors and merchants
have been developed for Windows NT and UNIX client/server platforms. Our
approach is to develop once only solutions to run on multiple platforms. This
approach facilitates integration with existing hardware and software systems,
including mainframe systems. In addition, our software products are vendor
neutral and are designed to interface with e-payment hardware and software
products of third-party vendors, including IBM, Oracle, Verifone, Microsoft,
SAP and Intershop.
Expertise in Secure E-Payment Industry. Since our inception, we have focused
on developing secure e-payment solutions for payment card transactions. We
believe our 13 years of experience in this industry has enabled us to develop
sophisticated e-commerce solutions for payment card transactions over the
Internet. We also believe that this industry focus has enabled us to develop
strong and close relationships with the card associations and banks that can
influence the structure and development of the e-payment industry.
Trintech's Growth Strategy
Our mission is to become the leading worldwide provider of secure e-payment
solutions for payment card transactions. The key elements of our strategy to
achieve this mission are the following:
Leverage Technology Expertise. Using our 13 years experience in developing
secure e-payment solutions, we have leveraged our technology expertise to
develop advanced solutions for this market. For example, our merchant software
product runs on multiple platforms, including personal computers located in
merchant call centers, third-party PoS systems, such as electronic cash
registers, and our own electronic PoS system products. In addition, we continue
to develop innovative electronic PoS system products. We intend to continue to
invest significant resources to further develop our product suite.
Extend Early Lead in Internet E-Payment Software. We were one of the first
software companies to adopt both the SET and SSL standards, and we were the
first software company to implement a SET transaction. We intend to continue to
extend our range of SET and SSL products and support new e-payment standards
and Internet technologies, including wireless access technologies, as they
emerge. For example, in February 2000, we jointly announced with Motorola the
availability of e-payment software applications for mobile commerce
transactions using mobile phones.
Continue to Build Strategic Relationships with Key Industry Leaders. We have
strategic relationships with VISA, MasterCard, Compaq, SAP America, Intershop
and RSA Security. These relationships have
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provided a number of competitive advantages, including access to product
development plans, joint marketing opportunities and lead-generation for our
direct sales force. We intend to continue to enter into development and
marketing alliances with key industry leaders to produce and distribute
custom-tailored e-payment solutions for specific market segments.
Expand Channels of Distribution Globally. We have relied primarily on our
direct sales force to market our products to banks and financial transaction
processors, card associations, card companies and other major U.S. and
international financial institutions. With the expansion of our e-commerce
product line, we are increasingly targeting large merchants, Internet service
providers and commerce service providers. To reach organizations that cannot
otherwise be effectively targeted by our direct sales force and to increase
worldwide market penetration, we have begun to use indirect sales channels,
including resellers providing additional services, systems integrators and
consultants.
Target Fast-Growing Markets. We believe that fast-growing markets can
provide significant marketing opportunities for e-payment applications. We
have recently begun to target Internet service providers, commerce service
providers, and telecommunications companies, including service and equipment
providers. Our goal is to begin to target cable-based providers of high-speed
Internet access to homes and businesses, and financial services companies
within the next 12 months.
Build Strong Brand Recognition. We are a leading brand name in the e-
payment industry and believe that we are benefiting from our early industry
presence. Our strategy is to promote, advertise and build our brand equity and
visibility through excellent service and a variety of marketing and
promotional campaigns. We plan to continue to invest significant resources in
our on-line marketing programs, such as epaynews.com, an award-winning site
for information and trends related to e-payments in the e-commerce industry.
Trintech Products
Our products are designed to provide flexible, vendor neutral, secure e-
payment solutions for banks, financial transaction processors, merchants,
businesses and cardholders. Our products can be deployed on a standalone
basis, or combined with each other to provide an end-to-end secure e-payment
solution or integrated with third party products. In addition, our products
support a broad range of communication protocols and security standards. Our
products also support multiple currencies, languages and payment protocols. In
connection with the license of our products, we provide a range of support
services to our customers including preventive maintenance, compliance,
upgrades, site inspections and 24-hour telephone and on-line support.
The following table summarizes our product lines, product functionality and
the end-users of our products:
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Product
Product Line Functionality End-user End-user Profile End-user Need
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PayGate Captures, Banks, financial Any business Pay merchants
authorizes, transaction that processes and bill
settles and processors, and settles cardholders
bills payment Internet or payment card while minimizing
card commerce service based fraud and
transactions and providers transactions or transaction
issues on-line issues on-line costs in the
payment cards payment cards physical world
and over the
Internet
PayWare Enables Merchants Any business Receive payment
Compact merchants to selling goods or for goods or
capture payment services that services in a
card and accepts payment secure,
transaction cards guaranteed form
information from with minimal
cardholders, and fraud over
send this multiple
information to channels,
the merchant's including
bank for payment physical retail
processing outlets and over
the Internet
EzCard Enables Cardholders On-line Pay for goods or
NetWallet cardholders to purchasers services with
securely pass payment cards in
details of their a secure manner
payment cards to over the
merchants over Internet
the Internet
</TABLE>
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Bank and Financial Transaction Processor Products: PayGate
PayGate is an e-payment transaction software suite primarily used by banks
and financial transaction processors. PayGate supports the payment card
transaction processing needs for both the merchant's bank and the cardholder's
bank. It uses a scalable and interoperable payment architecture for Windows NT
and UNIX platforms and supports modular payment components for specific
financial instruments and operating environments. This product provides
financial transaction processors and banks with the ability both to issue on-
line payment cards and to capture and process card-based e-payment transactions
in both the physical world and over the Internet. The PayGate product line is
designed to interface with third-party products, including many banks'
mainframe systems. The following are the principal products in the PayGate
product suite:
. PayGate Acquirer provides e-payment processing capabilities. PayGate
Acquirer consists of a suite of payment modules that can be purchased
individually or as part of an integrated suite. It provides banks and
financial transaction processors with the functionality required to
capture, authorize, settle and bill payment card transactions. PayGate
Acquirer was first released in May 1995. Core capabilities include:
-- transaction authorization functionality using a choice of protocols,
including certified interfaces to the VISA, MasterCard and EuroPay
networks, as well as a majority of the proprietary bank networks
-- data capture functionality using a choice of protocols, including
enhanced data formats for applications such as fuel and fleet card,
corporate and purchase card item detail, and loyalty schemes
-- automatic detection of the SSL and SET standards
-- smart card PoS device management, allowing the downloading of funds,
personal identification number verification and data capture for
off-line electronic purse transactions
-- remote deployment, update and configuration of merchant applications
. PayGate NetIssuer is designed to support the needs of payment card
issuers by enabling the distribution and management of electronic
payment cards and wallets. PayGate NetIssuer was first released in April
1999. PayGate NetIssuer provides the following functionality:
-- it can be deployed in a variety of configurations, with the majority
of the functionality residing on a bank's or financial transaction
processor's server or in a distributed manner with functionality
residing on a client's personal computer or within a smart card
-- it helps to reinforce the brand identity of the issuing bank by
providing dynamic delivery of up-to-date marketing and advertising
messages to issued wallets while the wallets are being used
-- it interacts with existing bank certificate authorities to pre-
generate authentication certificates while simultaneously supporting
SSL and SET payment options
Sales prices for PayGate licenses range from $50,000 to $500,000, depending
on the product licensed, the number of modules and the number of transactions
that can be processed.
Merchant Products: PayWare and Electronic PoS Systems
Payware
PayWare is an e-payment transaction software suite primarily used by
merchants. It can be deployed as a standalone merchant e-payment system or can
be integrated with third-party products. PayWare consists of a suite of payment
modules that can be purchased individually or as part of an integrated suite.
It offers a range of modules designed to meet merchant requirements for e-
commerce over the Internet or in a variety of retail environments in the
physical world, including large department stores, grocery chains, call
centers, mail order
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and telephone order. PayWare runs on multiple computing platforms, including
the following: computers running on Windows and UNIX operating systems located
in merchant businesses and call centers; third-party PoS systems, such as
electronic cash registers; and our own electronic PoS system products. For e-
commerce transactions over the Internet, PayWare processes secure e-payment
transactions using SSL or SET standards or a combination of both. We recently
introduced PayWare ERP, our enterprise product that operates seamlessly with
SAP's R/3 enterprise resource planning system.
Our Payware suite of products includes:
. PayWare Net is our primary e-commerce solution for Internet merchants.
It supports SSL and SET payment options. It is designed to interoperate
with commerce servers from Microsoft, Intershop and other third-parties.
We released PayWare Net in December 1998.
. PayWare NetHost is an e-commerce solution for Internet service
providers, commerce service providers and portals that provide hosting
services for Internet merchants. PayWare NetHost is designed to enable
these providers to manage e-payment transactions for multiple merchants
and to provide browser-based, remote administration facilities for
hosted merchants. We released PayWare NetHost in May 1999.
. PayWare SmartCard supports a variety of smart card-based payment options
for merchants. These payment options include small-value purchases over
the Internet and digital certificate-based identification and
authentication. We released PayWare SmartCard in June 1998.
. PayWare PurchaseCard is our business-to-business e-payment solution.
PayWare PurchaseCard allows businesses to define and implement corporate
purchase card policies and guidelines. This can significantly reduce the
administration cost of low-value procurement transactions. We released
PayWare PurchaseCard in April 1999.
. PayWare ERP seamlessly integrates our e-payment merchant functionality
into the SAP R/3 system for physical world and e-commerce payment card
transactions. We released PayWare ERP in September 1998.
. PayWare Call Center is our e-payment solution for call centers and mail
order centers. It is designed to integrate with third party software
systems and provide the e-payment functionality for telephone order and
mail order purchases. We released PayWare Call Center in March 1998.
Sales prices for PayWare licenses range from $500 to $250,000, depending on
the product licensed, the number of modules and the number of transactions that
can be processed.
Electronic PoS systems
Our electronic PoS system product line, Compact, contains the features and
functions required by merchants to manage card-based e-payments in the physical
world. The Compact product line is comprised of point of sale devices, high-
security personal identification number pads, and a software development
toolkit for merchant e-payment transactions in the physical world. This product
line has historically been the foundation of our sales and long-term
relationships with banks and financial transaction processors.
. Compact 9000i is a range of card acceptance PoS devices for merchants to
process payment card transactions, including smart card transactions, in
large department stores, grocery chains, restaurants, hotels and service
businesses. These countertop devices deliver e-payment transactions in a
secure electronic format to the payment networks for authorization and
data capture for onward settlement. The software configurations of these
products are modular and can be varied to meet the needs of a wide range
of merchants. We recently introduced the eVia 2000 which provides secure
payment mobility for merchants through the use of wireless standards,
including DECT and GSM, and IP-Protocols. We released our first
electronic PoS device in October 1989.
. Compact 950-PP is a high security cardholder interface device for a
cardholder using a debit or credit card to enter his personal
identification number. This product then encrypts the personal
identification number for forwarding in a secure message format to an
authorization center for verification. The
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Compact 950-PP contains alarm security electronics to prevent
unauthorized access to customer card and personal identification number
data. It is also used for viewing and deducting value from smart cards.
Secure payment applications and payment encryption keys can be securely
and remotely downloaded to the device. This product supports DES, Triple
DES and RSA public key encryption standards. We released the Compact
950-PP in February 1997.
. Compact 9000i SDK is a software development toolkit that allows our
distributors and partners in local markets to develop and test diverse
software modules for custom-tailored payment card applications. The SDK
includes a license for foundation software libraries, development and
test tools, as well as documentation. We released the Compact 9000i SDK
in March 1999.
Compact PoS devices and pin pads range from $325 each to $750 each,
depending on the functionality and the software modules included. Licenses of
the software development toolkit commence at approximately $50,000.
Cardholder Products: EzCard and NetWallet
EzCard is an e-payment transaction software product primarily used by on-
line cardholders. It provides secure storage and transfer of payment data to
the merchant. It also manages card accounts, digital certificates, delivery
address information and purchase history details. EzCard complies with the new
electronic commerce modeling language standard, developed by companies
including Visa, MasterCard, Trintech, Microsoft and America-On-Line, and,
supports both SSL and SET payment options. This product automatically
completes the merchants' purchasing data web page for merchants that comply
with this new standard. EzCard also allows payment card issuers to perform
risk management by monitoring on-line purchases and managing fraudulent card
activity. In addition, payment card issuers can advertise and market directly
to EzCard holders through PayGate NetIssuer, which manages messages to and
from the EzCard. Payment card issuers can also create on-line branding through
customizing EzCards for their customers. To promote the use of payment cards
for e-commerce, we have in the past and intend to continue to distribute
EzCard bundled with PayGate NetIssuer. We released EzCard in July 1999.
NetWallet is the precursor to our EzCard product. We released NetWallet in
October 1998 to promote the use of payment cards for e-commerce. Historically,
we have distributed NetWallet on a standalone basis at a minimal charge or
bundled with PayGate NetIssuer.
Services
To complement and support our product offerings, we provide our customers
with the following services:
. Consulting services. Our consulting team provides comprehensive project
management, using sophisticated methodologies and tools to identify
customers' business objectives and requirements for e-payment solutions.
We implement these solutions with our customers according to mutually
agreed plans and milestones. We also provide in-house product
consultation, and provide technical services to design or enhance our
customers' existing information technology infrastructure.
. Educational and training services. We offer educational and training
programs targeted specifically at users and administrators of our
customers' information technology systems. These programs are tailored
to provide customers with the technical knowledge to operate our e-
payment solutions. Additionally, seminars and other educational
initiatives are available on an ongoing basis to assist our customers in
staying current with advances in the e-payment industry.
. Customization and implementation services. We provide customization
services to customize or configure our solutions to meet our customers'
particular needs and to integrate our products into their other
processing, accounting and communications systems. Our experienced
professional services engineers also perform on-site implementation
services to manage, in conjunction with our customers' information
technology resources, the implementation of their new systems through
the testing and acceptance phases of the overall implementation plan.
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<PAGE>
Technology
Our software solutions incorporate advanced technologies to address user
requirements in today's highly distributed networking environments. Our
products support high volumes of transactions. Our recently released e-payment
software products are browser based to take advantage of client operating
system portability.
Our software is developed using C, C++, Java and web programming languages
and standards, and incorporates the following features:
. System Architecture. Our products are modular in design and flexible in
implementation, so that they can be rapidly adapted to address specific
customer requirements. We employ an object oriented systems
architecture, allowing us to add and re-use functionality across
existing and new products, lowering our product development costs. Our
modular design can improve our time to market for new products,
including emerging applications for products such as personal digital
assistants, advanced mobile telephones and set top boxes.
. Security and encryption. Due to the sensitive nature of the data handled
by our products, we have developed significant expertise in encryption
technology. We employ a dedicated team of cryptography specialists who
focus on the development of advanced cryptography algorithms and
software products. This team includes nine professionals with doctorate
degrees in mathematics, physics or related fields. These professionals
are responsible for implementing the security infrastructure that forms
the basis of our products. This infrastructure incorporates advanced
security algorithms including DES, Triple DES and RSA private/public key
and other advanced proprietary algorithms.
. Protocols and infrastructure. It is critical that our products be
interoperable with a wide range of payment networks and customer
information technology systems. Our products therefore feature advanced
application programming interfaces, or APIs, to facilitate
interoperability with payment systems and applications. Our products
also support a variety of communications protocols, including Internet
and telecommunications protocols such as X.25, ISDN and ATM, as well as
specific bank authorization and settlement protocols.
. Support of widely accepted technologies. Our products are configured to
run on operating systems and to support databases widely adopted by the
e-payment industry. This includes the Windows and UNIX operating
systems. They are also designed to integrate easily with enterprise
resource planning software systems, such as the SAP R/3 system.
Customers
We have a customer base of over 100 banks, financial transaction processors,
card associations, card companies, Internet service providers and technology
companies. As of January 31, 2000, we had shipped over 60,000 electronic PoS
systems and over 5,000 licenses of secure e-payment software. A representative
sample of our customers is as follows:
Banks, Card Associations Financial Transaction Processors
and Card Companies --------------------------------
--------------------------------------- Allcash
Bank of Ireland B+S Card Services
Boland Bank EasyCash
S-E Banken GRK
MasterCard Lufthansa Air Plus Card
VISA International Services
Discover Financial Services Post Girot
VISA USA Which/Tyco International
Technology Companies
Internet Service Providers -------------------
--------------------------- Cap Gemini
Big Planet Galileo
Open Market Inc. SAP
[email protected] (a subsidiary of Deutsche Bank) Siemens
Fort Nocs
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Sales and Marketing
Our sales and marketing efforts are targeted at three principal regions:
. Europe, Middle East and Africa,
. North and South America, and
. the Asia-Pacific region
Our principal market is Germany, which represented 60% of our total revenue
in fiscal 2000. Our sales strategy is to use our direct sales force in
conjunction with indirect distribution channels such as regional distributors
and co-marketing relationships with established leaders in the e-payment
industry. In Europe, we plan to continue to market our electronic PoS systems
and e-payment software through our direct sales force and strategic
partnerships. Consistent with our historical strategy, we plan to continue to
focus our electronic PoS systems marketing in Europe, primarily in Germany. In
North and South America, we intend to continue to use a direct sales approach
together with alliances and partnerships to develop this market for our
Internet software products. In the Asia-Pacific region, we plan to continue to
rely primarily on independent distributors to market our Internet software
products.
Direct Sales Channel
We have direct sales offices in Dublin, Ireland; Frankfurt, Germany; San
Mateo, California and Miami, Florida. We also have a direct sales and product
marketing office in Austin, Texas. These offices coordinate direct sales and
manage indirect sales channels in the various regions. Due to the technical
nature of our products, members of the direct sales force are accompanied by
pre-sales technical support staff who are key to closing sales contracts and
winning customer confidence.
Our direct sales accounted for approximately 96% of our total revenues in
fiscal 2000. At January 31, 2000, we employed 27 direct sales people who
primarily target card associations and card companies such as VISA, MasterCard,
Discover and American Express, as well as banks, financial transaction
processors and large merchants. Our direct sales group has also begun to target
Internet service providers and commerce service providers as customers of our
Internet software products.
Indirect Sales Channel Strategy
To further facilitate worldwide market penetration and complement our direct
sales efforts, we have begun to establish a range of indirect sales channels.
We expect these indirect channels to account for an increasing percentage of
our total revenue as we implement this strategy and e-commerce becomes more
widely adopted. These indirect channels include:
. Resellers Providing Additional Services. Since 1998, we have used
regional resellers trained and certified by us to develop customer
relationships and expand our global branding. We provide resellers such
as Prism in South Africa and Scopus Tecnologia in Brazil with our
software technology and implementation expertise.
. Systems Integrators and Consultants. We leverage our relationships with
systems integrators and consultants to market our e-payment solutions
while in turn providing them with the opportunity to make a highly
functional, vendor-independent solution available to their customers.
. Emerging Distribution Channels. We continually evaluate new methods and
opportunities to market and sell our products, including through on-line
Internet sales or branding opportunities with banks and other financial
institutions.
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Strategic Relationships
We intend to expand our position in the e-payment market by forming
additional strategic technology and marketing relationships with key industry
players. To date, we have established strategic relationships with VISA,
MasterCard, RSA Security, Compaq, SAP and Intershop. We believe our technology
and marketing alliances offer us a number of competitive advantages, which vary
with each relationship. These advantages include sales lead generation, early
access to the partner's engineering plans and technical personnel for
assistance in developing new product offerings. The following describes our
current strategic relationships:
VISA. We initially developed a strategic relationship with VISA
International in Europe and have since extended this relationship to the United
States, Latin America and the Asia-Pacific region. VISA currently markets
PayWare Net in different regions throughout the world. In addition, VISA
exclusively recommends our PayGate software to replace its proprietary data
capture software used by over 30 of its member banks. In August 1997, we
entered into agreements with VISA LAC relating to the marketing and
distribution of NetWallet in Latin America, including the customization of
software to provide e-payment solutions for VISA's smart card customers. In
August 1998, VISA International became a shareholder in us. In May 1999, VISA
USA entered into a strategic alliance with us to provide one-stop e-commerce
solutions for VISA's member banks and Internet merchants, incorporating our
PayWare and PayGate technology.
MasterCard. In 1999, we entered into a technology and strategic alliance
agreement with MasterCard International. Under the terms of this agreement,
MasterCard has agreed to license our PayGate NetIssuer product, to host and
operate a pilot site demonstrating PayGate NetIssuer, and to actively market
this product to MasterCard's member financial institutions and refer business
to us. We have agreed to provide sales materials to MasterCard and to provide
support for their marketing programs for PayGate NetIssuer. In addition, we and
MasterCard have jointly agreed to publicize this relationship, to maintain
links in a prominent position on each other's websites and to meet quarterly to
discuss product development.
RSA Security. In 1998, we entered into a technology license agreement with
RSA and also established a continuing strategic relationship. The technology
licensing agreement provides us with royalty-free access to source and object
code for cryptography functionality that we have incorporated into our e-
payment software products. In addition, we and RSA have entered into a joint
marketing agreement to publicize the relationship and encourage the sales of
our products that incorporate RSA's cryptographic technology. RSA also provides
us with sales leads and a link on their web site. RSA has made a strategic
equity investment in us, and its vice chairman sits on our board of directors.
Compaq. We are collaborating with Compaq to develop and provide Compaq and
its customers a secure e-payment software module that integrates with Compaq's
ActiveAnswers Internet solution, a product targeted to e-commerce needs. This
module is being designed to include the functionality of PayGate and PayWare.
Upon completion, our module will offer Compaq's customers with highly reliable,
secure Internet e-payment functionality running on Compaq ProLiant and
AlphaServer platforms.
SAP. We are a member of the SAP's complementary software program. As part of
the alliance, we have provided a secure e-payment module, PayWare ERP, for the
SAP R/3 system release 4.0 enterprise business software solution. SAP also
provides us with sales leads and a link on their web site.
Intershop. We work with Intershop to integrate our PayWare Net e-payment
product with Intershop's merchant server solutions to jointly provide complete
payment and hosting solutions to on-line merchants offering goods and services
on the Internet using SSL or SET security standards. Our enhanced version of
PayWare Net supports multiple currencies and payment types, complementing
Intershop's technology.
Research and Development
We believe that our future success will depend in large part on our ability
to enhance and expand our technologies. We intend to continue to develop new
and innovative e-payment solutions to respond to the needs
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of our customers in this rapidly changing industry. We intend to offer products
that interoperate with a variety of new and emerging acceptance channels and
communication and security protocols. We have developed our e-payment products
both independently, through our research and development team, and through
funded development projects, such as the development of certain modules of
PayWare SmartCard for VISA International. From time to time, we have acquired
or licensed technology from third parties, including encryption technology from
RSA Security.
Each of our development centers has been chosen for its combination of
access to global markets and the availability of skilled personnel. The
following lists our research and development centers and their primary
concentration:
. Dublin, Ireland: Electronic PoS systems and e-payment software
. Princeton, New Jersey: Encryption and authentication
. San Mateo, California: E-commerce payment solutions
. Frankfurt, Germany: Smart card applications
As of Feburary 29, 2000 we had a total of 161 employees dedicated to
research and development. Research and development expenses were $1.7 million
in fiscal 1998, $3.7 million in fiscal 1999 and $8.9 million in fiscal 2000.
Manufacturing
We outsource the fabrication, testing and packaging of our electronic PoS
system products to Keltek and Fujitsu, enabling us to concentrate our resources
on product design and software development. We believe this eliminates the high
cost of owning and operating a manufacturing facility. The manufacturing
facilities for Keltek are located in the United Kingdom and for Fujitsu are
located in Ireland.
We maintain a five-person quality control team that oversees the manufacture
of the products by Keltek and Fujitsu to ensure that our specifications are
met. These quality assurance engineers have both extensive knowledge of our
products and expertise in software quality assurance techniques. Members of the
team conduct on-site inspections of the manufacturing facilities of our
subcontractors as well as periodic assessments of products shipped by our
subcontractors to us. The members also participate on all beta release teams
and provide initial training materials for customer support and service.
Competition
The card based e-payment industry is highly competitive, and we expect
competition to increase as other e-payment companies introduce electronic PoS
system products and e-payment software. In the electronic PoS systems market,
we principally compete with Verifone, a subsidiary of Hewlett-Packard, Giesecke
& Devrient, Dassault, Hypercom and Ingenico. Indirectly, we also compete with
local firms that offer country-specific alternatives. In addition, several of
our electronic PoS system products compete with software solutions designed by
our customers' in-house engineering departments. Competition has in the past
caused us to reduce the average selling prices of our electronic PoS systems,
and we expect this trend to continue.
In the e-payment software market for payment card transactions in the
physical world, we principally compete with Verifone, CyberCash and Transaction
Systems Architects. In the e-payment software market for payment card
transactions over the Internet, we principally compete with IBM, Verifone,
GlobeSet and CyberCash. Additionally, we experience significant competition
from existing and potential customers that develop, implement and maintain
their own proprietary e-payment solutions relating to our e-payment software
solutions for both the physical world and the Internet. These existing and
potential customers are primarily banks, financial transaction processors and
merchants.
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In each of the electronic PoS systems and e-payment software markets, we
compete primarily on the basis of the following factors:
. product capabilities and technical features
. product performance and effectiveness
. price
. support of industry standards
. ease of use
. customer technical support and service
We believe that we compete favorably in each of these markets based on these
factors. However, in particular cases, our competitors may offer electronic PoS
system products or e-payment software with functionality that is sought by our
prospective customers and which differs from that offered by us. Several of our
competitors have also in the past, and may in the future, distribute products
in pilot programs at low-cost or below-market prices or, in the case of
electronic wallets, at no cost.
Additionally, several of our competitors have significantly greater
financial, technical and marketing resources and larger installed customer
bases than us. Also, a number of our competitors have been acquired by, or
formed strategic alliances with, industry leaders with significant resources.
We may not be able to compete successfully against current and future
competitors. In addition, our current and future competitors may develop
products comparable or superior to those developed by us or adapt more quickly
than us to new technologies, evolving industry standards or customer
requirements. Increased competition could result in price reductions, reduced
margins and loss of market share, any or all of which could have a material
adverse effect on our business, financial condition, results of operations and
prospects.
Intellectual Property and Proprietary Rights
Our success is dependent on our proprietary software technology. We rely on
a combination of patents, contractual rights, trade secrets, copyright law,
non-disclosure agreements and trademarks to establish and protect our
proprietary rights in our products and technologies. Our patents include the
following:
<TABLE>
<CAPTION>
Field of Application Regions Issued Regions Pending
-------------------- -------------- ---------------
<S> <C> <C>
Ireland, U.S., Canada, European Union, Ireland,
Electronic field of point- Australia, U.S., Australia, Brazil, and
of-sale security system South Africa, U.K., Japan Japan
incorporated in Compact and Germany
Secure merchant transaction Ireland European Union, U.S.,
software incorporated in Australia, Brazil, and Japan
PayWare
Secure bank/financial Ireland European Union, U.S.,
transaction processor Australia, Brazil, and Japan
software incorporated in
PayGate
Secure card issuing software -- European Union and U.S.
incorporated in PayGate
NetIssuer
</TABLE>
These issued patents and the pending patent applications cover key areas of
our e-payment software for payment card transactions in the physical world and
over the Internet, as well as our electronic PoS system products.
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<PAGE>
Our registered trademarks include the following:
<TABLE>
<CAPTION>
Trademark Regions Issued Regions Pending
--------- -------------- ---------------
<S> <C> <C>
Trintech logo -- Ireland
Trintech the Secure Way to -- Ireland
Pay logo
NetWallet -- United States
European Union, United --
PayWare States
European Union, United Ireland
PayGate States
PayPurse European Union, Ireland United States
PayLet -- United States, Ireland
S/PAY -- United States
</TABLE>
On March 31, 1998, we licensed the source code for S/PAY and J/PAY from RSA.
S/PAY and J/PAY are security toolkit products which enable the user to add
cryptography functionality to other software products for securing e-payment
transactions. The license is exclusive for that portion of the source code that
implemented and provided the functionality of parts of the SET 0.0 standard.
Under the terms of the agreement, we also received a royalty-free sublicensable
license to the object code of the licensed software. Our rights under the
license are subject to pre-existing rights of third-party licensees. In
exchange for receiving the rights under the license, we paid RSA a one-time
payment of $2.5 million in cash.
In addition to our patents, trademarks and technology licenses, we have
developed a significant portfolio of copyrights, know-how and trade secrets
during our 13 years of experience developing solutions for the e-payment
industry.
Except for the intellectual property described above, we are not currently
dependent on any intellectual property that is of material importance to our
business or profitability.
Employees
We employed the following numbers of employees as of January 31, 1998, 1999
and 2000:
<TABLE>
<CAPTION>
As of January
31,
--------------
Category 1998 1999 2000
-------- ---- ---- ----
<S> <C> <C> <C>
Research and development.................................... 63 103 155
Professional and support services........................... 19 39 35
Sales and marketing......................................... 13 46 54
Administration.............................................. 23 34 42
--- --- ---
Total..................................................... 118 222 286
=== === ===
</TABLE>
Of our total number of employees, as of January 31, 2000, 156 are located in
Ireland, 32 are located in Europe outside Ireland and 98 are located in North
America.
None of our employees are represented under collective bargaining
agreements. We have never experienced a work stoppage, and we believe that our
relations with our employees are good.
Additional risk factors that could affect operating results
In addition to other factors identified in this Form 20-F, the following
risk factors could materially and adversely affect our future operating
results, and could cause actual events to differ materially from those
predicted in our forwarding looking statements relating to our business.
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<PAGE>
We recently emphasized e-commerce software for Internet payment transactions,
an area in which we have limited experience.
We introduced our first e-commerce software product for Internet payment
transactions in 1996, and the majority of our e-commerce products and modules
that we currently market have been released in the last twelve months. As a
result, we have a very limited operating history in developing, marketing and
selling our e-commerce software, which makes the prediction of future operating
results for this portion of our business very difficult. A substantial majority
of our research and development expenses in the past two years has related to
e-commerce software for payment card transactions, and this effort will
continue to account for a significant percentage of our total research and
development expenses. Demand for our e-commerce software may not increase and
these products may not gain market acceptance. If we fail to increase sales of
our e-commerce software, our future revenue and net income, as well as the
prospects for this critical portion of our business, will be materially
adversely affected.
The standards for e-commerce payment transactions that we support may not
achieve broad market acceptance or market acceptance may be slower than
anticipated.
A significant part of our business strategy is to continue to develop
software products that support both SSL and SET standards for payment card
transactions over the Internet. If neither achieves broad market acceptance,
our results of operations and prospects will be materially adversely affected.
In addition, if a new standard emerges that is more accepted by the
marketplace, we may not be successful in developing products that comply with
that standard on a timely basis, or at all.
The SSL standard was developed in 1996, but it has not achieved broad
acceptance outside of North America. In particular, SSL has not achieved broad
acceptance in Europe, which is currently our primary market for our e-payment
solutions for payment card transactions in the physical world. The SET standard
was first implemented in 1997 to address perceived security limitations of SSL.
However, the SET standard has been adopted at a slower rate than we originally
anticipated, and currently the SET standard has achieved limited market
acceptance, particularly in the United States. Because our product development
efforts have focused on these two standards, future sales of our e-payment
products for Internet transactions and the rate of revenue growth attributable
to these products, will be materially adversely affected if these standards do
not achieve broad market acceptance.
Part of our strategy has been, and continues to be, to develop products that
support the SET standard. We pursue this strategy because we believe that
marketing SET-compliant products can differentiate us from competitors that do
not market SET-compliant products. We further believe that this differentiation
is important to our business because the level of competition relating to SSL
products is significantly greater than that relating to SET products. However,
the adoption of SET has been impeded by several factors, including:
. the ease of using SSL as compared to SET
. limited financial incentives for cardholders and merchants to use SET
. the installed base of SSL technology, including embedded functionality
in Netscape products
If SET technology is not broadly adopted, we will lose a potential
competitive advantage, and our prospects and results of operations could be
materially adversely affected.
To be successful, we will need to effectively respond to future changes in the
rapidly developing markets in which we sell our software products.
The markets for our e-payment software solutions for the physical world and,
in particular, for payment card transactions over the Internet, are at early
stages of development and are rapidly evolving. Our ability to design, develop,
introduce and support new e-payment software products and enhancements to
existing products on a timely basis that meet changing market needs and respond
to technological developments is
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<PAGE>
critical to our future success. In addition, these products will need to
support industry standards and interoperate with a variety of third parties'
products, including those of our competitors. We may be unable to develop
interoperable products, and widespread adoption of a proprietary or closed
e-payment standard could preclude us from effectively doing so. Also, the
number of businesses and cardholders engaged in e-commerce may not grow or
could decrease, reducing the potential market for our e-commerce products.
The market for e-payment solutions for mobile commerce may not develop and, if
it does develop, we may not be able to develop products that successfully
compete in this market, either of which would significantly impact our
financial results and prospects.
In February 2000, we announced the availability of our first e-payment
solution for making online purchases from mobile phones and other wireless
devices. We have not yet begun to market or sell this m-commerce payment
product, nor do we currently have any commercial customers for this product. We
intend to invest a significant portion of our future research and development
expenses to enhance this first product and to develop one or more additional
products for the m-commerce payment market. However, we cannot predict whether
we will be successful in these development efforts or whether our existing
product or any future m-commerce products will gain market acceptance. We do
not currently expect to recognize significant revenue from m-commerce products
until at least late fiscal 2002. In addition, if this market develops, we may
face significant competition from major telecommunication service providers and
mobile phone handset and equipment providers, among others. These companies
have significantly more resources than us and may develop new standards for
payment card mobile phone based transactions which we do not address and may
not be able to support in the future. In addition, these companies may provide
similar products to ours at a lower cost or at no cost to facilitate sales of
their telecom equipment or mobile phones. If we fail to generate significant
sales of our m-commerce payment products, our future revenue and net income, as
well as the prospects for this portion of our business, will be materially
adversely affected.
We depend on sales of our electronic point-of-sale systems for payment card
transactions for a substantial majority of our total revenue.
A substantial majority of our total revenue historically has been derived
from the sale of our electronic payment card point-of-sale system products. We
expect that these products will continue to account for a significant
percentage of our total revenue through at least fiscal 2002. We have
historically marketed our electronic PoS system products solely in Europe, and
particularly in Germany. For fiscal 2000, our customers in Germany accounted
for over 88% of our electronic PoS system product revenues. We intend to
continue to focus substantially all of our marketing efforts for our electronic
PoS system products in Europe, and particularly in Germany. As a result, our
future results of operations will depend on continued market demand for, and
acceptance of, these products in Europe in general and Germany in particular. A
reduction in demand for our electronic PoS system products could have a
material adverse effect on our business, financial condition and results of
operations.
Average selling prices for electronic PoS system products may continue to
decline, adversely affecting our results of operations, particularly our
revenue and operating and net income.
The market for electronic PoS system products is characterized by increasing
price competition, which historically has caused the average selling prices of
our electronic PoS systems to decrease over the life of each product. We expect
this trend to continue. To offset declines in the average selling prices of our
electronic PoS system products, we will need to reduce the cost of these
products by implementing cost reduction design changes, obtaining cost
reductions as and if volumes increase and successfully managing manufacturing
and subcontracting relationships. We do not operate our own manufacturing
facilities, and, as a result, we may not be able to reduce our costs as rapidly
as companies that operate their own manufacturing facilities. If we do not
design and introduce lower cost versions of our electronic PoS system products
in a timely manner or successfully manage our manufacturing relationships,
margins on our electronic PoS system products will
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<PAGE>
decrease. A decrease in margins or an accelerated decrease in average selling
prices could have a material adverse effect on our business, financial
condition and results of operations.
We have incurred losses and expect continued losses.
We incurred a net loss of $12.1 million for the year ended January 31, 2000,
and we have incurred net losses in nine of our last twelve quarters. As of
January 31, 2000, we had an accumulated deficit of $21.6 million. In fiscal
2000 we substantially increased our operating expenditures to build our
presence in the e-commerce software business. This has included significant
increases in our research and development expenses related to the development
of e-commerce capable products, and substantial increases in our sales and
marketing personnel. We intend to continue to grow our operating expenditures
and, consequently, we expect to continue to report losses from operations for
at least two years.
Our business is subject to currency fluctuations that can adversely affect our
operating results.
Due to our multinational operations, our business is subject to fluctuations
based upon changes in the exchange rates between the currencies in which we
collect revenues or pay expenses and the Irish pound and the euro. In
particular the value of the U.S. dollar and U.K. pound sterling impacts our
operating results. Our expenses are not necessarily incurred in the currency in
which revenue is generated, and, as a result, we are required from time to time
to convert currencies to meet our obligations. These currency conversions are
subject to exchange rate fluctuations, and changes to the value of the Irish
pound or the euro relative to other currencies could adversely affect our
business and results of operations. For example, sales of our electronic PoS
systems in Germany are denominated in euro while a portion of the related
manufacturing costs are denominated in U.K. pounds sterling. As a result, in
the year ended January 31, 2000, margins on electronic PoS systems were
negatively impacted.
In addition, our consolidated financial statements are prepared in Irish
pounds and translated to U.S. dollars for reporting purposes. As a result, even
when foreign currency expenses substantially offset revenues in the same
currency, our net income may be diminished, or our net loss increased, when
reported in U.S. dollars in our financial statements.
Our quarterly operating results are difficult to predict because they can
fluctuate significantly. This limits your ability to evaluate our historical
financial results and increases the likelihood that our results will fall below
market analysts' expectations, which could cause the price of our ADSs to drop
rapidly and severely.
We have experienced significant quarterly fluctuations in operating results
and cash flows and we expect that these fluctuations will continue in future
periods. In addition, our revenue is difficult to predict for several reasons.
As a result, we believe that our quarterly revenue, expenses and operating
results are likely to vary significantly in the future. Thus, it is likely that
in some future quarters our results of operations will be below the
expectations of public market analysts and investors, which could have a severe
adverse effect on the trading price of our ADSs. We also believe that period-
to-period comparisons of our quarterly operating results are not necessarily
meaningful and that, as a result, these comparisons should not be relied upon
as indications of our future performance.
Quarterly fluctuations have been, and may in the future be, caused by
factors which include:
. the size and timing of orders
. currency fluctuations
. product mix
. the rate of acceptance of new products
20
<PAGE>
. purchasing and payment patterns of our customers
. our pricing policies and those of our competitors
In addition, our revenue is difficult to predict for the following reasons:
. we have generally recognized a substantial portion of our revenue in the
last month of each quarter
. the market for our e-commerce products is new and rapidly changing
. the sales cycle for our products is typically 6 to 12 months and varies
substantially from customer to customer
Over the past few years, we have substantially increased our investment in
our infrastructure, and we expect to continue to do so. As a result, if revenue
in any quarter falls below expectations, expenditure levels could be
disproportionately high as a percentage of revenue, and our business and
operating results for that quarter would be adversely affected, perhaps
materially.
We derive a significant amount of our revenues from a limited number of
customers.
A significant percentage of our revenue is derived from a limited number of
our customers. Approximately 40% of our total revenue for the year ended
January 31, 2000 was attributable to our three largest customers in that
period. The loss of any major customer, or any reduction or delay in orders by
any major customer, could have a material adverse effect on our business,
financial condition and results of operations.
We rely on strategic relationships that may not continue in the future.
We have developed strategic relationships with larger, public companies. We
rely in part on these relationships to co-market our products and generate
leads for our direct sales force. However, these relationships are not
exclusive, and the third party generally is not obligated to market our
products or provide leads. We will need to establish additional strategic
relationships to be successful.
Two of the companies with which we have developed strategic relationships
are VISA International and MasterCard International. We believe that our
reputation has benefited from past transactions and joint press releases with
VISA and MasterCard, as well as from VISA's equity investment in us in 1998.
Neither VISA nor MasterCard is obligated to continue to conduct business or
marketing activities with us. VISA's or MasterCard's endorsement of one or more
of our competitors could cause existing customers to switch to competitors and
could materially adversely affect our ability to add new customers.
Our success depends on our ability to expand our direct sales force.
We have sold our products almost exclusively through our direct sales force.
Our future revenue growth will depend in large part on our ability to recruit,
train and manage additional sales personnel worldwide. We have experienced and
continue to experience difficulty in recruiting qualified sales personnel, and
the market for these personnel is highly competitive. We may not be able to
successfully expand our direct sales force, and any expansion of the sales
force may not result in increased revenue. Our business and results of
operations will be materially adversely affected if we fail to successfully
expand our direct sales force.
Our growth may be limited if we fail to build an indirect sales channel.
Indirect sales channels accounted for approximately 4% of our total revenue
in fiscal 2000. We recently have established relationships with a limited
number of resellers and systems integrators and consultants. These are new,
early-stage relationships and, as such, are generally untested. Our existing
indirect channels will have to generate significant revenue, and we will need
to establish additional indirect channels to be successful.
21
<PAGE>
Increased competition may result in decreased demand for our products and
services, which may result in reduced revenues and gross margins and loss of
market share.
The market for e-payment software and electronic PoS systems is intensely
competitive, and we expect competition to continue to increase. Our competitors
include Verifone, a subsidiary of Hewlett-Packard, and Giesecke & Devrient for
our electronic PoS system products, and IBM, Verifone and GlobeSet for our e-
payment software. In addition, the companies with whom we have strategic
relationships could develop products or services which compete with our
products or services. Growing competition may result in reduced revenues and
gross margins and loss of market share, any one of which could have a material
adverse effect on our business, financial condition and results of operations.
Some competitors in our market have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater brand
recognition and a larger installed customer base than we do. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships to expand their product offerings and to offer more
comprehensive e-payment solutions. We also expect to face additional
competition as other established and emerging companies enter the market for e-
payment solutions.
We depend on a few key personnel to manage and operate us.
Our success is largely dependent on the personal efforts and abilities of
our senior management, including in particular John McGuire, Cyril McGuire,
George Burne, Kevin Shea, Paul Byrne, Chris Meehan and John Harte. The loss of
one or more of members of our senior management could have a material adverse
effect on our business and prospects.
If we are unable to attract and retain highly skilled personnel with experience
in the e-payment and banking industries, we may be unable to grow our business.
The market for qualified personnel with experience in the e-payment and
banking industries in general, and software engineers with this experience in
particular, is highly competitive. Our strategic plan requires continued
investment in research and development and sales and marketing personnel.
Failure to successfully attract, hire, assimilate and retain qualified
personnel could limit the rate at which we develop new products and generate
sales, which could have a material adverse effect on our business, prospects
and results of operations.
Our reliance on third parties to manufacture our electronic PoS system products
involves risks, including, in particular, reduced control over the
manufacturing process and product quality.
Our electronic PoS system products are manufactured by Keltek and Fujitsu.
Our reliance on outsourced manufacturers involves significant risks, including:
. reduced control over delivery schedules, quality assurance and cost
. the potential lack of adequate manufacturing capacity
. the potential misappropriation of our intellectual property
We must make binding forecasts as much as three months in advance of
expected delivery dates. If product sales do not meet these forecasts, our
cashflow would be adversely impacted, and the risk that our inventory could
become obsolete would increase. If Keltek or Fujitsu cease manufacturing our
electronic PoS system products or increase their prices, we may not be able to
rapidly obtain alternative capacity at a comparable price. Any delay in
delivery of products to our customers or any increase in manufacturing costs
could have a material adverse effect on our business and results of operations.
We have in the past received products that contained defects from our
manufacturers. Because we warrant the quality of our electronic PoS system
products to our customers, we have been required to repair or replace defective
products at our own expense. This expense has in the past exceeded the amounts
reimbursed to us by
22
<PAGE>
the manufacturers. This expense has not in the past had a material adverse
effect on our results of operations. However, any repetition of these or
similar problems could have a material adverse effect on our reputation,
business and results of operations.
We may not be able to timely respond to rapid technological changes that impact
our business.
The markets for our e-payment software and electronic PoS system solutions
are susceptible to rapid changes due to technology innovation, evolving
industry standards, changes in customer and cardholder needs and frequent new
product introductions. We will need to use leading technologies effectively,
continue to develop our technical expertise and enhance our existing products
on a timely basis to compete successfully in these markets. We may not be
successful in achieving these business requirements.
We may be unable to protect our proprietary rights. Unauthorized use of our
technology may result in development of products which compete with our
products.
Our success depends in part on our ability to protect our rights in our e-
payment and PoS system technology. We rely upon a combination of patents,
contractual rights, trade secrets, copyright laws and trademarks to establish
and protect these rights. We also enter into confidentiality agreements with
our employees, consultants and third parties to seek to limit and protect the
distribution of our proprietary information regarding this technology. However,
we have not signed protective agreements in every case. Unauthorized parties
may copy aspects of our products and obtain and use information that we regard
as proprietary. Other parties may breach confidentiality agreements and other
protective contracts we have executed. We may not become aware of, or have
adequate remedies in the event of, a breach.
Some may claim that we infringe their intellectual property rights, which could
result in costly litigation or require us to reengineer or cease sales of our
products.
We believe that our products do not infringe upon the intellectual property
rights of others and that we have all rights necessary to use the intellectual
property employed in our business. However, we have not performed patent
searches for all of the technologies encompassed in our products. Third parties
may in the future claim that our current or future products infringe their
proprietary rights. Any infringement claim, with or without merit, could result
in costly litigation or require us to reengineer or cease sales of our
products, any of which could have a material adverse effect on our business,
financial condition, results of operations and prospects. Infringement claims
could also require us to enter into royalty or licensing agreements. Licensing
agreements, if required, may not be available on terms acceptable to us or at
all.
Our industry and our customers' industry are subject to government regulations
that could limit our ability to market our products.
Our current and prospective customers include non-U.S. and state and
federally chartered banks and savings and loan associations. These customers,
as well as customers in other industries that we plan to target in the future,
operate in markets that are subject to extensive and complex regulation. While
we are not directly subject to this regulation, our products and services must
be designed to work within the extensive and evolving regulatory constraints
under which our customers operate. If our products fail to comply with
regulations applicable to our customers, or if we cannot timely and cost-
effectively respond to changes in the regulatory environments of each of our
customers, our product sales could be materially adversely affected, which
could have a material adverse effect on our business, prospects and results of
operations.
Exports of software products utilizing encryption technology are generally
restricted by the U.S., Irish, German and various other foreign governments.
Our inability to obtain and maintain required approvals under these regulations
could adversely affect our ability to sell our products. Also, U.S., Irish,
German or other foreign legislation or regulations may further limit levels of
encryption or authentication technology that may be sold or exported. Any
export restrictions of this sort, new legislation or regulations, or increased
costs of compliance could have a material adverse effect on our business,
results of operations and prospects.
23
<PAGE>
Our electronic PoS system products must comply with standards established by
telecommunications authorities in various countries, as well as with
recommendations of quasi-regulatory authorities and standards-setting
committees. Failure to comply with these standards and recommendations could
limit our ability to sell these products.
Rapid growth could strain our personnel and systems.
We have recently experienced rapid expansion of our operations in multiple
countries, which has placed, and is expected to continue to place, significant
demands on our administrative, operational and financial personnel and systems.
Because of these demands, we hired a significant number of employees in fiscal
2000 and expect to continue hiring during fiscal 2001. Our inability to train
and integrate our new employees and promptly address and respond to rapid
growth if it occurs could have a material adverse effect on our business and
results of operations.
We may fail to integrate adequately acquired products, technologies or
businesses.
From time to time, we evaluate opportunities to acquire additional product
offerings, complementary technologies and businesses. Any future acquisition
could result in difficulties assimilating acquired products, technologies and
businesses, amortization of acquired intangible assets and diversion of our
management's attention. Our management has limited experience in assimilating
acquired organizations and products into our operations. We may not be able to
integrate successfully any products or technologies or businesses that might be
acquired in the future, and the failure to do so could have a material adverse
effect on our business and results of operations. In addition, the accounting
treatment for any future acquisition may result in the recognition of
significant goodwill which, when amortized, would adversely affect our net
income (loss) and earnings per equivalent ADS.
Trading in our shares could be subject to extreme price fluctuations and the
holders of our ADSs could have difficulty trading their shares.
The market for shares in newly public technology companies is subject to
extreme price and volume fluctuations, often unrelated to the operating
performance of these companies. Due to the potential volatility of our stock
price, we may in the future be the target of securities class action
litigation. Securities litigation could result in substantial costs and divert
our management's attention and resources. In addition, although the ADSs are
quoted on the Nasdaq National Market and the Neuer Markt, the daily trading
volume has been limited. An active trading market may not develop or be
sustained. In addition, the Neuer Markt is a new trading market. The Neuer
Markt may experience delays in settlement and clearance as trading volume
increases. These factors could adversely affect the market price of the ADSs.
The rights of shareholders in Irish corporations may be more limited than the
rights of shareholders in United States and German corporations.
The rights of holders of ordinary shares and, therefore, some of the rights
of ADS holders, are governed by Irish law and the laws of the European Union.
As a result, the rights of our shareholders differ from, and may be more
limited than, the rights of shareholders in typical United States or German
corporations. In particular, Irish law significantly limits the circumstances
under which shareholders of Irish corporations may bring derivative actions.
Our three largest shareholders have the ability to significantly influence or
control corporate actions, which limits the ability of the holders of our ADSs
to influence or control corporate actions. This concentration of ownership also
can reduce the market price of the ADSs.
Our three largest shareholders have the ability to significantly influence,
if not control, the election of directors and the outcome of all corporate
actions requiring shareholder approval. This concentration of ownership also
may have the effect of delaying or preventing a change in control of us, which
in turn could reduce the market price of the ADSs.
24
<PAGE>
Our corporate tax rate may increase, which could adversely impact our cash
flow, financial condition and results of operations.
We have operations and generate substantially all of our taxable income in
the Republic of Ireland. Currently, some of our Irish subsidiaries are taxed at
rates substantially lower than U.S. or German tax rates. If our Irish
subsidiaries were no longer to qualify for these lower tax rates or if the
applicable tax laws were rescinded or changed, our operating results could be
materially adversely affected. In addition, if German, U.S. or other foreign
tax authorities were to change applicable tax laws or successfully challenge
the manner in which our subsidiaries' profits are currently recognized, our
taxes could increase, and our business, cash flow, financial condition and
results of operations could be materially adversely affected.
The German takeover code, our articles of association and Irish law may make an
acquisition of us more difficult, which could affect the trading price of our
ADSs.
As required by the Neuer Markt, we have adopted the takeover code
recommended by the Stock Exchange Expert Commission at the German Federal
Ministry of Finance. Although this takeover code does not have the force of
law, it is generally required by the Frankfurt Stock Exchange that companies
listed on the Neuer Markt acknowledge these takeover provisions. The
applicability of the takeover code, as well as provisions of our articles of
association and Irish law, could delay, defer or prevent a change of control of
us, which in turn could reduce the market price of the ADSs. In addition, the
rights of our shareholders under the takeover code could differ from the rights
of shareholders under the United States federal and state laws governing tender
offers and takeovers.
Company History and Structure
We were incorporated as a limited liability company under the laws of the
Republic of Ireland in 1987. On August 23, 1999, our shareholders resolved by
special resolution to re-register us as a public limited company. The following
is a list and brief description of our significant subsidiaries:
Trintech Technologies Limited, a wholly-owned subsidiary, is a limited
liability company having a share capital incorporated under the laws of the
Republic of Ireland. The principal activity of Trintech Technologies Limited is
the sale of electronic PoS system products and e-payment software.
Trintech Limited is a limited liability company having a share capital
incorporated under the laws of the Republic of Ireland. All of the voting
securities of Trintech Limited are owned by us. The principal activity of
Trintech Limited is research and development.
Trintech GmbH, a wholly-owned subsidiary, is a limited liability company
incorporated in the Federal Republic of Germany. The principal activity of
Trintech GmbH is the sale of electronic PoS system products and e-payment
software.
Trintech Inc., a wholly-owned subsidiary, is a California corporation. The
principal activity of Trintech Inc. is the sale of e-payment software.
Item 2. Description of Property
Our principal development center and our principal European executive and
administrative offices are located in a 22,500 square foot leased office
facility in Dublin, Ireland. Our principal executive and administrative offices
for North and South America are located in a 11,300 square foot leased facility
in San Mateo, California. We also have offices for development, sales and
marketing personnel which total an aggregate of approximately 11,700 square
feet in Frankfurt, Germany; Miami, Florida; Austin, Texas; and Princeton, New
Jersey.
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<PAGE>
Item 3. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. For example, in
September 1999, a former employee filed a complaint against us alleging
wrongful termination and breach of contract. While we believe this claim is
without merit, we cannot predict the outcome of this dispute. Neither we nor
any of our consolidated subsidiaries are a party to any litigation or
arbitration proceedings which could have, or during the last two fiscal years
has had, a material adverse effect on our business, financial condition and
results of operations.
We are involved from time to time in disputes with respect to our
intellectual property rights and the intellectual property rights of others.
Pending and future litigation involving our business, whether as plaintiff or
defendant, regardless of outcome, may result in substantial costs and expenses
to our business and significant diversion of effort by our technical and
management personnel. In addition, litigation, either instituted by or against
our business, may be necessary to resolve issues that may arise from time to
time in the future. Furthermore, our efforts to protect our intellectual
property through litigation may be unable to prevent duplication of our
technology or products. Any such litigation could have a material adverse
effect upon our business, financial condition or results of operations.
There has been substantial litigation in the technology industry regarding
rights to intellectual property, and our business is subject to the risk of
claims against it for alleged infringement of the intellectual property rights
of others. In addition, the existence of any such claim by a third party may
not become known to us until well after we have committed significant resources
to the development of a potentially infringing product. From time to time, we
have received claims that we have infringed third parties' intellectual
property rights, and there is no assurance that third parties will not claim
infringement by us in the future. Any such claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays,
or require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, or at all.
Item 4. Control of Registrant
The following table sets forth certain information known to us with respect
to beneficial ownership of our ADSs as of January 31, 2000 by (i) each
shareholder known to us to be the beneficial owner of more than ten percent of
any class of our registered voting securities and (ii) all of our executive
officers and directors as a group. To our knowledge we are not directly or
indirectly owned or controlled by any corporation or by any foreign government.
<TABLE>
<CAPTION>
Equivalent American
Depositary Shares
Beneficially Owned(1)
---------------------
Beneficial Owner Number Percent(2)
---------------- ---------- ----------
<S> <C> <C>
John F. McGuire (3)(4)................................... 9,300,017 17.7%
Cyril P. McGuire (3)(5).................................. 9,300,017 17.7
Instove Limited (6)...................................... 7,701,466 15.3
Officers and directors as a group (13 persons) (7)....... 24,141,938 45.9
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated below, we believe that
the persons named in the table have sole voting and sole investment power
with respect to all shares shown as beneficially owned, subject to
community property laws where applicable. Securities subject to options or
warrants that are currently exercisable or exercisable within 60 days after
January 31, 2000 are deemed to be issued and to be beneficially owned by
the person holding such options or warrants for the purpose of computing
the percentage ownership of such person but are not treated as issued for
the purpose of computing the percentage ownership of any other person.
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<PAGE>
(2) Percentage ownership is calculated based on 50,281,444 equivalent ADSs
issued and outstanding at January 31, 2000 in accordance with the formula
in footnote 1 above.
(3) Jayness Limited and Vanspur Limited, which are owned by two Jersey
discretionary trusts, Jayness Trust and Vanspur Trust, have the option to
acquire up to 2,890,750 equivalent ADSs, representing approximately 5.6% of
the equivalent ADSs, currently owned by John McGuire and have the option to
acquire up to 2,890,750 equivalent ADSs, representing approximately 5.6% of
the equivalent ADSs, currently owned by Cyril McGuire. Neither John
McGuire, Cyril McGuire nor any of their family members are trustees or
beneficiaries of these trusts and John and Cyril McGuire disclaim any
beneficial interest in the securities held by Jayness Limited, Vanspur
Limited or the trusts. For shares held by Instove Limited, see note (6)
below.
(4) Includes 133,333 equivalent ADSs subject to options that are exercisable
currently or within 60 days of January 31, 2000.
(5) Includes 133,333 equivalent ADSs subject to options that are exercisable
currently or within 60 days of January 31, 2000.
(6) Equivalent ADSs are held by Instove Limited, which in turn is owned by two
Jersey discretionary trusts, Hacke Trust and Belte Trust. Neither John
McGuire nor Cyril McGuire nor any of their family members are trustees or
beneficiaries of these trusts, but the trustees may, in their sole
discretion, select any beneficiaries. John McGuire and Cyril McGuire both
disclaim any beneficial interest in the equivalent ADSs held by Instove
Limited or the trusts.
(7) Includes 659,995 equivalent ADSs subject to options that are exercisable
currently or within 60 days of January 31, 2000.
Item 5. Nature of Trading Market
On September 24, 1999, we consummated a public offering in the U.S. of
5,800,000 ordinary shares, represented by 5,800,000 (pre-split) American
Depositary Shares, or ADSs. On October 26, we sold an additional 870,000
ordinary shares, represented by 870,000 (pre-split) ADSs pursuant to an option
granted to the underwriters in the offering to cover over-allotments. After
giving effect to a two-for-one ADS split on March 21, 2000, each ordinary share
equals two equivalent ADSs. As of April 26, 2000, there were 97 holders of
record of the ordinary shares.
Our ADSs are listed and principally traded on the Nasdaq National Market
under the symbol TTPA, where the prices are expressed in U.S. dollars, and on
the Neuer Markt segment of the Frankfurt Stock Exchange in Germany under the
symbol TTP, where the prices are expressed in euro. The ADSs are represented by
American Depositary Receipts, or ADRs, which are issued by the Bank of New
York, the Depositary. The table below presents, for the periods indicated, (i)
the high and low closing sales prices quoted in euro for the ADSs on the Neuer
Markt and (ii) the high and low closing sales prices quoted in U.S. dollars for
the ADSs on the Nasdaq National Market.
<TABLE>
<CAPTION>
Price per ADS on Price per ADS
Nasdaq on
National Market Neuer Markt
---------------- ----------------------
High $ Low $ High euro Low euro
-------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended January 31, 2000
Third quarter (from September 24,
1999)............................... $ 8.81 $6.00 (Euro) 8.48 (Euro)5.75
Fourth quarter....................... $31.69 $8.75 (Euro)32.80 (Euro)8.35
</TABLE>
The Frankfurt Stock Exchange and the Neuer Markt
The Frankfurt Stock Exchange is the most significant of the eight German
stock exchanges and accounted for approximately 80% of the turnover in traded
shares in Germany in 1999. The aggregate annual turnover of the Frankfurt Stock
Exchange in 1999 of approximately DM 7.975 trillion for both equity and debt
instruments, made it the fourth largest stock exchange in the world behind the
New York Stock Exchange, London and
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<PAGE>
Tokyo in terms of turnover. The calculation of the aggregate annual turnover of
the Frankfurt Stock Exchange is based on the Frankfurt Stock Exchange's
practice of separately recording the sale and purchase components involved in
any trade. As of December 31, 1999, the equity securities of 3,265
corporations, including more than 2,000 foreign corporations, were traded on
the Frankfurt Stock Exchange.
The Neuer Markt segment of the Frankfurt Stock Exchange is a new trading
segment that was launched in March 1997. It is designed for innovative, small
to mid-size companies in high growth industries or in traditional industries
that have an international orientation and that are willing to provide active
investor relations. The Frankfurt Stock Exchange requires that the issuer make
a presentation, and it may reject the issuer if it considers the issuer
inappropriate for the Neuer Markt. Issuers are requested to provide investors
on an ongoing basis with information such as annual and quarterly reports,
including cash flow statements, and a corporate action timetable. This
information is required to be submitted in English and German as well as in
electronic form, thus enabling the stock exchange to disseminate corporate
information over the Internet page entitled "Company Information" at
http://www.neuer-markt.de.
Trading on the Neuer Markt
Trading of shares listed on the Neuer Markt takes place on the floor of the
stock exchange, but is computer-aided. Shares listed on the Neuer Markt can
also be traded on a computer-aided system called Xetra. Trading takes place on
every business day between 9:00 a.m. and 5:30 p.m., Frankfurt time. Trading
within the Xetra system is done by banks and brokers who have been admitted to
trading on at least one of Germany's stock exchanges. Xetra is integrated into
the Frankfurt Stock Exchange and is subject to its rules and regulations.
Markets in listed securities are generally of the auction type, but listed
securities also change hands in inter-bank dealer markets off the Frankfurt
Stock Exchange. Price formation is determined by open bid by state-appointed
specialists who are themselves exchange members, but who do not, as a rule,
deal with the public. Prices of shares traded on the Neuer Markt are displayed
continuously during trading hours. At the half-way point of each trading day, a
single standard quotation is determined for all shares. The members'
association of the Frankfurt Stock Exchange publishes a daily list of prices
which contains the standard prices of all traded securities, as well as their
highest and lowest quotations during the past year.
Transactions on the Frankfurt Stock Exchange, including transactions within
the Xetra system, are settled on the second business day following trading.
Transactions off the Frankfurt Stock Exchange for large volumes or if one of
the parties is foreign are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
Following an amendment to the conditions of German banks for securities
trading, customers' orders to buy or sell listed securities must be executed on
a stock exchange, unless the customer instructs otherwise. Trading can be
suspended by the Frankfurt Stock Exchange if orderly stock exchange trading is
temporarily endangered or if a suspension is in the public interest.
A specific feature of the Neuer Markt is the introduction of the obligatory
designated sponsor. The designated sponsor is an entity admitted for trading at
the Frankfurt Stock Exchange which provides additional liquidity by quoting
prices for the buying and selling of shares on request. Each issuer on the
Neuer Markt has to nominate at least two designated sponsors which will not
only ensure that there is sufficient liquidity for its shares, but also serve
as consultants on all stock market related matters for the issuer.
Trading on German stock exchanges is monitored by regulatory agencies
including the Federal Supervisory Office for Securities Trading.
The Neuer Markt is still a relatively new market. Therefore, an active
trading market for the ADSs may not develop on the Neuer Markt or the Neuer
Markt may experience problems in settlement or clearance as trading develops.
Any delays or problems could adversely affect the market price of the ADSs.
Persons proposing to trade the ADSs on the Neuer Markt should inform themselves
about the potential costs of trading on this market.
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<PAGE>
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
Exchange Control Regulations
Republic of Ireland. Irish exchange control regulations ceased to apply from
and after December 31, 1992. Except as indicated below, there are no
restrictions on non-residents of the Republic of Ireland dealing in domestic
securities which includes shares or depositary receipts of Irish companies such
as us and dividends and redemption proceeds are freely transferable to non-
resident holders of the securities.
The Financial Transfers Act, 1992 of Ireland was enacted in December 1992.
This act gives power to the Minister for Finance of Ireland to make provision
for the restriction of financial transfers between the Republic of Ireland and
other countries. Financial transfers are broadly defined and include all
transfers which would be movements of capital or payments within the meaning of
the treaties governing the European Communities. The acquisition or disposal of
ADSs issued by an Irish incorporated company and associated payments may fall
within this definition. In addition, dividends or payments on redemption or
purchase of shares and payments on a liquidation of an Irish incorporated
company would fall within this definition. Currently, orders under this act
prohibit any financial transfer to or by the order of or on behalf of residents
of the Federal Republic of Yugoslavia, reconstituted in 1991 as Serbia and
Montenegro, or Iraq unless permission for the transfer has been given by the
Central Bank of Ireland.
We do not anticipate that Irish exchange controls or orders under the
Financial Transfers Act, 1992 will have a material effect on our business.
For the purposes of the orders relating to Iraq and the Federal Republic of
Yugoslavia, reconstituted in 1991 as Serbia and Montenegro, a resident of those
countries is a person living in these countries, a body corporate or entity
operating in these countries and any person acting on behalf of any one of
these persons.
Any transfer of, or payment for, an ordinary share or ADS involving the
government of any country which is currently the subject of United Nation
sanctions, any person or body controlled by any government or country under
United Nations sanctions, or any person acting on behalf of these governments
or countries, may be subject to restrictions required under these sanctions as
implemented into Irish law. Angola is currently the subject of United Nation
sanctions.
Federal Republic of Germany. At present, the Federal Republic of Germany
does not restrict the export or import of capital, except for investments in
countries such as Iraq and Libya as required by resolutions adopted by the
United Nations and the European Union. However, for statistical purposes only,
every individual or corporation residing in Germany, a resident, must report to
the German Federal Central Bank, subject only to several immaterial exceptions,
any payment received from or made to an individual or a corporation resident
outside Germany, or a non-resident, if a payment exceeds DM 5,000 or the
equivalent in a foreign currency. In addition, residents must report any claims
against or any liabilities payable to non-residents if these claims or
liabilities, in the aggregate, exceed DM 3 million or the equivalent in a
foreign currency during any one month.
Furthermore, residents must periodically report investments which it may
make in a non-resident enterprise if at least 10% of the share capital or of
the voting rights of the non-resident enterprise is attributable to the
resident or any of its non-resident affiliates. However, this reporting
requirement does not apply if the total assets of the non-resident enterprise
do not exceed DM 1.0 million or, if less than 50% of the share capital or
voting rights of the non-resident enterprise are attributable to the resident
or any of its non-resident affiliates, do not exceed DM 10.0 million.
A non-resident affiliate is a non-resident entity of which more than 50% of
the share capital or voting rights are attributable to a resident. Moreover,
enterprises resident in Germany must periodically report investments which are
made in them if at least 10% of the share capital or of the voting rights of
the resident enterprise are attributable to one or more non-residents or any of
their resident affiliates. However, this reporting requirement does not apply
if the total assets of the resident enterprise do not exceed DM 1.0 million
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or, if less than 50% of the share capital or voting rights of the resident
enterprise are attributable to one or more non-residents or any of their
resident affiliates, do not exceed DM 10.0 million. A resident affiliate is a
resident entity of which more than 50% of the share capital or voting rights
are attributable to a non-resident.
Dividends
Shareholders are entitled to receive dividends as may be recommended by the
board of directors and approved by our shareholders or any interim dividends
the board of directors may decide to pay. No dividends have been paid on the
ordinary shares in any of the five fiscal years immediately preceding the date
of this Form 20-F. We currently intend to retain future earnings, if any, to
fund the development and growth of our business.
Under Irish law, we may only pay dividends out of profits legally available
for that purpose. Available profits are defined as our accumulated realized
profits, to the extent not previously distributed or capitalized, less our
accumulated realized losses, to the extent not previously written off in a
reduction or reorganization of capital. In addition, we may make a distribution
only if and to the extent that, at the time of the distribution, the amount of
our net assets is not less than the aggregate of our paid up share capital and
undistributable reserves.
If in the future dividends are, subject to Irish law, approved by our board
or by our shareholders, the dividends will be paid to the persons who hold our
securities on the date determined by our board. However, under our articles of
association, our directors may resolve that we will not be required to pay
dividends to a shareholder who has not claimed these dividends within twelve
years of their declaration if resolved by the board of directors. Unclaimed
dividends will be used by us as decided by our board of directors.
Irish Mergers and Competition Legislation and Other Anti-Takeover Provisions
Irish Mergers and Competitive Legislation. Irish law requires prospective
purchasers of our voting securities to provide advance notice of an acquisition
of our shares to the minister for Enterprise, Trade and Employment of Ireland
if, after an acquisition, that person would control more than 25% of our voting
securities and specific financial thresholds are exceeded. Subject to several
exceptions, the person must also notify the minister of any subsequent
acquisition of voting securities. Under Irish law, title to the shares
concerned will not pass unless either clearance for an acquisition is obtained
from the minister or the prescribed statutory period following notification of
the acquisition lapses without the minister having made an order.
In addition, under Irish competition legislation, proposed mergers and
acquisitions which might be anti-competitive in nature may require prior
notification to, and approval of, the Irish Competition Authority. Further,
third parties may file a complaint with the Irish Competition Authority or
institute court proceedings seeking relief, including injunctions and exemplary
damages, for a merger or acquisition which would be prohibited under the
relevant legislation.
For purposes of the Irish mergers and competition legislation described
above, the acquisition of ADSs would generally be treated in the same manner as
an acquisition of ordinary shares.
Provisions of our Memorandum and Articles of Association Concerning
Control. Several provisions of our memorandum and articles of association,
which are described in these paragraphs, may have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in its best interests, including those attempts that
might result in a premium over the market price for the ADSs.
German Antitakeover Law. In compliance with the admission regulations of the
Neuer Markt segment of the Frankfurt Stock Exchange, we have adopted the
takeover code recommended by the Stock Exchange Expert Commission at the German
Federal Ministry of Finance. This takeover code, while not having the force of
law, is complied with by those companies listed on the Neuer Markt segment of
the Frankfurt Stock Exchange which acknowledge it.
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Enforcement of Civil Liabilities under United States Federal Securities Laws
We are a public limited company incorporated under the laws of the Republic
of Ireland. Several of our directors and officers, and experts named in this
Form 20-F are non-residents of the United States, and these persons and a
significant portion of our assets are located outside the United States. As a
result, it may not be possible for investors to effect service of process
within the United States upon these persons or to enforce against them in U.S.
courts judgments predicated upon the civil liability provisions of the laws of
the United States, including the federal securities laws. We have been advised
by A&L Goodbody, Solicitors, our Irish corporate counsel, that there is doubt
regarding the enforceability against these persons in the Republic of Ireland,
whether in original actions or in actions for the enforcement of judgments in
U.S. courts, of civil liabilities predicated solely upon the laws of the United
States, including the federal securities laws.
Item 7. Taxation
The following is a general summary of important tax considerations derived
from the laws of the Republic of Ireland, Germany and the federal law of the
United States relating to the purchase, ownership and disposition of ADSs or
ordinary shares by U.S. holders, German holders and Irish holders. For the
purposes of this discussion, a U.S. holder means an individual citizen or
resident of the United States for U.S. federal income tax purposes, a
corporation or partnership created or organized under the laws of the United
States, or any of the states comprising the United States, an estate the income
of which is subject to U.S. federal income taxation regardless of its source,
or a trust, the administration of which is subject to the primary supervision
of a court within the United States and regarding which one or more U.S.
persons have the authority to control all substantial decisions of the trust.
For purposes of this discussion, a German holder means an individual with his
residence or usual place of stay in Germany as well as a corporation with its
registered seat or management in Germany, or permanent establishment in
Germany, which is maintained by a shareholder not subject to unlimited tax
liability or is usually at the shareholder's disposal, and an Irish holder
means any person who is a resident or is ordinarily resident in Ireland or who
is carrying on a trade in Ireland through a branch or agency.
This summary is of a general nature only and does not discuss all aspects of
Irish, German and U.S. taxation that may be relevant to a particular investor.
In particular, the following summary does not address the tax treatment of U.S.
holders or Irish holders who own, actually or constructively, 10% or more of
our outstanding voting stock. Nor does this summary address classes of U.S.
holders, such as broker-dealers, insurance companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax and
persons who do not hold ADSs as capital assets. These particular investors not
addressed in this summary may be subject to special rules.
The statements of Irish, German and U.S. tax laws described below are based
on the laws in force and as interpreted by the relevant taxation authorities as
of April 13, 2000 and are subject to any changes in Irish, German or U.S. law,
or in the interpretation of these laws by the relevant taxation authorities, or
in the double taxation conventions among any two of the Republic of Ireland,
Germany and the United States occurring after that date. The discussion
regarding Irish taxation matters is based on the various Irish taxes acts,
finance acts and other relevant legislation, judicial decisions, statements of
practice and revenue practices in force at this time, all of which are subject
to change, possibly with retrospective effect. The discussion regarding U.S.
federal income taxation matters is based on the provisions of the Internal
Revenue Code of 1986, as amended, final, temporary and proposed U.S. treasury
regulations promulgated under the U.S. code and administrative and judicial
interpretations of the U.S. code, all as in effect as of April 13, 2000 and all
of which are subject to change, possibly with retroactive effect.
On January 11, 2000, the German Federal Ministry of Finance published the
draft "Business Tax Reform and Tax Reduction Act," or the "Draft Bill". Most of
the proposed changes will be implemented with effect from January 1, 2001.
According to the Draft Bill, the current split rate of corporate income tax
will be replaced by a flat tax rate of 25%. The top marginal personal income
tax rate on ordinary income of currently 51% will be reduced--over
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several years--to 45% by 2005. Trade tax and solidarity surcharge will remain
unchanged. The cornerstone of the Draft Bill is a fundamental reform of the
structure of German business taxation, including the transfer from the current
corporate full imputation tax system to a system referred to as "Half Income
System" as well as an option for partnerships to be treated as corporations for
tax purposes. Other notable changes include an unconditional participation
exemption for capital gains on the disposition of shares by a corporation which
will come into effect on January 1, 2002.
The German Federal Government adopted the Draft Bill on February 9, 2000
with only a few changes. It will now be submitted to the German Federal
Parliament and, after having passed the German Federal Parliament, to the
German Federal Council of States. The proposed changes are put into parentheses
in the following sections:
Our Taxation
German Taxation. The tax treatment of ADSs includes some unresolved
questions, since ADSs are comparatively new instruments in Germany. Therefore
no court decisions or letters of the fiscal authorities exist in Germany
dealing with special questions of ADSs.
For purposes of German law, ownership of the ADSs is not considered legal
ownership of the underlying ordinary shares. However, the economic and other
rights associated with owning ADSs are similar to those associated with owning
the underlying ordinary shares directly. Therefore, there are no tax benefits
associated with, and in principal no differences regarding the German tax
treatment of dividends or capital gains resulting from, holding ADSs instead of
ordinary shares.
Taxation of Dividends
Republic of Ireland Taxation. We currently intend to retain future earnings,
if any, to fund the development and growth of our business. Should we begin
paying dividends, unless exempted, all dividends paid by us will be subject to
Irish withholding tax at the rate of 22%. An individual holder of ordinary
shares resident in a relevant territory, being a country with which Ireland has
a double tax treaty, which includes the United States, or in a member state of
the European Union other than Ireland, will be exempt from withholding tax
provided he makes the requisite declaration. Corporate holders of ordinary
shares ultimately controlled by residents of a relevant territory or the
principal class of shares of which, or of a 75% parent, is traded on a stock
exchange in a relevant territory will be exempt from withholding tax provided
the appropriate declaration is made. Corporate holders of ordinary shares
resident in a relevant territory which are not controlled by Irish residents
and corporate holders wholly owned by two or more companies, the shares of each
of which are traded on a stock exchange in a relevant territory will be exempt
from withholding tax provided that the appropriate declaration is made. A
holder of ADRs will be exempt from withholding tax if it is beneficially
entitled to the dividend and if its address on the register of ADRs maintained
by the depositary is in the United States. Additionally, the depositary must be
authorized by the Irish Revenue Commissioners as a qualifying intermediary for
this exemption to apply. Where such a withholding is made it will satisfy the
liability to Irish tax of the shareholder except in circumstances where an
Irish resident or ordinarily resident individual holder of ordinary shares may
have an additional liability.
A charge to Irish social security taxes and other levies can arise for
individuals. An individual who is neither resident nor ordinarily resident in
Ireland can only incur this liability if that individual also carries on a
trade or profession in Ireland. However, under the social welfare agreement
between Ireland and the United States, an individual who is liable for U.S.
social security contributions can normally claim an exemption from these taxes
and levies.
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United States Taxation. For U.S. federal income tax purposes, the gross
amount, which includes the amount of the tax credit described below, of any
dividend paid, to the extent of our current or accumulated earnings and profits
as determined based on U.S. tax principles, will be included in a U.S. holder's
gross income and treated as foreign source dividend income. These dividends
will not be eligible for the dividends received deduction allowed to U.S.
corporations. The amount of any distribution that exceeds earnings and profits
will be treated first as a nontaxable return of capital, reducing the U.S.
holder's basis in its shares, and then as capital gain. The amount includable
in income will be the U.S. dollar value of the payment based on the exchange
rate on the date of payment regardless of whether the payment is in fact
converted into U.S. dollars. Generally, gain or loss, if any, resulting from
currency fluctuations during the period from the date any dividend is paid to
the date the payment is converted into U.S. dollars generally will be treated
as ordinary income or loss.
The U.S. Internal Revenue Service, has ruled privately that a U.S. holder
will be eligible for a U.S. foreign tax credit under Article XIII of the 1949
Convention for the Irish tax imposed on a dividend paid by an Irish company.
The same result should occur under the 1997 Convention. Although private letter
rulings are not binding authority and are directed only to the taxpayer who
requests them, they are considered persuasive in determining the position of
the IRS. The amount of the allowable credit is likely to be determined by
applying a statutorily defined formula. To the extent that any distribution is
made by us out of profits taxed in the Republic of Ireland at the standard
rate, the allowable tax credit amount should be equal to 11/89ths of the net
distribution. To the extent that the distribution is paid out of profits
taxable in the Republic of Ireland at the reduced 10% rate, the allowable tax
credit amount should be equal to 1/18th of the net distribution.
If the U.S. holder is a U.S. partnership, trust or estate, the allowable tax
credit amount will be available only to the extent that the income derived by
the partnership, trust or estate is subject to U.S. tax as the income of a
resident either in its hands or in the hands of its partners or beneficiaries.
German Taxation. Dividends paid on ordinary shares or ADSs held as German
business assets are subject to trade tax. German holders of at least 10%
ordinary shares might benefit from a participation exemption for trade tax
purposes.
Profits distributed by us are subject to German income or corporation tax,
if they are paid to:
(a) a shareholder or ADS holder subject to unlimited tax liability, including
individuals with their residence or usual place of stay in Germany as well
as corporations with their registered seat or management in Germany, or
(b) a permanent establishment in Germany which is maintained by a shareholder
not subject to unlimited tax liability or is usually at the shareholder's or
ADS holder's disposal.
These dividend payments are subject to German corporation tax at the rate of
40% (25%) or the German progressive income tax, in each case plus a solidarity
surcharge of 5.5%. Profits transferred after the deduction of taxes as
described in clause (b) are not subject to withholding tax. Holders of at least
10% ordinary shares might benefit from a participation exemption for
corporation tax purposes. (Pursuant to the Draft Bill, it is planned that
dividends were tax exempt without any holding periods or participation ratios,
provided that they are derived by a corporation, effective January 1, 2001.
However, 5% of the dividend amount which are deemed to be non tax-deductible
business expenses under current law will still be treated as non tax-
deductible.)
If withholding tax is levied in Ireland on dividend distributions paid by
us, Irish withholding tax in an amount of 18% can be credited against that
portion of the German income or corporation tax attributable to the dividend
payment. It is, however, unclear regarding whether ADSs holders may avail
themselves of this tax credit because only the legal shareholder typically has
the right to take a credit for foreign withholding tax. If the withholding tax
amount actually withheld exceeds the German income tax attributable to the
dividend payment, the tax credit is restricted to the latter amount. Instead of
the tax credit, the withholding actually withheld may be deducted from taxable
income.
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German holders who are individuals may, as of the year 2000, claim a tax-
exempt amount for income from capital assets of DM3,000 or, for married couples
filing a joint income tax return, DM 6,000. These German holders can also
deduct from their dividend income costs resulting from the purchase, custody
and ownership of the ordinary shares or ADSs, in particular the fees of custody
and refinancing. These costs may, without evidence, be deducted for tax
purposes from the profits from dividends, to the amount of DM100 per year or
DM200 in the case of married couples filing a joint income tax return.
Taxation of Capital Gains
Republic of Ireland Taxation. A person who is not an Irish holder will not
be subject to Irish capital gains tax on the disposal of ordinary shares or
ADSs provided that the ordinary shares or ADSs are quoted on a recognized stock
exchange. Nasdaq and the Neuer Markt are recognized stock exchanges. Irish
holders will be liable to Irish tax on capital gains arising on the disposal of
the ordinary shares or ADSs. The capital gain will generally be calculated by
reference to the difference between the purchase price and the sale price of
the ordinary shares or ADSs. The usual indexation relief and other reliefs and
allowances may be available in computing the liability of the shareholder.
United States Taxation. Subject to the discussion of passive foreign
investment companies, or PFICs, below, a U.S. holder's sale or exchange of ADSs
generally will result in the recognition of capital gain or loss by the U.S.
holder in an amount equal to the difference between the amount realized and the
U.S. holder's tax basis in the ADSs sold. Gain or loss realized on the sale of
ADSs by non-corporate U.S. holders will be subject to a maximum rate of U.S.
federal income tax of 20%, provided the ADSs were held for more than 12 months
as capital assets. In general, any capital gain or loss recognized by a U.S.
holder upon the sale or exchange of ADSs will be treated as U.S. source income
or loss for U.S. foreign tax credit purposes. The deductibility of capital
losses is subject to limitations. A U.S. holder's tax basis in its ADSs will
generally be the purchase price paid for its ADSs by the U.S. holder. A U.S.
holder that is liable for both Irish and U.S. tax on gain on the disposal of
the ordinary shares will generally be entitled, subject to limitations and
under the 1997 Convention, to credit the amount of Irish capital gains or
corporate tax paid for the gain on the sale against the U.S. holder's U.S.
federal income tax liability for this gain.
German Taxation. Capital gains realized from the sale of ordinary shares or
ADSs which were held as business assets by a German holder are subject to
taxation without any special regulations. The conversion of ADSs into ordinary
shares should not be a taxable event for German tax purposes. The conversion
should qualify as a replacement of the sole economic against the legal and
economic ownership. There are no German tax court decisions addressing the
exchange or conversion of foreign depositary receipts into foreign shares.
Capital gains deriving from the sale of ordinary shares or ADSs held as
private assets are only subject to taxation if:
(a) the sale takes place within one year of purchase or, after this period
has expired, the holder had, at any time during the five years preceding the
sale, a participation of at least 10% (1%) directly or indirectly in the
case of ADSs, in us, or
(b) the ordinary shares or ADSs were received in return for a tax privileged
contribution in kind.
The conversion of ADSs into ordinary shares should not be a taxable event in
either case, although there are some uncertainties regarding German tax
treatment of the conversion by private individuals as described above.
Passive Foreign Investment Company Considerations
We will be classified as a PFIC for U.S. federal income tax purposes if we
satisfy either of the following two tests:
(a) 75% or more of our gross income for the taxable year is passive income,
or
(b) on average for the taxable year, 50% or more of the value of our assets
produce or are held for the production of passive income.
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We do not believe that we satisfy either of the tests for PFIC status. We
also do not believe that we will satisfy either of the tests for PFIC status
immediately after completion of this offering. If we are a PFIC for any taxable
year, a U.S. holder would be required to
(a) pay an interest charge together with tax calculated at maximum ordinary
income rates on any "excess distribution", which is defined to include gain
on a sale or other disposition of ADSs,
(b) if a qualified electing fund election is made by the U.S. holder, to
include in their taxable income enumerated undistributed amounts of our
income, or
(c) if an election is made by the U.S. holder to mark our shares to market,
to include as ordinary income each year the excess, if any, of the fair
market value at the end of the year of our shares held by the U.S. holder
over its adjusted basis in the shares, and to recognize additional gain, if
any, on the sale or other disposition of the shares as ordinary income for
that year. The U.S. holder will be allowed to claim a deduction as an
ordinary loss for the excess, if any, of the adjusted basis of the shares
over their fair market value at the end of the year or over their final sale
or disposition price, to the extent of the net amount of previously included
income resulting from the mark to market election. The U.S. holder's basis
in our ordinary shares will be adjusted to reflect any income or less
amounts.
Each U.S. holder should consult his own tax advisor regarding the
advisability of making the qualified electing fund election mentioned in
paragraph (b) above.
U.S. Information Reporting and Backup Withholding
Any dividends paid, or proceeds on a sale of, ADSs to or by U.S. holders may
be subject to U.S. information reporting, and the 31% U.S. backup withholding
tax may apply unless the holder (1) is an exempt recipient, or (2) provides a
U.S. taxpayer identification number, certifies that no loss of exemption from
backup withholding has occurred and otherwise complies with any applicable
backup withholding requirements. Any amounts withheld under the U.S. backup
withholding tax rules will be allowed as a refund or credit against the U.S.
holder's U.S. federal income tax, provided the required information is
furnished to the U.S. IRS.
Irish Capital Acquisition Tax and Probate Tax
A gift or inheritance of ordinary shares or ADRs will be within the charge
to capital acquisitions tax, regardless of where the disponer or the
donee/successor in relation to the gift/inheritance is domiciled, resident or
ordinarily resident. The capital acquisitions tax is charged at a rate of 20%
on the taxable value of the gift or inheritance above a tax-free threshold.
This tax-free threshold is determined by the amount of the current benefit and
of previous benefits within the charge to the capital acquisitions tax and the
relationship between the former holder and the successor. Gifts and
inheritances between spouses are not subject to the capital acquisitions tax.
There is also a probate tax which is charged at 2% on the value of the estates
of deceased persons which exceed a specified threshold. To the extent that they
pass under a will or outside of a will, ordinary shares or ADRs would be within
the charge to this tax.
The Estate Tax Convention between Ireland and the United States generally
provides for Irish capital acquisitions tax paid on inheritances in Ireland to
be credited, in whole or in part, against tax payable in the United States, in
the case where an inheritance of ordinary shares or ADRs is subject to both
Irish capital acquisitions tax and US federal estate tax. The Estate Tax
Convention does not apply to Irish capital acquisitions tax paid on gifts.
Irish Stamp Duty
It is assumed for the purpose of this paragraph that ADRs are dealt in on a
stock exchange in the United States recognized by the Irish taxing authorities.
Under current Irish law, no stamp duty will be payable on the acquisition of
ADRs by persons purchasing ADRs or on any subsequent transfer of an ADR. A
transfer of
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ordinary shares, including transfers effected through CREST, wherever executed
and whether on sale, in contemplation of a sale or by way of a gift, will
attract duty at the rate of 1% of the consideration given or, in the case of a
gift or where the purchase price is inadequate or unascertainable, on the
market value of the ordinary shares. Transfers of ordinary shares which are not
liable to duty at the rate of 1%, such as transfers under which there is no
change in beneficial ownership, may attract a fixed duty of IR(Pounds)10.
The transfer by a holder to the depositary or custodian of ordinary shares
for deposit in return for ADRs and a transfer of ordinary shares from the
depositary or custodian in return for the surrender of ADRs will be stampable
at the rate of 1% if the transfer of the ordinary shares relates to a sale or
contemplated sale or any other change in the beneficial ownership under Irish
law of the ordinary shares. If, however, the transfer of the ordinary shares is
a transfer under which there is no change in the beneficial ownership under
Irish law of the ordinary shares being transferred, a fixed duty of
IR(Pounds)10 may be payable on the transfer.
The person accountable for payment of stamp duty is the recipient or, in the
case of a transfer by way of a gift or for a consideration less than the market
value, all parties to the transfer. Stamp duty is normally payable within 30
days after the date of execution of the transfer. Late or inadequate payment of
stamp duty will result in a liability to interest, penalties and fines.
The Irish Revenue Commissioners are prepared to exempt from Irish stamp duty
the transfer of ADRs dealt in on the Neuer Markt as long as the ADRs are also
dealt in on the Nasdaq National Market.
Other Taxes in Germany
Wealth Tax. At present, for assessment periods as of January 1, 1997, there
is no wealth tax levied in Germany.
Inheritance and Gift Tax. The transfer of ordinary shares or ADSs to another
person as a gift or due to death is only subject to German inheritance and gift
tax if:
(a) the former holder, or the new holder has, at the time of the passing of
the assets, his residence or usual place of stay in Germany or before this
time has been a German citizen not living abroad for more than five years,
without having a residence in Germany, or
(b) the ordinary shares or ADSs were part of the former holder's business
assets, for which a permanent establishment was maintained in Germany or a
permanent representative was commissioned.
Other Taxes. If a purchase, sale or other alienation of ordinary shares or
ADSs is executed, no German capital transfer, tax, sales tax, stamp duty or
similar tax will be incurred.
Real estate transfer tax may be incurred if 95% of the ordinary shares or
ADSs are transferred to one shareholder or if there is a unification of 95% of
the ordinary shares or ADSs at the level of a shareholder, provided we or one
of our direct or indirect subsidiaries hold German real estate.
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Item 8. Selected Financial Data
The following selected consolidated statements of operations data for the
years ended January 31, 1998, 1999 and 2000 and the consolidated balance sheet
data at January 31, 1998, 1999 and 2000 are derived from our consolidated
financial statements, which have been audited by Ernst & Young and are included
in this Form 20-F. The selected consolidated statements of operations data for
the years ended January 31, 1996 and 1997 and the consolidated balance sheet
data at January 31, 1996 and 1997 are derived from our audited consolidated
financial statements which are not included in this Form 20-F. This table
should be read in conjunction with our consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 20-F.
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(in thousands of U.S. dollars, except share and per
share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Product............... $ 4,355 $ 8,235 $ 10,824 $ 14,554 $ 18,457
License............... 738 1,359 4,101 4,477 9,158
Service............... 1,478 2,496 1,721 2,002 2,629
---------- ---------- ---------- ---------- ----------
Total revenue........ 6,571 12,090 16,646 21,033 30,244
---------- ---------- ---------- ---------- ----------
Cost of revenue:
Product............... 3,637 6,080 8,352 10,851 12,034
License............... 27 132 334 648 2,981
Service............... 478 857 1,008 2,414 2,242
---------- ---------- ---------- ---------- ----------
Total cost of
revenue............. 4,142 7,069 9,694 13,913 17,257
---------- ---------- ---------- ---------- ----------
Gross margin.......... 2,429 5,021 6,952 7,120 12,987
Operating expenses:
Research and
development.......... 557 1,170 1,729 3,676 8,892
Sales and marketing... 1,019 1,783 2,474 5,921 8,849
General and
administrative....... 1,087 1,951 2,530 4,347 7,336
Stock compensation.... -- -- -- -- 2,068
---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 2,663 4,904 6,733 13,944 27,145
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (234) 117 219 (6,824) (14,158)
Interest income
(expense), net......... 58 25 18 272 1,208
Exchange gain (loss),
net.................... (32) (69) (12) (321) 842
---------- ---------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes.................. (208) 73 225 (6,873) (12,108)
Provision for income
tax.................... (2) (3) (50) -- (3)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (210) $ 70 $ 175 $ (6,873) $ (12,111)
========== ========== ========== ========== ==========
Basic net income (loss)
per equivalent ADS..... $ (0.01) $ 0.00 $ 0.01 $ (0.21) $ (0.31)
========== ========== ========== ========== ==========
ADSs used in computation
of basic net income
(loss) per equivalent
ADS.................... 30,595,930 30,595,930 31,376,670 32,315,662 38,619,928
========== ========== ========== ========== ==========
Diluted net income
(loss) per equivalent
ADS.................... $ (0.01) $ 0.00 $ 0.01 $ (0.21) $ (0.31)
========== ========== ========== ========== ==========
ADSs used in computation
of diluted net income
(loss) per equivalent
ADS.................... 30,595,930 30,595,930 31,498,322 32,315,662 38,619,928
========== ========== ========== ========== ==========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
January 31,
-------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------- -------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................ $2,100 $1,899 $ 272 $ 1,691 $10,862
Marketable securities.................... -- -- -- 7,178 48,830
Working capital.......................... 1,223 1,541 1,449 9,437 57,803
Total assets........................... 4,289 6,330 7,003 20,261 74,295
Long-term obligations, less current
portion................................. 157 432 546 935 1,127
Redeemable preference shares............. 283 -- -- 17,760 --
Total shareholders' equity (net capital
deficiency)........................... 1,052 1,739 1,642 (4,700) 61,116
</TABLE>
See note 11 of notes to consolidated financial statements for an explanation
of the method used to calculate basic and diluted net income (loss) per
equivalent ADS. Basic and diluted net income (loss) have been calculated after
giving effect to a two-for-one ADS split effected on March 21, 2000. As a
result of the two-for-one ADSs split, each ordinary share equals two equivalent
ADSs.
Exchange rate information
A significant portion of our revenues and expenses is denominated in
currencies other than U.S. dollars. We do not currently anticipate paying any
dividends to shareholders. However, any dividends declared by us would be in
the currency determined by our directors at the time they are declared, and
exchange rate fluctuations would affect the U.S. dollar equivalent of any cash
dividend received by holders of ADSs that is paid in a currency other than U.S.
dollars.
The Maastricht Treaty, to which each of the Republic of Ireland and the
Federal Republic of Germany is a signatory, provided that on January 1, 1999,
the euro became legal tender in those member states of the European Monetary
Union that satisfied the convergence criteria stated in the Maastricht Treaty
and so elected to adopt the euro as its legal tender, including Ireland and
Germany. The conversion rate between the Irish pound, which will continue to
have legal tender status through a transition period ending June 30, 2002, at
the latest, and the euro was fixed by the Council of the European Union at
IR(Pounds)0.787564. The conversion rate between the Deutsche mark, which will
continue to have legal tender status through a transition period ending June
30, 2002, at the latest, and the euro was fixed by the Council of the European
Union at DM 1.95583.
On December 31, 1998, the Federal Reserve Bank of New York discontinued the
quotation of noon buying rates for currencies now denominated in euro,
including Irish pounds and Deutsche marks.
Prices quoted for the ADSs on the Neuer Markt are quoted in euro. Prices
quoted for the ADSs on the Nasdaq National Market are quoted in U.S. dollars.
Irish Pounds
The table below presents, for the periods and dates indicated, information
concerning the noon buying rates for the Irish pound expressed in Irish pounds
per US$1.00. The information below the caption "Period Average" represents the
average of the noon buying rates on the last business day of each full calendar
month during the relevant period. No representation is made that the Irish
pound or U.S. dollar amounts referred to below could be or could have been
converted into U.S. dollars or Irish pounds at any particular rate or at all.
<TABLE>
<CAPTION>
Fiscal Year Ended Period
January 31, High Low Period Average End
----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1995.................... IR(Pounds)0.7132 IR(Pounds)0.6198 IR(Pounds)0.6597 IR(Pounds)0.6404
1996.................... 0.6487 0.6033 0.6220 0.6390
1997.................... 0.6445 0.5915 0.6212 0.6287
1998.................... 0.7731 0.6218 0.6720 0.7315
1999 (through December
31, 1998).............. 0.7391 0.6443 0.7004 0.6709
</TABLE>
38
<PAGE>
Deutsche Marks
The table below presents, for the periods and dates indicated, information
concerning the noon buying rates for the Deutsche mark expressed in Deutsche
marks per US$1.00. The information below the caption "Period Average"
represents the average of the noon buying rates on the last business day of
each full calendar month during the relevant period. No representation is made
that the Deutsche mark or U.S. dollar amounts referred to below could be or
could have been converted into U.S. dollars or Deutsche marks, at any
particular rate or at all.
<TABLE>
<CAPTION>
Period Period
Fiscal Year Ended January 31, High Low Average End
----------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1995.................................. DM1.7627 DM1.4920 DM1.5938 DM1.5232
1996.................................. 1.5362 1.3565 1.4233 1.4895
1997.................................. 1.6485 1.4450 1.5192 1.6362
1998.................................. 1.8810 1.6399 1.7557 1.8315
1999 (through December 31, 1998)...... 1.8542 1.6060 1.7521 1.6670
</TABLE>
Euro
The table below presents, for the period indicated, information concerning
the noon buying rates for the euro expressed in euro per US$1.00. The
information below the caption "Period Average" represents the average of the
noon buying rates on the last business day of each full calendar month during
the relevant period. No representation is made that the euro or U.S. dollar
amounts referred to below could be or could have been converted into U.S.
dollars or euro, at any particular rate or at all.
<TABLE>
<CAPTION>
Period Period
Fiscal Year Ended January 31, High Low Average End
----------------------------- ------ ------ ------- ------
<S> <C> <C> <C> <C>
1999 (from January 1, 1999)................... 0.8794 0.8466 0.8794 0.8794
2000.......................................... 1.0249 0.8819 0.9567 1.0249
2001 (to February 29, 2000)................... 1.0370 0.9940 1.0370 1.0370
</TABLE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
From our organization through 1995, we developed and marketed electronic PoS
systems and e-payment software for payment card transactions in the physical
world. In early fiscal 1997, we launched our first products for Internet e-
payment transactions. Today, our revenue is primarily derived from three
sources:
Product Revenue. Product revenue, which continues to represent the majority
of our total revenue, is derived from sales of our electronic PoS system
products, primarily the Compact 9000 and 9000i PoS devices and the Compact 950-
PP pin pad. Revenue for these products is recognized at the time the products
are shipped.
License Revenue. Software license revenue is derived from license fees from
our e-payment software products for payment card transactions in the physical
world and over the Internet, and the provision of related support and
maintenance services to customers. We recognize software license revenue under
SOP 97-2. Under the terms of SOP 97-2, where an arrangement to deliver software
does not require significant production, modification or customization, we
recognize software license revenue when all of the following criteria are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred;
. our fee is fixed or determinable; and
. collectibility is probable.
39
<PAGE>
Before fiscal 1999, we recognized software license revenue under SOP 91-1.
Under SOP 91-1, the initial license fee, as well as subsequent license fees
arising from upgrades and licenses of additional modules, were generally
recognized at the time of shipment, provided that we had no significant vendor
obligations or collection uncertainties remaining. We also license our software
on a recurring rental basis, and, under SOP 97-2, we recognize revenue from
these arrangements ratably over the life of the agreement. Customer support and
maintenance fees are established as a percentage of the software license price,
typically 18% per year, and are generally paid quarterly. We recognize revenue
related to customer support and maintenance fees ratably over the life of the
agreement. The adoption of SOP 97-2 did not have a material effect on our
operating results.
Service Revenue. We derive service revenue from consulting services,
educational and training services and customization and implementation
services. Services are provided primarily on a time and materials basis for
which revenue is recognized in the period that the services are provided.
With the launch of our first Internet product in fiscal 1997, we shifted our
growth strategy to emphasize e-commerce software products for Internet
applications. Due in part to this shift in emphasis, revenue from software
license fees increased by 202% for the fiscal year ended January 31, 1998,
increasing from 11% of total revenue for the fiscal year ended January 31, 1997
to 25% of total revenue for the fiscal year ended January 31, 1998. In the
fiscal year ended January 31, 1999, software license revenue grew by 9% over
the prior year, and accounted for 21% of total revenue for the year. Software
license and related service revenue growth in fiscal 1999 was negatively
influenced by several factors, including the overall slower than anticipated
rate of adoption of emerging secure e-payment technologies by banks and
financial transaction processors, particularly SET technology. Our software
license and related service revenue was also negatively impacted by the re-
direction of information technology funds by our customers to address euro and
year-2000 issues, as well as the economic situation in Asia, which we believe
led potential customers to become cautious. In the fiscal year ended January
31, 2000, software license revenue grew by 105% over the prior year, and
accounted for 30% of total revenue for the year. Software license and related
service revenue growth in fiscal 2000 was positively influenced by increased
adoption of SSL e-payment technologies by banks and financial transaction
processors.
We have historically sold our products primarily through a direct sales
force in Europe and North and South America, which accounted for 96% of our
total revenue in fiscal 2000. Since January 1998, we have established strategic
relationships with VISA, MasterCard, RSA Security, Compaq and SAP, which
provide joint marketing opportunities as well as lead-generation for our direct
sales force. To facilitate worldwide market penetration, we have begun to
establish indirect sales channels, such as resellers and systems integrators.
Revenue from products sold through indirect sales channels is recognized net of
commissions and discounts.
The following table illustrates our revenues for the fiscal years ended
January 31, 1998, 1999 and 2000 by customer location before intercompany
eliminations:
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------------
1998 1999 2000
-------- -------- --------
(in thousands of U.S.
dollars)
<S> <C> <C> <C>
Germany........................................... $ 21,176 $ 25,649 $ 31,616
Europe (excluding Germany)........................ 6,906 12,245 18,762
Rest of the world................................. 1,934 2,238 6,580
Eliminations...................................... (13,370) (19,099) (26,714)
-------- -------- --------
Total........................................... $ 16,646 $ 21,033 $ 30,244
======== ======== ========
</TABLE>
Cost of product revenue includes outsourced manufacturing costs, and
packaging, documentation, labor and other costs associated with packaging and
shipping our electronic PoS system products and the amortization of capitalized
software development costs. Cost of license revenue includes shipping, software
40
<PAGE>
documentation, labor, third-party license fees and other costs associated with
the delivery of software products from which license revenue is derived and the
cost of providing after-sale support and maintenance services to customers.
Cost of service revenue includes labor, travel and other non-recoverable costs
associated with the delivery of services to customers.
Research and development expenses consist primarily of labor and associated
costs connected with the development of our software products and electronic
PoS system products. Sales and marketing expenses consist of labor costs,
including commissions, travel and other costs associated with sales activity,
and advertising, trade show participation, public relations and other marketing
costs. General and administrative expenses consist primarily of labor and
recruitment costs, facilities costs, telephone and other office costs and
depreciation.
Due to our decision to emphasize e-commerce software products for Internet
applications, in fiscal 1999 and in fiscal 2000, we substantially increased our
operating expenditures to build our presence in this business. This has
included significant increases in our research and development expenses related
to the development of e-commerce capable products, and substantial increases in
our sales and marketing personnel as we have expanded our global sales
capabilities. We intend to continue to grow our operating expenditures and,
consequently, we expect to continue to report losses from operations through at
least fiscal 2002.
We operate as a holding company with operating subsidiaries in Ireland,
Germany, the United Kingdom and the United States and a financing subsidiary in
the Cayman Islands. Each subsidiary is taxed based on the laws of the
jurisdiction in which it is incorporated. Because taxes are incurred at the
subsidiary level, and one subsidiary's tax losses cannot be used to offset the
taxable income of subsidiaries in other tax jurisdictions, our consolidated
effective tax rate may increase to the extent that we report tax losses in some
subsidiaries and taxable income in others. In addition, our tax rate may also
be affected by costs that are not deductible for tax purposes, such as
amortization of goodwill.
We have significant operations and generate substantially all of our taxable
income in the Republic of Ireland, and some of our Irish operating subsidiaries
are taxed at rates substantially lower than U.S. tax rates. One Irish
subsidiary currently qualifies for a 10% tax rate which, under current
legislation, will remain in force until December 31, 2010, and another Irish
subsidiary qualifies for an exemption from income tax as our revenue source is
license fees from qualifying patents within the meaning of Section 234 of the
Irish Taxes Consolidation Act, 1997. We currently anticipate that we will
continue to benefit from this tax treatment, although the extent of the benefit
could vary from period to period, and our tax situation may change. In
addition, if these subsidiaries were no longer to qualify for these tax rates
or if the tax laws were rescinded or changed, our operating results could be
materially adversely affected.
A significant portion of our revenue, costs, assets and liabilities are
denominated in currencies other than the U.S. dollar, and we and all of our
subsidiaries, other than our U.S. and Cayman Islands subsidiaries, have
functional currencies other than the U.S. dollar. These currencies fluctuate
significantly against the U.S. dollar. As a result of the currency fluctuations
resulting primarily from fluctuations in the U.S. dollar and the Irish pound
and the conversion to U.S. dollars for financial reporting purposes, we
experience fluctuations in our operating results on an annual and, in
particular, on a quarterly basis. We also experience significant fluctuations
in the value of marketable securities denominated in U.S. dollars, which are
translated to Irish pounds, our functional currency on preparing consolidated
financial statements. At January 31, 2000, the value of marketable securities
was $48.8 million. From time to time we have in the past and may in the future
hedge against the fluctuations in exchange rates. Future hedging transactions
may not successfully mitigate losses caused by currency fluctuations. We expect
to continue to experience exchange rate fluctuations on an annual and quarterly
basis, and currency fluctuations could have a material adverse impact on our
results of operations.
The conversion to the euro has not had a material effect on the pricing of,
or the market for, our products, licenses and services, and we do not expect
the conversion will have a material effect in the future.
41
<PAGE>
Results of Operations
The following table presents our results of operations expressed as a
percentage of total revenue, after giving effect to rounding, for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Revenue:
Product......................................... 65% 69% 61%
License......................................... 25 21 30
Service......................................... 10 10 9
------- ------- -------
Total revenue................................. 100 100 100
Cost of revenue:
Product......................................... 51 52 40
License......................................... 2 3 10
Service......................................... 6 11 7
------- ------- -------
Total cost of revenue......................... 59 66 57
------- ------- -------
Gross margin.................................... 41 34 43
Operating expenses:
Research and development........................ 10 17 29
Sales and marketing............................. 15 28 29
General and administrative...................... 15 21 24
Stock compensation.............................. -- -- 7
------- ------- -------
Total operating expenses...................... 40 66 90
------- ------- -------
Income (loss) from operations..................... 1 (32) (47)
Other expenses:
Interest income (expense), net.................. -- 1 4
Exchange gain (loss), net....................... -- (1) 3
------- ------- -------
Income (loss) before provision for income
taxes.......................................... 1 (32) (40)
Provision for income taxes........................ -- -- --
------- ------- -------
Net income (loss)............................. 1% (32)% (40)%
======= ======= =======
</TABLE>
Fiscal Year Ended January 31, 2000 Compared To Fiscal Year Ended January 31,
1999
Revenue
Total Revenue. Total revenue increased $9.2 million to $30.2 million in the
fiscal year ended January 31, 2000 from $21.0 million in the fiscal year ended
January 31, 1999, an increase of 44%. The increase was primarily attributable
to increased sales of electronic PoS system products and software license fees.
We have historically derived a significant portion of our total revenue from
a small number of customers. In the fiscal year ended January 31, 2000, Which,
a subsidiary of Tyco, accounted for 20% of our total revenue and Deutsche
Verkehrs Bank Zentrale accounted for 11% of our total revenue. In the fiscal
year ended January 31, 1999, Which accounted for 33% of our total revenue and
Bank of Ireland accounted for 11% of our total revenue.
Product. Product revenue increased $3.9 million to $18.5 million in the
fiscal year ended January 31, 2000 from $14.6 million in the fiscal year ended
January 31, 1999, an increase of 27%. Electronic PoS system sales represented
61% of total revenue in the fiscal year ended January 31, 2000 compared to 69%
of total revenue in the fiscal year ended January 31, 1999. The increase in
product revenue in absolute dollars was due primarily to increased volume of
sales, which represented approximately 160% of the increase in product
42
<PAGE>
revenues for this period, to existing and new customers. The increase in
product revenue, however, was partially offset by lower average selling prices
for our electronic PoS system products, which declined by an average of 7% per
unit in the fiscal year ended January 31, 2000 compared to the fiscal year
ended January 31, 1999. The increase of product revenue was further offset by
the impact of the declining value of the euro as against the dollar in fiscal
2000, which reduced product revenue, when converted to and reported in U.S.
dollars, by 9% if calculated using the exchange rate we experienced in fiscal
1999.
License. Software license revenue increased $4.7 million to $9.2 million in
the fiscal year ended January 31, 2000 from $4.5 million in the fiscal year
ended January 31, 1999, an increase of 105%. Software license revenue
represented 30% of total revenue in the fiscal year ended January 31, 2000
compared to 21% of total revenue in the fiscal year ended January 31, 1999. The
increase in software license revenue was primarily due to increased sales of
our e-payment software products to new customers.
Service. Service revenue increased $627,000 to $2.6 million in the fiscal
year ended January 31, 2000 from $2.0 million in the fiscal year ended January
31, 1999, an increase of 31%. Service revenue represented 9% of total revenue
in the fiscal year ended January 31, 2000 and 10% of total revenue in the
fiscal year ended January 31, 1999. The increase in service revenue was
primarily due to increased sales of consulting, training and implementation
services associated with increased software license sales.
Cost of Revenue
Total Cost of Revenue. Total cost of revenue increased $3.3 million to $17.3
million in the fiscal year ended January 31, 2000 from $13.9 million in the
fiscal year ended January 31, 1999, an increase of 24%. Gross margin increased
to 43% in the fiscal year ended January 31, 2000 from 34% in the fiscal year
ended January 31, 1999. The increase in gross margin was attributed to
improvements in the product margin and an increase in the proportion of higher
margin software license revenues relative to product and service revenues.
Product. Cost of product revenue increased $1.2 million to $12.0 million in
the fiscal year ended January 31, 2000 from $10.8 million in the fiscal year
ended January 31, 1999, an increase of 11%. The increase in the cost of product
revenue in absolute dollars primarily resulted from increased volume of sales.
Product revenue costs decreased to 65% of product revenue in the fiscal year
ended January 31, 2000 from 75% of product revenue in the fiscal year ended
January 31, 1999. The decrease as a percentage of product revenue was primarily
due to the introduction of a new version of the Compact 9000i electronic PoS
system in January 1999, which costs less to manufacture than its predecessor.
This decrease as a percentage of product revenue was partially offset by lower
average selling prices in fiscal 2000 for our electronic PoS system products
and by the impact of the declining value of the euro as against the dollar in
fiscal 2000. For example, sales of our electronic PoS systems in Germany are
denominated in euro while a portion of the related manufacturing costs are
denominated in U.K. pounds sterling.
License. Cost of software license revenue increased $2.3 million to $3.0
million in the fiscal year ended January 31, 2000 from $648,000 in the fiscal
year ended January 31, 1999, an increase of 360%. Software license costs were
33% of license revenue in the fiscal year ended January 31, 2000 compared to
14% in the fiscal year ended January 31, 1999. The increase in absolute dollars
and as a percentage of license revenue resulted from the amortization of our
capitalized software development costs, increased expenditures in both
infrastructure and labor costs associated with the expansion of our support and
maintenance facilities and the cost of third-party software products sold as
part of our e-payment software solution.
Service. Cost of service revenue decreased $172,000 to $2.2 million in the
fiscal year ended January 31, 2000 from $2.4 million in the fiscal year ended
January 31, 1999, a decrease of 8%. Service costs were 85% of service revenue
in the fiscal year ended January 31, 2000 compared to 121% of service revenue
in the fiscal year ended January 31, 1999. The decrease in the cost of service
revenue in absolute dollars and as a percentage of service revenue primarily
resulted from a lower investment in service infrastructure as compared to
fiscal 1999.
43
<PAGE>
Operating Expenses
Research and Development. Research and development expenses increased $5.2
million to $8.9 million in the fiscal year ended January 31, 2000 from $3.7
million in the fiscal year ended January 31, 1999, an increase of 142%.
Research and development expenses were 29% of total revenue in the fiscal year
ended January 31, 2000 compared to 17% of total revenue in the fiscal year
ended January 31, 1999. The increase in absolute dollars and as a percentage of
total revenue was primarily due an increase in number of research and
development employees from 103 at January 31, 1999 to 155 at January 31, 2000.
Sales and Marketing. Sales and marketing expenses increased $2.9 million to
$8.9 million in the fiscal year ended January 31, 2000 from $5.9 million in the
fiscal year ended January 31, 1999, an increase of 49%. Sales and marketing
expenses were 29% of total revenue in the fiscal year ended January 31, 2000
compared to 28% of total revenue in the fiscal year ended January 31, 1999. The
increase in absolute dollars primarily resulted from the recruitment of
additional sales personnel, the expansion of our sales offices in San Mateo,
California and Dublin, Ireland, and increases in direct marketing activities
and travel costs.
General and Administrative. General and administrative expenses increased
$3.0 million to $7.3 million in the fiscal year ended January 31, 2000 from
$4.3 million in the fiscal year ended January 31, 1999, a 69% increase. General
and administrative expenses were 24% of total revenue in the fiscal year ended
January 31, 2000 compared to 21% of total revenue in the fiscal year ended
January 31, 1999. The increase in absolute dollars and as a percentage of total
revenue primarily resulted from increases in labor costs of approximately
$682,000 related to hiring additional management and administrative personnel,
facilities costs of approximately $573,000 due to the leasing of additional
office space in Dublin, Ireland, Frankfurt, Germany and Princeton, New Jersey,
telecommunications and management information systems costs of approximately
$365,000, and an increase in depreciation costs of approximately $351,000.
Stock Compensation. For fiscal 2000, we recognized in the fourth quarter
$2.1 million of non-cash stock compensation associated with options to acquire
an aggregate of 230,000 ordinary shares (460,000 equivalent ADSs) granted to
members of our advisory board and MasterCard at fair market value on the date
of grant. The options are treated as variable options for accounting purposes
under Financial Accounting Standard 123 and Emerging Issues Task Force 96-18
("Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods and Services" (EITF 96-18)).
As a result, in the fourth quarter we recognized, and in the future on a
quarterly basis we will recognize, non-cash stock compensation related to the
fair value of the option determined using the Black-Scholes option pricing
model on the last trading day of each quarter, multiplied by the number of
options time-apportioned over their respective vesting periods.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income and interest expense. Interest income, net increased $936,000
to $1.2 million of interest income, net in the fiscal year ended January 31,
2000 compared to $272,000 of interest income, net in the fiscal year ended
January 31, 1999. The increase was due to higher cash balances arising from the
sale of 5.9 million ordinary shares in our initial public offering.
Provision for Income Taxes. Provision for income taxes was $3,000 in the
fiscal year ended January 31, 2000 compared to no provision for income taxes in
the fiscal year ended January 31, 1999.
Fiscal Year Ended January 31, 1999 Compared To Fiscal Year Ended January 31,
1998
Revenue
Total Revenue. Total revenue increased by $4.4 million to $21.0 million in
the fiscal year ended January 31, 1999 from $16.6 million in the fiscal year
ended January 31, 1998, an increase of 26%. The increase was primarily
attributable to strong electronic PoS system product sales to our customers.
44
<PAGE>
In the fiscal year ended January 31, 1999, Which, a subsidiary of Tyco,
accounted for approximately 33% of our total revenue and Bank of Ireland
accounted for approximately 11% of our total revenue. In fiscal 1998, Which
accounted for 26% of our total revenue, EasyCash accounted for 12% of our total
revenue, Bank of Ireland accounted for 11% of our total revenue and GRK, the
card processing organization for Germany's community banks, accounted for 10%
of our total revenue.
Product. Product revenue increased by $3.8 million to $14.6 million in the
fiscal year ended January 31, 1999 from $10.8 million in the fiscal year ended
January 31, 1998, an increase of 34%. Electronic PoS systems sales represented
69% of total revenue in the fiscal year ended January 31, 1999 compared to 65%
of total revenue in the fiscal year ended January 31, 1998. The increase in
product sales in absolute dollars and as a percentage of total revenue was due
primarily to an increased volume of sales of electronic PoS system products in
Germany, which increase represented approximately 114% of the increase in
product revenues for this period. This increase, however, was partially offset
by lower average selling prices for our electronic PoS system products, which
declined by an average of 14% per unit in the fiscal year ended January 31,
1999 compared to the fiscal year ended January 31, 1998.
License. Software license revenue increased by $376,000 to $4.5 million in
the fiscal year ended January 31, 1999 from $4.1 million in the fiscal year
ended January 31, 1998, an increase of 9%. The increase in software license
revenue was due to increased sales of e-payment software products to new
customers. Software license revenue represented 21% of total revenue in the
fiscal year ended January 31, 1999 compared to 25% of total revenue in the
fiscal year ended January 31, 1998. Software license revenue declined as a
percentage of total revenue as a result of the more rapid sales growth rate of
electronic PoS system products.
Service. Service revenue increased by $281,000 to $2.0 million in the fiscal
year ended January 31, 1999 from $1.7 million in the fiscal year ended January
31, 1998, an increase of 16%. Service revenue represented 10% of total revenue
in each of the fiscal years ended January 31, 1998 and 1999. The increase in
service revenue in absolute dollars was due primarily to an increase in sales
of software license, which resulted in increased demand for services.
Cost of Revenue
Total Cost of Revenue. Total cost of revenue increased by $4.2 million to
$13.9 million in the fiscal year ended January 31, 1999 from $9.7 million in
the fiscal year ended January 31, 1998, an increase of 44%. Gross margin
decreased to 34% in the fiscal year ended January 31, 1999 from 41% in the
fiscal year ended January 31, 1998. The decrease in gross margin primarily
resulted from increased headcount in our services group, the expansion of our
software license support and maintenance facilities and investment in
infrastructure, in each case in advance of associated revenue.
Product. Cost of product revenue increased by $2.5 million to $10.9 million
in the fiscal year ended January 31, 1999 from $8.4 million in the fiscal year
ended January 31, 1998, an increase of 30%. The increase in the cost of product
revenue primarily resulted from increased volume of product shipments. Product
revenue costs as a percentage of product revenue decreased to 75% in the fiscal
year ended January 31, 1999 from 77% in the prior fiscal year primarily due to
our ability to negotiate more favorable prices from our vendors as purchase
volumes increased. This decrease was partially offset by lower average selling
prices for our electronic PoS system products.
License. Cost of software license revenue increased $314,000 to $648,000 in
the fiscal year ended January 31, 1999 from $334,000 in the fiscal year ended
January 31, 1998, an increase of 94%. Software license costs were 14% of
software license revenue in the fiscal year ended January 31, 1999 compared to
8% in the fiscal year ended January 31, 1998. The increase in absolute dollars
and as a percentage of license revenue resulted from increased expenditures in
both infrastructure and labor costs associated with the expansion of our
support and maintenance facilities.
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Service. Cost of service revenue increased by $1.4 million to $2.4 million
in the fiscal year ended January 31, 1999 from $1.0 million in the fiscal year
ended January 31, 1998, an increase of 139%. Service costs were 121% of service
revenue in the fiscal year ended January 31, 1999 compared to 59% of service
revenue in the fiscal year ended January 31, 1998. The increase in the cost of
service revenue in absolute dollars and as a percentage of service revenue
primarily resulted from increased headcount and investment in infrastructure in
advance of associated revenue.
Operating Expenses
Research and Development. Research and development expenses increased $1.9
million to $3.7 million in the fiscal year ended January 31, 1999 from $1.7
million in the fiscal year ended January 31, 1998, an increase of 113%.
Research and development expenses were 17% of total revenue in the fiscal year
ended January 31, 1999 compared to 10% of total revenue in the fiscal year
ended January 31, 1998. The increase in absolute dollars and as a percentage of
total revenue was primarily due to increased labor costs resulting from
increased headcount associated with our increased emphasis on the development
of e-commerce software, and due to higher average salaries.
Sales and Marketing. Sales and marketing expenses increased $3.4 million to
$5.9 million in the fiscal year ended January 31, 1999 from $2.5 million in the
fiscal year ended January 31, 1998, an increase of 139%. Sales and marketing
expenses were 28% of total revenue in the fiscal year ended January 31, 1999
compared to 15% of total revenue in the fiscal year ended January 31, 1998. The
increase in absolute dollars and as a percentage of total revenue primarily
resulted from the recruitment of additional sales personnel, the expansion of
our sales offices in Campbell, California and Miami, Florida, and increases in
direct marketing activities and travel costs.
General and Administrative. General and administrative expenses increased
$1.8 million to $4.3 million in the fiscal year ended January 31, 1999 from
$2.5 million in the fiscal year ended January 31, 1998, a 72% increase. General
and administrative expenses were 21% of total revenue in the fiscal year ended
January 31, 1999 compared to 15% of total revenue in the fiscal year ended
January 31, 1998. The increase in absolute dollars and as a percentage of total
revenue primarily resulted from increases in labor costs of approximately
$284,000 related to hiring additional management and administrative personnel,
recruitment costs of approximately $480,000 associated with a general increase
in our employee base, facilities costs of approximately $278,000 due to the
leasing of additional office space in Dublin, Ireland, Frankfurt, Germany and
Princeton, New Jersey, telecommunications and management information systems
costs of approximately $379,000, and an increase in depreciation costs of
approximately $225,000.
Interest Income (Expense), Net. Interest income, net increased $254,000 to
$272,000 of interest income, net in the fiscal year ended January 31, 1999
compared to $18,000 of interest income, net in the fiscal year ended January
31, 1998. The increase was due to higher cash balances arising from the
completion of equity financings in fiscal 1999 that generated gross proceeds of
approximately $20.0 million.
Provision for Income Taxes. There was no provision for income taxes in
fiscal 1999 compared to a provision for income taxes of $50,000 in fiscal 1998.
The decrease in fiscal 1999 is partly due to the losses incurred, which did not
require a tax provision, and to non-recoverable withholding taxes incurred in
fiscal 1998.
Liquidity and Capital Resources
Until 1998, we had satisfied our cash requirements principally through cash
generated by operations, proceeds from the sale of ordinary shares to a single
outside investor and borrowings under our bank credit facilities. We have an
approved credit facility from Bank of Ireland of IR(Pounds)650,000 or
approximately $808,000 as of January 31, 2000. The credit facility bears
interest at the bank's overdraft rate which was 5.94% per year as of January
31, 2000. The facility does not have a stated expiration date, but all amounts
drawn under it are
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repayable on demand. As of January 31, 2000, there was $0 outstanding under the
credit facility. As of January 31, 2000, we had working capital of $57.8
million, including cash and cash equivalents totaling $10.9 million and
marketable securities totaling $48.8 million.
In fiscal 1999, we raised an aggregate of $20.0 million in private
placements of 482,765 ordinary shares and 3 million redeemable convertible
preference shares. In September 1999, we raised $59.5 million net of expenses
from the sale of 5.9 million ordinary shares in our initial public offering.
Net cash used in operating activities was approximately $695,000, $12.6
million and $48.4 million for fiscal 1998, 1999 and 2000. Net cash used in
operating activities in fiscal 1998 resulted primarily from increases in
accounts receivable and general working capital requirements. Net cash used in
operating activities in fiscal 1999 resulted primarily from a loss on
operations of $6.9 million and net purchases of marketable securities of $7.2
million. Net cash used in operating activities in fiscal 2000 resulted
primarily from a loss on operations of $12.1 million and net purchases of
marketable securities of $41.7 million, partially offset by an increase in the
level of current liabilities.
Net cash used in investing activities was approximately $427,000 for fiscal
1998, $4.1 million for fiscal 1999 and $1.9 million for fiscal 2000. Cash used
in investing activities was primarily related to the purchase of property and
equipment. In addition, net cash used in investing activities in fiscal 1999
included $2.5 million for the purchase of capitalized software.
Net cash used in financing activities was approximately $427,000 for fiscal
1998. Net cash provided by financing activities was approximately $18.2 million
for fiscal 1999 and $59.2 million for fiscal 2000. Net cash used in financing
activities in fiscal 1998 primarily related to the repayment of the loans from
three of our directors and the repayment of a bank overdraft which was
outstanding at the end of fiscal 1997. Net cash provided by financing
activities in fiscal 1999 primarily related to the $20.0 million raised in
private placements of 482,765 ordinary shares and 3 million redeemable
convertible preference shares. Net cash provided by financing activities in
fiscal 2000 primarily related to the $59.5 million net of expenses raised from
the sale of 5.9 million ordinary shares in our initial public offering.
Although we have no material commitments for capital expenditures or
strategic investments, we anticipate an increase in the rate of capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. Our future liquidity and capital requirements
will depend upon numerous factors including the cost and timing of expansion of
product development efforts and the success of these development efforts, the
cost and timing of expansion of sales and marketing activities, the extent to
which our existing and new products gain market acceptance, market
developments, the level and timing of license revenue and available borrowings
under line of credit arrangements.
We believe that funds available under our credit facility and cash and cash
equivalents on hand will be sufficient to meet our projected working capital
requirements for at least the next 12 months. However, the underlying assumed
levels of revenues and expenses may prove to be inaccurate. We may be required
to finance any additional requirements within the next twelve months or beyond
through additional equity, debt financings or credit facilities. On March 17,
2000, we filed a registration statement on Form F-1 with the Securities and
Exchange Commission in anticipation of our planned follow-on public offering.
Due to market conditions and other factors, however, we may not be able to
consummate this public offering and thereby raise additional funds. We may not
be able to obtain additional financings or credit facilities, or if these funds
are available, they may not be available on satisfactory terms. If funding is
insufficient at any time in the future, we may be unable to develop or enhance
our products or services, take advantage of business opportunities or respond
to competitive pressures. If we raise additional funds by issuing equity
securities, dilution to existing shareholders will result.
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Year 2000 Readiness
The year 2000 issue existed because many computer systems and applications
use two-digit rather than four-digit date fields to designate a year. As a
result, the systems and applications may not properly recognize the year 2000
or be able to process data including it, which has the potential to cause data
miscalculations or inaccuracies, operational malfunctions or failures.
In November 1997, we established a year 2000 steering committee, comprised
of our group quality manager, group management information systems manager,
European controller, customer support manager and product manager. The
committee reports to Chris Meehan, our executive vice president, operations and
a member of our board of directors. The committee was charged with evaluation
of the year 2000 issue as it affects our products and services, our internal
network and supporting infrastructure and the internal network and supporting
infrastructure of our customers. To identify and prioritize efforts for
critical systems, networks, products and key business partners, we identified
the following tasks for the year 2000 committee: inventory, assessment,
remediation, testing, implementation, contingency plans and monitoring. As of
January 31, 2000, these tasks have been substantially completed.
These costs would not have a material impact on our business, financial
condition or results of operations. We currently anticipate incurring
approximately $70,000 in fiscal 2001 in connection with continuing year 2000
related costs. Modifying and testing our information and transaction processing
systems is estimated to cost approximately $50,000 to be incurred in fiscal
2001 as we complete the installation and testing of new or modified hardware
and software. Additional capital costs to be incurred in fiscal 2001 to support
the replacement of systems, hardware or equipment are currently estimated to be
approximately $50,000. These estimates also do not include litigation or
warranty costs related to the year 2000 issue, which at this time cannot be
reasonably estimated. All year 2000 costs previously incurred have been funded
from operations.
As of February 29, 2000, we have not experienced any year 2000 issues with
our internal network or infrastructure and we were not aware of any year 2000
issues with our products or services, or the internal network and supporting
infrastructure of our manufacturers, suppliers or strategic partners. We may
become aware of year 2000 issues in the future, which could adversely affect
our business and results of operations.
Item 9A. Qualitative and Quantitative Disclosure About Market Risk
Interest income and expense are sensitive to changes in the general level of
Irish and U.S. interest rates, particularly since our investments are in short-
term instruments and our available line of credit requires interest payments at
variable rates. As of January 31, 2000, one of our subsidiaries had a contract
maturing in February 2000 and a contract maturing in May 2000, each to sell
$1.0 million for euro. Based on the nature and current levels of our
investments and debt, we have concluded that there is no material market risk
exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in marketable securities such as commercial paper,
corporate bonds and U.S. government agency fixed income securities. As stated
in our investment policy, we are averse to principal loss and seek to ensure
the safety and preservation of invested funds by limiting default and market
risks. We mitigate default risk by investing in only investment-grade
securities.
At January 31, 2000, our cash and cash equivalents consisted primarily of
highly liquid investments with maturity of three months or less. We have
concluded that this does not result in any material market risk exposure.
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Item 10. Directors and Officers of Registrant
The following table presents information regarding our directors and
executive officers as of April 12, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- -------------------------------------------------
<S> <C> <C>
Executive Directors
John F. McGuire....... 38 Chief Executive Officer and Director
Cyril P. McGuire...... 40 Executive Chairman and Director(1)
Kevin C. Shea......... 49 Chief Operating Officer and Director
R. Paul Byrne......... 35 Chief Financial Officer and Director
Chris P. Meehan....... 40 Executive Vice President, Operations and Director
Non-executive Directors
D. James Bidzos....... 45 Director
Wolfgang H. Heinrich.. 51 Director(1)(2)
Robert M. Wadsworth... 39 Director(1)(2)
Trevor D. Sullivan.... 63 Director
Other Executive Officers
George L. Burne....... 37 Vice President, Technology
John Harte............ 55 Executive Vice President, Sales and Marketing
Donald Marcotte....... 43 Vice President, Sales
Noel Ryan............. 34 Controller
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
John F. McGuire, one of our co-founders, has served as a director since
1987, the year of our incorporation, and has been our chief executive officer
since 1987. During his studies at Trinity College, Dublin, Mr. McGuire
developed an encrypted electronic PoS device, which provided our original
business concept. Mr. McGuire has received a bachelors of arts in mathematics,
a bachelors of engineering in electronics and a diploma of business management
from Trinity College, Dublin. Mr. McGuire is a member of Institute of Engineers
of Ireland. Mr. McGuire currently resides in Dublin, Ireland.
Cyril P. McGuire, one of our co-founders, has served as a director since
1987 and as our executive chairman since August 1999. From 1991 to August 1999,
Mr. McGuire served as our president, and from 1987
to 1991, Mr. McGuire served as our managing director. Before co-founding us,
Mr. McGuire worked with the Industrial Credit Corporation plc, a leading Irish
commercial bank, from 1982 to 1987, where his responsibilities included the
appraisal of electronic industry investment projects. Mr. McGuire received a
bachelors of commerce and masters of business studies from University College
Dublin. Mr. McGuire is a member of the Marketing Institute of Ireland. Mr.
McGuire currently resides in Dublin, Ireland.
Kevin C. Shea has served as a director and Chief Operating Officer since
January 2000. Prior to joining us, Mr. Shea was Chief Financial Officer of
National Data Corporation from May 1998 to December 1999. Mr. Shea was
Executive Vice President of corporate strategy and business development from
June 1996 until May 1998 and was General Manager of the Integrated Payment
Systems division of National Data Corporation from 1992 to 1996. Prior to
joining National Data Corporation, he held senior executive positions at
Citicorp and First Interstate Bank Corporation. Mr. Shea received a bachelors
of social science from the State University of New York. Mr. Shea currently
resides in the United States.
R. Paul Byrne has been our chief financial officer since January 1996. Since
February 1997, Mr. Byrne has also served as a director and secretary. Before
joining us, Mr. Byrne was group financial controller and publisher at Lafferty
Publications Limited, a publishing company located in Dublin, from September
1989 to December 1995. From 1985 through 1989, Mr. Byrne was an accountant with
Price Waterhouse, a large
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accounting firm. Mr. Byrne received a bachelors of commerce and a diploma in
professional accounting from University College Dublin and is a fellow of the
Institute of Chartered Accountants in Ireland. Mr. Byrne currently resides in
Dublin, Ireland.
Chris P. Meehan has been our executive vice president, operations and a
director since January 1996. Before joining us, Mr. Meehan was group finance
director at Mentec Limited, a computer software company, from February 1983 to
December 1995. From 1979 through 1983, Mr. Meehan was an accountant with KPMG,
a large accounting firm. Mr. Meehan received a bachelors of commerce from
University College Dublin and is a fellow of the Institute of Chartered
Accountants in Ireland. Mr. Meehan currently resides in Dublin, Ireland.
Trevor D. Sullivan has served as a director since 1991. From 1991 to August
1999, Mr. Sullivan was the chairman of our board of directors. From 1987 to
1990, Mr. Sullivan was managing director of Memorex Ireland, a computer
products company, and, from 1985 until 1987, Mr. Sullivan was vice president,
customer operations of Memorex International, a computer products company. From
1981 until 1985, Mr. Sullivan held other senior management positions at Memorex
International, a computer products company. Before 1981, Mr. Sullivan held
several senior management positions at IBM, a computer company. Mr. Sullivan
currently resides in Dublin, Ireland.
D. James Bidzos has served as a director since February 1999. Since its
founding in April 1995, Mr. Bidzos has served as chairman of the board of
directors of VeriSign, Inc., a public key infrastructure company, and, from
April 1995 to July 1995, as its chief executive officer. Between 1986 and
February 1999, Mr. Bidzos also served as the president and chief executive
officer of RSA Security, Inc., a security encryption company. Additionally, Mr.
Bidzos is a director and vice chairman of RSA Securities, Inc., formerly
Security Dynamics Technologies, Inc., a data security company and the parent of
RSA.
Wolfgang H. Heinrich has served as a director since June 1999. From February
2000 to date, he has served as president, EMEA region of Oasis Technology Ltd.
From 1997 to February 2000, he has served as executive vice president, global
customer support, Visa International, a card association company, and, from
1995 to 1997, he served as executive vice president in charge of developing
strategies for domestic processing, international standardization, chip
technology developments and electronic commerce infrastructure developments.
From 1990 to 1995, he served as managing director of B+S Card Service, a
payment card service provider. From 1985 to 1990, he served as head of the
Frankfurt branch and member of the executive team of IKOSS GmbH, Frankfurt, a
banking software company.
Robert M. Wadsworth has served as a director since September 1998. Since
1986, Mr. Wadsworth has been a general partner of HarbourVest Partners LLC, a
private investment company. Mr. Wadsworth has served as the Managing Director
of HarbourVest Partners LLC since 1997. Before 1986, Mr. Wadsworth worked for
Booz, Allen & Hamilton, an international consulting company, specializing in
the areas of operations strategy and manufacturing productivity. Mr. Wadsworth
currently serves on the advisory boards of several US venture firms and on the
board of directors of Banyan Systems, Inc., Coil S.A., Communication Systems
Technology, Inc., Concord Communications, Inc., Nuera Communications, Inc. and
Outsourcing Services Group, Inc. Mr. Wadsworth received his bachelor of science
degree, magna cum laude, in systems engineering and computer science from the
University of Virginia, and his masters in business administration, with
distinction, from Harvard Business School.
George L. Burne has been our vice president, technology since September
1989. Before joining us, Mr. Burne was a senior software design
engineer/project leader at PCAS, a European technology company, from January
1988 to September 1989. Mr. Burne received a bachelors of science in English,
first class honors and a higher diploma in English from Trinity College,
Dublin. Mr. Burne is a member of the Institute of Electrical Engineers.
John M. Harte joined us in August 1999 as our executive vice president for
sales and marketing. From 1993 to 1999, Mr. Harte served as president and chief
executive officer of NeoVista Software Inc., a provider of data mining services
and a developer of solutions for knowledge discovery in databases. Mr. Harte
has sat on the board of directors of NeoVista Software Inc. since 1996. From
1987 to 1992, Mr. Harte held senior management positions in Alliant Computer
Systems Inc., a manufacturer of standards based parallel supercomputers. From
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1989 to 1992, Mr. Harte served as vice president, worldwide sales, marketing
and services, and from 1987 to 1989 he served as president european operations.
Between 1987 and 1988, Mr. Harte held various sales and marketing positions in
Floating Point Systems Inc., a systems integration and software supplier. Mr.
Harte holds a bachelors of science in physics degree from Exeter University,
United Kingdom.
Donald J. Marcotte joined us in January, 1999 and is our vice-president,
sales. Before joining us, Mr. Marcotte worked at Syncsort Inc., a maker of
client server performance software from 1990 until 1999. From 1995 through
1999, Mr. Marcotte served as Syncsort's director of North American sales. From
1990 through 1995, Mr. Marcotte was director for international operations where
he managed distributor operations. Mr. Marcotte also spent eleven years from
1979 to 1990 with Wang Laboratories, a computer services company, and IBM, a
computer company, where he held a number of management positions including
sales management. Mr. Marcotte received his bachelor in business administration
from the University of Notre Dame and his masters in business administration in
finance from Fordham University.
Noel Ryan has served as our controller since March, 1999. From January 1997
until March 1999, Mr. Ryan was our management accountant. Before joining us,
Mr. Ryan was a senior financial analyst in Dataproducts, a subsidiary of the
Hitachi Corporation, Japan, from June 1990 until January 1997. Mr. Ryan has
received a bachelor of business studies from Dublin City University and is a
member of the Chartered Institute of Management Accountants.
John McGuire and Cyril McGuire are brothers. There are no other family
relationships among any of our directors or executive officers.
Our Advisory Board
In March 1999, we established an advisory board consisting of members from
the banking, smart card and Internet industries. The role of the advisory board
is to provide insight and consultation on industry developments and trends that
affect us. The members of the advisory board also provide us with valuable
international contacts and profile in the e-payment industry. The advisory
board has no corporate authority under our memorandum or articles of
association. The members of the advisory board are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Edward Jensen............................................... 62 Chairman
Robert Schneider............................................ 51 Member
Magdalena Yesil............................................. 41 Member
</TABLE>
Edward Jensen has served as the chairman of our advisory board since May
1999. From 1994 until 1999, he was the president and chief executive officer of
Visa International, a card association. From 1974 until 1994, he held various
positions at US Bancorp. Mr. Jensen served as vice president of corporate
planning and development of US Bancorp from 1974 until 1991, as chief operating
officer from 1991 until 1993 and as vice-chairman from 1993 until 1994.
Robert Schneider has served as a member of our advisory board since June
1999. Mr. Schneider founded SCM Microsystems, Inc., a provider of smart-card
products and technologies, as its president, chief executive officer, general
manager and chairman of the board in 1990. Mr. Schneider currently serves as
chairman of the board and managing director of SCM Microsystems GmbH, a German
subsidiary of SCM Microsystems, Inc. Mr. Schneider holds a degree in
engineering from HTBL Salzburg and a B.A. degree from Akademie for business
administration in Uberlingen.
Magdalena Yesil has served as a member of our advisory board since June
1999. Since 1998, Ms. Yesil has been a general partner in U.S. Ventures, a
venture capital firm. From August 1996 until April 1997, Ms. Yesil was the
chief executive officer of MarketPay, an e-commerce software company, and from
1994 until
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August 1996, Ms. Yesil was a co-founder and vice-president of marketing and
technology of CyberCash, a software company. Ms. Yesil has received a B.A. in
engineering from Stanford University.
We currently do not provide cash compensation to persons for their services
as members of our advisory board. However, each advisory board member is
granted an option to acquire up to 60,000 ordinary shares (120,000 equivalent
ADSs) under our directors and consultants share option scheme in return for
service which he provides as a member of the advisory board.
We do not have any currently outstanding loans to any members of our
advisory board. In addition, we do not have any currently outstanding
guarantees for the benefit of any members of our advisory board.
Limitations on Liability and Indemnification Matters
In general, Section 200 of the Irish Companies Act, 1963 prohibits us from
exempting any of our officers or auditors from, or indemnifying any of them
against, any liability arising from any negligence, default, breach of duty or
breach of trust of which he may be guilty in relation to us. Section 200 does,
however, provide that we may indemnify any of our officers or auditors against
any liability incurred by him in defending proceedings, whether civil or
criminal, if judgment is given in his favor or the officer or auditor is
acquitted. Additionally, upon our election, we can provide an indemnity under
Section 200 where an officer or auditor is granted relief by a court under
either Section 391 of the Irish Companies Act of 1963 or Section 42 of the
Irish Companies (Amendment) Act, 1983. Our articles of association contain a
provision for this indemnity.
Our subsidiary, Trintech, Inc., has agreed to indemnify each of its
directors and officers and each of the officers and directors serving at the
request of Trintech, Inc. as our directors and officers against liabilities and
expenses incurred by them in connection with claims made by reason of their
being a director or officer.
We have obtained directors and officers insurance for some of our directors,
officers, affiliates, partners or employees for liabilities relating to the
performance of their duties.
At present, there is no pending material litigation or proceeding involving
any of our officers or directors where indemnification will be required or
permitted. We are not aware of any threatened material litigation or proceeding
which may result in a claim for indemnification of an officer or director.
Board Composition
Our memorandum and articles of association authorize no fewer than three nor
more than fifteen directors. Our shareholders may, from time to time, increase
or reduce the number of directors by ordinary resolution. We presently have
nine directors.
Generally, directors are elected by our shareholders at an annual general
meeting by ordinary resolution, a resolution adopted by a majority of the votes
cast on the resolution by our shareholders entitled to vote on the matter. Our
shareholders may also, by ordinary resolution, appoint persons at extraordinary
meetings to fill vacancies created by retirement or by the increasing of the
size of the board. Our shareholders may also determine the retirement rotation
for any additional directors. Additionally, our shareholders may by ordinary
resolution at any shareholders' meeting remove any director and appoint another
person in his place, subject to compliance with the relevant statutory and
notice provisions and to the rights of the removed director to compensation or
damages arising from the removal.
Our directors may also, at any time and from time to time, appoint any
person to the board to fill a vacancy or as an additional director. Any
director so appointed will serve until the next annual general meeting of the
shareholders and will be subject to re-election by the shareholders at that
meeting.
Our directors are subject to retirement by rotation. At each annual meeting
of the shareholders, one third of the directors, rounded down to the next whole
number if it is a fractional number, are required to retire from
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office. The retiring directors are those who have been in office for the
longest period of time. Retirement for persons who became directors or were
reappointed on the same day is determined by lot, unless otherwise agreed. Any
director who retires at an annual meeting may be immediately reappointed by the
shareholders.
Under our current board composition, two of our directors are required to
retire at each annual general meeting of the shareholders. John and Cyril
McGuire will be required to retire at our annual general meeting in 2000.
Messrs. Sullivan and Meehan will be required to retire at our annual general
meeting in 2001. Messrs. Byrne and Wadsworth will be required to retire at our
annual general meeting in 2002. Messrs. Heinrich and Bidzos will be required to
retire at our annual general meeting in 2003. Mr. Shea will be required to
retire at our annual general meeting in 2004. The number of directors obligated
to retire at any annual general meeting could change if we appoint additional
directors.
Board Committees
Our board of directors may delegate aspects of its responsibilities to
committees of the board. Our board of directors has established an audit
committee and a compensation committee. The audit committee oversees actions
taken by our independent auditors, recommends the engagement of auditors and
reviews our internal audits. The compensation committee establishes
compensation policies and is responsible for determining cash and equity
compensation for executive officers, including the granting of options under
our share option schemes.
Item 11. Compensation of Directors and Officers
The aggregate compensation paid by us and our subsidiaries to our directors
and executive officers as a group of 13 persons in the year ended January 31,
2000 totaled $1,150,535. All of the $1,150,535 was paid by our subsidiaries.
Amounts paid include salary and pension, retirement and other similar benefits.
We have entered into indefinite term employment agreements with each of John
McGuire, Cyril McGuire, Christopher Meehan, R. Paul Byrne, John Harte and Kevin
Shea under which each receives an annual base salary, an annual bonus and all
standard benefits accorded our other executives. In addition, each of these
executives will be entitled to participate in and receive options from our
employee share option schemes.
We do not have any currently outstanding loans to any of our directors. In
addition, we do not currently have any outstanding guarantees for the benefit
of any of our directors.
Item 12. Options to Purchase Securities From Registrant or Subsidiaries
As of April 27, 2000, there were outstanding options to purchase an
aggregate of 3,547,439 ordinary shares at exercise prices ranging from $1.56 to
$107 per ordinary share and expiration dates ranging from May 2004 to April
2007. As of April 27, 2000, the Company's directors and executive officers held
options to purchase an aggregate of 1,314,697 ordinary shares at exercise
prices ranging from $2.02 to $100.10 per ordinary share with expiration dates
ranging from May 2004 to September 2006.
Item 13. Interest of Management in Certain Transactions
On March 31, 1998, we licensed the source code for S/PAY and J/PAY from RSA
Security. S/PAY and J/PAY are security toolkit products which enable the user
to add cryptography functionality to other software products for securing e-
payment transactions. The license is exclusive for that portion of the source
code that implements and provides the functionality of the SET standard. Under
the terms of the agreement, we also received a royalty-free sublicensable
license to the object code of the licensed software. Our rights under the
license are subject to pre-existing rights of third-party licensees to license
portions of the tool kit products. In exchange for receiving the rights under
the license, we paid RSA Security a one-time payment of $2.5 million in cash.
In connection with the execution of this license, we and RSA Security also
entered into an agreement that specified joint marketing activities to be
undertaken by us and RSA Security.
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On March 31, 1998, RSA Security, purchased 482,765 of our ordinary shares.
As part of the equity investment, we granted RSA Security the right to appoint
one member to our board of directors. James Bidzos, a director and vice
chairman of RSA Security, was initially appointed by RSA Security and currently
serves on our board. RSA Security's right to appoint one member to our board of
directors terminated upon the closing of our initial public offering.
On June 30, 1998, we closed the sale of 2,750,000 of our redeemable
convertible preference shares at a price of $6.00 per share. HarbourVest
Partners LLC purchased 1,000,000 redeemable convertible preference shares and
RSA Security purchased 500,000 redeemable convertible preference shares in this
transaction. As part of this transaction, we granted the investors the right to
appoint one member to our board of directors. Robert M. Wadsworth, a general
partner of HarbourVest Partners LLC, was initially appointed by the investors
and currently serves on our board. The investors' right to appoint one member
to our board of directors terminated upon the closing of our initial public
offering.
In August 1998, we entered into an agreement with VISA International. The
agreement confirmed and summarized the intentions of both parties concerning
the development of a strategic relationship to pursue opportunities in the
Internet marketplace. In connection with this agreement, we issued to VISA
International a warrant to purchase 250,000 ordinary shares, exercisable for a
two-year period. As part of this transaction, we granted VISA International the
right to appoint one member to our board of directors. Wolfgang Heinrich was
initially appointed by VISA International and currently serves on our board.
VISA International's right to appoint a board member terminate upon the closing
of this offering. Concurrent with the closing of the transactions with VISA
International, VISA International purchased 250,000 of our redeemable
convertible preference shares at a price of $6.00 per share.
From time to time, we have entered into development and marketing agreements
with Visa International and some of its affiliated entities. Under these
arrangements, we have developed products to meet the specific needs of Visa and
its members. In return, Visa has paid us development and services fees and has
agreed to promote these products to its members. Additionally, once we have
developed these products, we have entered into licensing arrangements with Visa
in which we have provided Visa licenses to use these products and additional
technical and support services.
In April 1999, we entered into a development and marketing agreement with
Visa International to develop a product meeting Visa's cash payment server
specifications.
In May 1999, we entered into a license agreement with Visa USA in which we
agreed to license one copy of PayGate Enterprise Gateway to Visa International.
The purpose of the license was to develop and test the product for merchants.
Visa paid us license and support fees plus additional royalties. Under the
agreement, we are required to place in escrow the current version of RSA S-Pay
source code and documentation. If we fail to provide a modification to the
source code to meet Visa's modified SET specifications within 90 days of Visa's
publication of these specifications or if we suffer a bankruptcy during the
term of the agreement, Visa will have access to the source code solely for use
under the license.
Effective September 1, 1998, we entered into a lease agreement with John and
Cyril McGuire under which we currently lease approximately 22,500 square feet
of space in a building located in Dublin, Ireland which is owned by John and
Cyril McGuire. The term of the lease is for a period of 25 years. Our rent
under the lease is IR(Pounds)401,514, or approximately $539,795 per year, which
was determined by a fair assessment of the local rental market by an
independent appraisal firm. The rent is to be reviewed by an independent
appraiser every five years and may be increased based on the independent
appraiser's assessment of the current rental market using rental rates for
similar properties in comparable locations. This lease agreement may be amended
from time to time by agreement among us and John and Cyril McGuire. We have the
right to terminate the lease on September 1, 2007.
Trintech Limited, one of our Irish subsidiaries, has issued shares of
special non-voting class to Huttoft Company, an unlimited company. Huttoft
Company is wholly-owned by John McGuire, Cyril McGuire, R. Paul
54
<PAGE>
Byrne and Christopher Meehan, four of our executive officers, but is otherwise
unrelated to us. We own all of the voting securities of Trintech Limited. The
shares held by Huttoft Company do not entitle it to any share of the assets of
Trintech Limited in the event of a winding-up. We and Huttoft Company own all
of the outstanding securities of Trintech Limited. Trintech Limited has in the
past and may in the future declare and pay dividends to Huttoft Company, and
Huttoft Company may pay dividends to its shareholders out of these amounts. The
amount of any dividends paid to Huttoft Company will be determined by our board
of directors, subject to Irish law, in its discretion. We treat any dividends
paid by Trintech Limited to Huttoft Company as compensation expense for
accounting purposes. Any dividends which are declared and paid by Trintech
Limited to Huttoft Company would result in a reduction in profits available to
us.
In March 1991, we entered into an agreement with some of our then existing
shareholders. This agreement was subsequently supplanted by a shareholders'
agreement entered into in September 1993 and again in November 1993. Enterprise
Ireland, John and Cyril McGuire were the only parties to this agreement who
remain shareholders in us. Under this agreement, each of John and Cyril McGuire
agreed to restrictions on his ability to compete with us for a period of one
year after their employment with us has been terminated for any reason.
Additionally, John McGuire, Cyril McGuire and Enterprise Ireland agreed to
provide each other with rights to participate in any sale of their shares to a
third party.
On January 31, 1997, we entered into a shareholders' agreement with John
McGuire, Cyril McGuire and Enterprise Ireland. This shareholders' agreement
provides Enterprise Ireland with the right to appoint one person to serve on
our board of directors for so long as it is a shareholder. This agreement also
requires that we provide Enterprise Ireland with information rights. Under a
letter agreement between Enterprise Ireland, John and Cyril McGuire and us
dated June 11, 1999, each of the amended March 1991 agreement and the January
1997 agreement terminated on the closing date of our initial public offering.
From time to time since December 1996, Enterprise Ireland has provided us
with grants in support of some of our projects for the purpose of increasing
employment in Ireland. These grants have totaled an aggregate of
IR(Pounds)942,320. These grants must be repaid if we fail to maintain the
projected employment for a period of five years from the date of receipt of the
grant.
We believe that the terms of all transactions with related parties are
comparable to those that would be attainable by us in the ordinary course of
business from unaffiliated third parties under similar circumstances.
As of January 31, 2000, we had granted share options to the following
directors and officers:
<TABLE>
<CAPTION>
Number of
Options (in
equivalent
Name ADSs)
---- -----------
<S> <C>
Kevin C. Shea................................................ 840,000
R. Paul Byrne................................................ 512,170
John Harte................................................... 450,000
Donald Marcotte.............................................. 300,000
Christopher P. Meehan........................................ 294,556
John F. McGuire.............................................. 200,000
Cyril P. McGuire............................................. 200,000
George L. Burne.............................................. 141,000
Noel Ryan.................................................... 24,000
Trevor Sullivan.............................................. 20,000
Robert Wadsworth............................................. 20,000
Wolfgang H. Heinrich......................................... 20,000
D. James Bidzos.............................................. 20,000
</TABLE>
55
<PAGE>
PART II
Item 14. Description of Securities to be Registered
Not applicable.
PART III
Item 15. Defaults upon Senior Securities
Not applicable.
Item 16. Changes in Securities and Changes in Security for Registered
Securities
Not applicable.
PART IV
Item 17. Financial Statements
The Company has responded to Item 18.
56
<PAGE>
Item 18. Financial Statements
See attached pages F-1 to F-28.
57
<PAGE>
Item 19. Financial Statements and Exhibits
(a) Financial Statements
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Schedule II: Valuation and Qualifying Accounts
</TABLE>
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
Exhibit 1 Consent of Ernst & Young Accountants, Independent Auditors
Exhibit 3 Subsidiaries of Trintech Group PLC
</TABLE>
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TRINTECH GROUP PLC (Registrant)
/s/ Richard Paul Byrne
By: _________________________________
R. Paul Byrne
Chief Financial Officer
Date April 28, 2000
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows ..................................... F-6
Notes to the Consolidated Financial Statements............................. F-7
Schedule II: Valuation and Qualifying Accounts............................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
Trintech Group PLC
We have audited the accompanying consolidated balance sheets of Trintech
Group PLC and subsidiaries as of January 31, 1998, 1999 and 2000 and the
related consolidated statements of operations, changes in redeemable
convertible preference shares and shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. 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 Trintech Group PLC and its subsidiaries at January 31, 1998, 1999 and 2000,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
Ernst & Young
Dublin, Ireland
March 16, 2000
F-2
<PAGE>
TRINTECH GROUP PLC
CONSOLIDATED BALANCE SHEETS
(U.S dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
January 31,
--------------------------
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 272 $ 1,691 $ 10,862
Marketable securities.............................. -- 7,178 48,830
Accounts receivable, net of allowance for doubtful
accounts of $98, $241 and $330 respectively....... 4,017 4,073 7,799
Inventories (note 4)............................... 893 1,055 840
Value added taxes.................................. 420 407 192
Prepaid expenses and other current assets.......... 662 1,299 1,332
------- ------- --------
Total current assets.............................. 6,264 15,703 69,855
Property and equipment, net (notes 7 and 8)........ 739 2,058 3,190
Other assets--software development costs........... -- 2,500 1,250
------- ------- --------
Total assets...................................... $ 7,003 $20,261 74,295
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft..................................... $ -- $ 411 $ --
Accounts payable................................... 2,009 1,459 4,082
Accrued payroll and related expenses............... 235 583 871
Other accrued liabilities.......................... 512 1,571 2,677
Value added taxes.................................. 517 372 460
Warranty reserve................................... 922 876 556
Deferred revenue................................... 620 994 3,406
------- ------- --------
Total current liabilities......................... 4,815 6,266 12,052
------- ------- --------
Capital lease due after more than one year (note
7)................................................ 67 142 409
Government grants repayable and related loans (note
15)............................................... 479 793 718
Series A redeemable convertible preference shares,
$0.0027 par value nil, 3,000,000 and nil shares
authorized at January 31, 1998, 1999 and 2000
respectively nil, 2,960,000 and nil shares issued
and outstanding at January 31, 1998, 1999 and 2000
respectively...................................... -- 17,760 --
Series B preference shares, $0.0027 par value nil,
nil and 10,000,000 authorized at January 31, 1998,
1999 and 2000 respectively
None issued and outstanding....................... -- -- --
Shareholders' equity:
Ordinary Shares, $0.0027 par value: 100,000,000
shares authorized; 15,689,715, 16,227,445 and
25,140,722 shares issued and outstanding at
January 31, 1998, 1999 and 2000 respectively...... 45 47 71
Additional paid-in capital......................... 4,547 4,781 84,286
Accumulated deficit................................ (2,601) (9,474) (21,585)
Accumulated other comprehensive income............. (349) (54) (1,656)
------- ------- --------
Total shareholders' equity (net capital
deficiency)...................................... 1,642 (4,700) 61,116
------- ------- --------
Total liabilities and shareholders' equity........ $ 7,003 $20,261 $ 74,295
======= ======= ========
</TABLE>
See accompanying notes
F-3
<PAGE>
TRINTECH GROUP PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended January 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Product.................................. $ 10,824 $ 14,554 $ 18,457
License.................................. 4,101 4,477 9,158
Service.................................. 1,721 2,002 2,629
---------- ---------- ----------
Total revenue.......................... 16,646 21,033 30,244
---------- ---------- ----------
Cost of revenue:
Product.................................. 8,352 10,851 12,034
License.................................. 334 648 2,981
Service.................................. 1,008 2,414 2,242
---------- ---------- ----------
Total cost of revenue.................. 9,694 13,913 17,257
---------- ---------- ----------
Gross margin.............................. 6,952 7,120 12,987
Operating expenses:
Research and development................. 1,729 3,676 8,892
Sales and marketing...................... 2,474 5,921 8,849
General and administrative............... 2,530 4,347 7,336
Stock compensation....................... -- -- 2,068
---------- ---------- ----------
Total operating expenses............... 6,733 13,944 27,145
---------- ---------- ----------
Income (loss) from operations............. 219 (6,824) (14,158)
Interest income, net..................... 18 272 1,208
Exchange gain (loss), net................ (12) (321) 842
---------- ---------- ----------
Income (loss) before provision for income
taxes.................................... 225 (6,873) (12,108)
Provision for income taxes (note 13)..... (50) -- (3)
---------- ---------- ----------
Net Income (loss)......................... $ 175 $ (6,873) $ (12,111)
========== ========== ==========
Basic net income (loss) per Ordinary
Share.................................... $ 0.01 $ (0.43) $ (0.63)
========== ========== ==========
Shares used in computing basic net income
(loss) per Ordinary Share................ 15,688,335 16,157,831 19,309,964
========== ========== ==========
Diluted net income (loss) per Ordinary
Share.................................... $ 0.01 $ (0.43) $ (0.63)
========== ========== ==========
Shares used in computing diluted net
income (loss) per Ordinary Share......... 15,749,161 16,157,831 19,309,964
========== ========== ==========
Basic net income (loss) per equivalent
ADS...................................... $ 0.01 $ (0.21) $ (0.31)
========== ========== ==========
Diluted net income (loss) per equivalent
ADS...................................... $ 0.01 $ (0.21) $ (0.31)
========== ========== ==========
</TABLE>
See accompanying notes
F-4
<PAGE>
TRINTECH GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERENCE SHARES
AND
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
Number of Total
Redeemable Redeemable Accumulated Shareholders'
Convertible Convertible Number of Additional Other Equity (net
Preference Preference Ordinary Ordinary Paid-in Accumulated Comprehensive capital
Shares Shares Shares Shares Capital Deficit Income deficiency)
----------- ----------- ---------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1997.................... -- $ -- 15,685,575 $45 $ 4,543 $ (2,776) $ (73) $ 1,739
Issuance of Ordinary
Shares on exercise of
options (a)............. -- -- 4,140 0 4 -- -- 4
Net income.............. -- -- -- -- -- 175 -- 175
Currency translation
adjustment.............. -- -- -- -- -- -- (276) (276)
--------
Comprehensive income
(loss).................. -- -- -- -- -- -- -- (101)
---------- -------- ---------- --- ------- -------- ------- --------
Balance at January 31,
1998.................... -- -- 15,689,715 45 4,547 (2,601) (349) 1,642
Issuance of Ordinary
Shares.................. -- -- 482,765 2 1,998 -- -- 2,000
Issuance of Ordinary
Shares on exercise of
options (a)............. -- -- 14,965 0 20 -- -- 20
Issuance of Convertible
Redeemable Preference
Shares (b).............. 3,000,000 18,000 -- -- -- -- -- --
Conversion of Redeemable
Convertible Preference
Shares to Ordinary
Shares (b).............. (40,000) (240) 40,000 0 240 -- -- 240
Issuance of Warrant to
Visa.................... -- -- -- -- 163 -- -- 163
Expenses of share
issues.................. -- -- -- -- (2,187) -- -- (2,187)
Net loss................ -- -- -- -- -- (6,873) -- (6,873)
Currency translation
adjustment.............. -- -- -- -- -- -- 295 295
--------
Comprehensive income
(loss).................. -- -- -- -- -- -- -- (6,578)
---------- -------- ---------- --- ------- -------- ------- --------
Balance at January 31,
1999.................... 2,960,000 17,760 16,227,445 47 4,781 (9,474) (54) (4,700)
Conversion of Redeemable
Convertible Preference
Shares to Ordinary
Shares (b).............. (2,960,000) (17,760) 2,960,000 8 17,752 -- -- 17,760
Issuance of Ordinary
Shares on exercise of
options (a)............. -- -- 65,679 0 145 -- -- 145
Issuance of Ordinary
Shares for Cash......... -- -- 5,887,598 16 63,086 -- -- 63,102
Expense of share
issues.................. -- -- -- -- (3,546) -- -- (3,546)
Stock compensation...... -- -- -- -- 2,068 -- -- 2,068
Net loss................ -- -- -- -- -- (12,111) -- (12,111)
Currency translation
adjustment.............. -- -- -- -- -- -- (1,602) (1,602)
--------
Comprehensive income
(loss).................. -- -- -- -- -- -- -- (13,713)
---------- -------- ---------- --- ------- -------- ------- --------
Balance at January 31,
2000.................... 0 $ 0 25,140,722 $71 $84,286 $(21,585) $(1,656) $ 61,116
========== ======== ========== === ======= ======== ======= ========
</TABLE>
- ----
(a) See note 12 to these statements
(b) See note 10 to these statements
F-5
<PAGE>
TRINTECH GROUP PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss).................................. $ 175 $(6,873) $(12,111)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization..................... 339 566 2,277
Stock compensation................................ -- 83 2,148
(Profit) on disposal of marketable securities..... -- (159) (919)
Purchase of marketable securities................. -- (64,227) (302,167)
Sale of marketable securities..................... -- 57,208 261,434
Effect of changes in foreign currency exchange
rates............................................ (254) 252 (1,611)
Changes in operating assets and liabilities:
Inventories..................................... (94) (102) 75
Accounts receivable............................. (2,292) 151 (4,536)
Prepaid expenses and other assets............... (153) (515) (252)
Value added tax receivable...................... (178) 35 181
Accounts payable................................ 794 (647) 2,913
Accrued payroll and related expenses............ 38 331 362
Deferred revenues............................... 254 333 2,591
Value added tax payable......................... 317 (175) 148
Warranty reserve................................ 275 (99) (213)
Government grants repayable and related loans... 139 283 50
Other accrued liabilities....................... (55) 948 1,242
------ ------- --------
Net cash (used in) provided by operating
activities........................................ (695) (12,607) (48,388)
------ ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (458) (1,636) (1,904)
Sale of property and equipment..................... 31 27 14
Purchase of capitalized software development
costs............................................. -- (2,500) --
------ ------- --------
Net cash used in investing activities.............. (427) (4,109) (1,890)
------ ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases............... (37) (86) (127)
Issuance of ordinary shares........................ 4 2,020 63,247
Issuance of convertible redeemable preference
shares............................................ -- 18,000 --
Expenses of share issue............................ -- (2,187) (3,546)
Proceeds (repayments) of loans from directors...... (222) -- --
Proceed (repayments) under bank overdraft
facility.......................................... (172) 405 (388)
------ ------- --------
Net cash provided by (used in) financing
activities........................................ (427) 18,152 59,186
------ ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (1,549) 1,436 8,908
Effect of exchange rate changes on cash and cash
equivalents....................................... (78) (17) 263
Cash and cash equivalents at beginning of period... 1,899 272 1,691
------ ------- --------
Cash and cash equivalents at end of period......... $ 272 $ 1,691 $ 10,862
====== ======= ========
Supplemental disclosure of cash flow information
Interest paid..................................... $ 19 $ -- $ 6
====== ======= ========
Taxes paid........................................ $ 20 $ -- $ 3
====== ======= ========
Supplemental disclosure of non-cash flow
information:
Acquisition of property and equipment under
capital leases................................... $ 108 $ 217 $ 434
====== ======= ========
</TABLE>
See accompanying notes
F-6
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Trintech Group PLC is organized as a public limited company under the laws
of Ireland. Trintech Group PLC and its wholly-owned subsidiaries (collectively,
the "Company") operate in two market segments: electronic PoS systems that
securely process card payment transactions in a physical point-of-sale ("PoS")
environment and e-payment software products that securely process on-line card-
payment transactions over private and public networks, including the Internet.
The Company also provides related development and professional services,
including project management, implementation and training services. The
Company's major customers, based on revenues earned, are banks and other
financial transaction processors in Germany. The Company also earns significant
revenues from similar customers in other European countries, the Americas and
the rest of the world.
In March 1998 the Company completed a private placement of $2 million in
ordinary shares and in August 1998 the Company completed a private placement of
$18 million in Series A Redeemable Convertible Preference Shares.
In August 1999, 5,800,000 American Depositary Shares ("ADS") representing
5,800,000 Ordinary shares were sold in an initial public offering (the "IPO").
Simultaneous with that sale, the underwriters elected to exercise their over-
allotment option to purchase an additional 87,598 ADS representing 87,598
Ordinary Shares.
Trintech converted all its Redeemable Convertible Preferred Shares into
Ordinary Shares on the completion of its IPO.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States
and include the Company and its wholly-owned subsidiaries in Ireland, the
United Kingdom, the Cayman Islands, Germany and the United States after
eliminating all material inter-company accounts and transactions.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying footnotes. Actual results could differ from
those estimates.
Vulnerabilities due to Certain Concentrations
A small number of customers have historically accounted for a significant
portion of the Company's revenues. The loss of any of the Company's major
customers or delays in orders by any such customers could have a material
adverse effect on the Company's business and results of operations.
The Company uses two manufacturers for its PoS system products. While the
Company has alternative manufacturing sources, if either manufacturer increased
cost or ceased manufacturing the Company may not be able to rapidly obtain
alternative capacity at a comparable price. Failure to obtain an adequate
supply of products on a timely basis would delay product delivery to customers,
which may have a material adverse effect on the Company's business and results
of operations.
F-7
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Companies Acts, 1963 to 1999
The financial information relating to Trintech Group PLC and its
subsidiaries included in this document does not comprise statutory financial
statements as referred to in Section 19 of the Companies (Amendment) Act,
1986, copies of which are required by that Act to be annexed to the company's
annual return lodged with the Registrar of Companies. The auditors have made
reports without qualification under Section 193 of the Irish Companies Act,
1990 in respect of all such financial statements. Copies of statutory
financial statements of the Company as an individual entity for the years
ended January 31, 1998 and January 31, 1999 have been so annexed to the
relevant annual returns, and a copy of the group statutory financial
statements for the year ended January 31, 2000 will be annexed to the relevant
annual return in due course.
Translation of Financial Statements of Foreign Entities
The Irish pound ("IR(Pounds)") is the functional currency of the Company
and the Company's subsidiaries in Ireland. The US dollar ("US$") is the
functional currency of the Company's subsidiaries in the United States and the
Cayman Islands. The United Kingdom pound sterling (Sterling) is the functional
currency of the Company's UK subsidiary and the Deutsche mark is the
functional currency of the Company's subsidiary in Germany. Transaction gains
or losses arising on changes in the exchange rates between functional
currencies and foreign currencies are included in net income (loss) for the
period.
The Company's assets and liabilities are translated to US dollars, the
reporting currency, at the exchange rate at the balance sheet date. Revenues,
costs and expenses are translated to US dollars at average rates of exchange
prevailing during the periods. Translation adjustments arising are reported as
a component of shareholders' equity.
Revenue Recognition
The Company's revenue is derived from product sales, license fees and
charges for services.
The Company recognizes product revenue from the sale of electronic PoS
system products upon shipment.
For Fiscal Years 1999 and 2000, the Company followed the revenue
recognition criteria of Statement of Position 97-2 ("SOP 97-2"), as amended by
SOP 98-4 and SOP 98-9 issued by the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants for its license
revenue. The adoption of SOP 97-2 did not have a material effect on the
Company's operating results.
Under the terms of SOP 97-2 where an arrangement to deliver software does
not require significant production, modification or customization, the Company
recognizes license revenue when all of the following criteria are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred;
. vendor's fee is fixed or determinable; and
. collectibility is probable.
For Fiscal Year 1998, the Company followed the revenue recognition criteria
set out in SOP 91-1. Accordingly, the Company recognized license revenue on
shipment, provided that it had no significant related obligations or
collection uncertainties remaining.
F-8
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies--(Continued)
The Company recognizes technical support revenue ratably over the term of
the support agreement, generally twelve months.
The Company recognizes service revenue when earned. Service revenue is
derived from consultancy, educational and training and customization and
implementation services. Services are provided primarily on a time and
materials basis for which revenue is recognized in the period that the services
are provided. Where contracts for services extend over a number of accounting
periods and are not being provided on a time and materials basis the revenue is
accounted for in conformity with the percentage-of-completion contract
accounting method. Percentage-of-completion is measured using output measures,
primarily arrangement milestones where such milestones indicate progress to
completion, or input measures using the allocation of time spent to date as a
proportion of total time allocated to the contract.
Cost of Revenue
Cost of product revenue includes outsourced manufacturing costs, and
packaging, documentation, labor and other costs associated with packaging and
shipping electronic PoS system products. Cost of license revenue includes
shipping, software documentation, labor, third-party license fees and other
costs associated with the delivery of software products from which license
revenue is derived and the cost of providing after-sale support and maintenance
services to customers. Cost of service revenue includes labor, travel and other
non-recoverable costs associated with the delivery of services to customers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with insignificant
interest rate risk and purchased with a maturity of three months or less to be
cash equivalents.
Marketable Securities
Marketable securities consist of commercial paper, corporate bonds and U.S.
government agency fixed income securities. Marketable securities are stated at
market value, and by policy, the Company invests in high grade marketable
securities. All marketable securities are defined as trading securities under
the provisions of Statement of Financial Account Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and
unrealized holding gains and losses are reflected in earnings.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards Number 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Development costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been insignificant. Through January 31, 2000, all research
and development costs have been expensed.
On March 31, 1998, Trintech Technologies Limited, a subsidiary of the
Company purchased technology for US$2.5 million from RSA Data Security, a
wholly owned subsidiary of Security Dynamics, under the terms of the RSA
Technology License Agreement. The technology comprised a license to the source
code and a royalty-free sublicensable license to the object code, for S/PAY and
J/PAY. S/PAY and J/PAY are encryption technology toolkits that implemented and
provided the functionality of certain elements of the SET 0.0 standard, and the
license is exclusive as to the SET portions of the source code. The purchase of
this
F-9
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies--(Continued)
technology has been accounted for as expenditure on a product enhancement that
has reached technological feasibility and accordingly has been capitalized. The
capitalized costs are being amortized to income on the sales curve or straight
line methods, whichever gives the greater amortization, over the two year
period from February 1, 1999 following the achievement of the SET mark in
January 1999 and the general availability of the enhanced product from that
date.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Motor vehicles, computer and office equipment, furniture and
fixtures......................................................... 3 years
</TABLE>
Net Income (Loss) per Ordinary Share
Basic and diluted earnings per share is calculated in accordance with
statement of Financial Accounting Standards No. 128 "Earnings per Share"
("Statement 128"). All earnings per share amounts for all periods have been
presented in conformity with the requirements of Statement 128.
Concentration of Credit Risk
The Company sells its products primarily to banks and financial transaction
processors throughout the world. While a small number of customers have
historically accounted for a significant portion of the Company's revenue,
management believes that these customers are credit worthy and, accordingly,
minimal credit risk exists with respect to these customers. The Company
performs ongoing credit evaluations on its customers and maintains reserves for
potential credit losses. To date such losses have been within management's
expectations. The Company had an allowance for doubtful accounts of
approximately US$98,000, US$241,000 and US$330,000 at January 31, 1998, 1999
and 2000 respectively. The Company generally requires no collateral from its
customers.
The Company invests its excess cash in low-risk, short-term deposit accounts
with high credit-quality banks in the United States, Germany and Ireland. At
January 31, 2000 US$48,830,000 was invested in marketable securities held for
trading purposes, comprised of US$19,550,000 in corporate bonds and
US$29,280,000 in U.S. government agency securities, under the management of a
financial institution. The Company performs periodic evaluations of the
relative credit standing of all of the financial institutions dealt with by the
Company, and considers the credit risk to be minimal.
Employment Grants
Employment grants are credited to the income statement when earned and
offset against the related payroll expense in two equal installments, the first
on the creation of the job, and the second six months following the creation of
the job.
Marketing Grants and related loans
Marketing grants and related loans received are accounted for in accordance
with the terms of the agreement for the specific grant/loan. This is either as
a 50% offset against the relevant expenditure on developing an overseas market
and a 50% loan to be repaid at rates linked to future revenues earned in the
related markets, or as a 100% loan to be repaid at rates linked to future
revenues earned in the related markets. All loan amounts are credited to a
balance sheet liability account as the Company believes they will have to be
repaid in the future.
F-10
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Accounting for Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws which will be in effect
when the differences are expected to reverse.
Foreign Exchange Contracts
From time to time one of the Company's Irish subsidiaries enters into
foreign exchange contracts as a hedge against accounts receivable in currencies
other than its functional currency. Market value gains and losses are
recognized, and the resulting credit or debit offsets foreign exchange losses
or gains included in Exchange gain (loss), net in the statement of operations.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion Number
25, "Accounting for Stock Issued to Employees", ("APB 25") and related
interpretations in accounting for its stock options. FASB Statement Number 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), requires that
companies electing to continue using the intrinsic value method make pro-forma
disclosures of net earnings and earnings per share as if the fair value based
method of accounting had been applied. See Note 12 for the fair value
disclosures required under SFAS 123.
Under APB 25, the Company has not recognized compensation expense during the
years ended January 31, 1998, 1999 and 2000 respectively, as the Company
believes the exercise price of the Company's share options at the date of grant
was equal to or greater than the estimated fair value of the underlying shares
on the date of grant.
The Company has followed the provisions of SFAS 123 and EITF 96-18
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services", in accounting
for warrants and options issued to nonemployees. The Company has adopted the
fair value method as prescribed by SFAS 123 in determining the fair value of
the warrants issued and the resultant compensation expense. The Company has
recognized compensation expense of US$0, US$83,000 and US$2,148,000 during the
years ended January 31, 1998, 1999 and 2000 respectively in respect of warrants
issued to nonemployees.
Advertising and Promotion Expense
All costs associated with advertising are expensed as incurred. Advertising
and promotion expense was US$215,000, US$919,000 and US$1,125,000 for the years
ended January 31, 1998, 1999 and 2000, respectively.
Inventories
Inventories are stated at the lower of cost or market.
Warranty Reserves
The Company maintains reserves for future warranty claims arising from past
sales of product. The Company makes provision for such costs when revenue is
recorded from product sales.
F-11
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Recent Accounting Pronouncements
In 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which was originally required to be adopted for fiscal years commencing after
June 15, 1999 but has now been deferred to fiscal years commencing after June
15, 2000. SFAS 133, requires all derivatives to be recorded in the balance
sheet at fair value and establishes "special accounting" for the following
three different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments ("referred to as fair value hedges"), hedges of
the variable cash flows of forecasted transactions ("cash flow hedges") and
hedges of foreign currency exposures of net investments in foreign operations
("forwards"). Forwards that are not hedges must be adjusted to fair value
through income. If the forwards are hedges, depending on the nature of the
hedges, changes in their fair values will either be offset against the change
in the fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The Company has not yet determined what the
effect of SFAS 133 will be on the earnings and financial position of the
Company. Because SFAS 133 allows certain foreign currency transactions to be
accounted for as hedges, the Company may change its policies towards the
management of certain foreign currency exposures. Any changes that may occur
would be to reduce the Company's exposure to foreign currency risks.
2. Cash and Marketable Securities
<TABLE>
<CAPTION>
January 31,
--------------
1998 1999 2000
---- ---- ----
(U.S. dollars
in thousands)
<S> <C> <C> <C>
Restricted Cash............................................. $ -- $ -- $161
==== ==== ====
</TABLE>
Marketable securities are considered to be trading securities per SFAS 115
and are carried on the balance sheet at their market value.
<TABLE>
<CAPTION>
January 31, 1999
--------------------
Unrealized
Gain Market
Cost (Loss) Value
------ ------ ------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
U.S. Government Agency Securities.................... $3,152 $ 3 $3,155
Corporate bonds...................................... 4,028 (5) 4,023
------ --- ------
Total.............................................. $7,180 $(2) $7,178
====== === ======
</TABLE>
<TABLE>
<CAPTION>
January 31, 2000
--------------------------
Unrealized Market
Cost Gain Value
------- ---------- -------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
U.S. Government Agency Securities.............. $29,120 $160 $29,280
Corporate bonds................................ 19,385 165 19,550
------- ---- -------
Total........................................ $48,505 $325 $48,830
======= ==== =======
</TABLE>
F-12
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Cash and Marketable Securities--(Continued)
The change in unrealized gain (loss) included in net income (loss) is as
follows:
<TABLE>
<CAPTION>
Year ended
January 31,
------------
1999 2000
----- -----
(U.S.
dollars in
thousands)
<S> <C> <C>
Unrealized (loss) at beginning of period...................... $ -- $ (2)
Included in income (loss) in the period....................... (2) 327
----- -----
Unrealized gain (loss) of end of period....................... $ (2) $ 325
===== =====
</TABLE>
3. Revolving Credit Facility: Bank Overdraft Facility and Overdrafts
The Company currently has a secured overdraft facility of IR(Pounds)650,000
(approximately US$808,000) from Bank of Ireland. This overdraft is secured by a
debenture over the assets of Trintech Group PLC, Trintech Limited and Trintech
Technologies Limited to a value of IR(Pounds)650,000. Advances under the
facility bear interest at the Bank's AA overdraft rate, 5.94% as at January 31,
2000. As of January 31, 2000 there was US$0 outstanding under the facility. The
facility does not have a stated expiration date, but all amounts drawn
thereunder are repayable on demand.
4. Inventories
<TABLE>
<CAPTION>
January 31,
-----------------------------
1998 1999 2000
------------------- ---------
(U.S. dollars in thousands)
<S> <C> <C> <C>
Raw materials................................. $ 398 $ 333 $ 78
Finished goods................................ 495 722 762
-------- ---------- --------
Total....................................... $ 893 $ 1,055 $ 840
======== ========== ========
</TABLE>
5. Foreign Exchange Contracts and Fair Value of Financial Instruments
At January 31, 2000, the Company had a contract maturing in February 2000
and a contract maturing in May 2000 each to sell 1,000,000 US dollars and
receive euro. The fair value of the contracts at January 31, 2000 was
US$100,000 negative. At January 31, 1998, the Company had contracts maturing in
February 1998 to sell 500,000 Deutsche marks and receive Irish pounds. The fair
value of the contract at January 31, 1998 was $2,000 negative.
<TABLE>
<CAPTION>
January 31,
-------------------------------------------------
1998 1999 2000
-------------- --------------- ----------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- ----- -------- ------ -------- -------
(U.S. dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non Derivatives
Cash and cash equivalents.. $272 $272 $1,691 $1,691 $10,862 $10,862
Marketable Securities
trading................... $-- $-- $7,178 $7,178 $48,830 $48,830
Derivatives
Foreign currency forward
contracts................. $-- $ (2) $ -- $ (2) $ -- $ (100)
</TABLE>
The carrying amounts in the table are included in the statements of
financial position under the indicated captions.
F-13
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Operating Lease Commitments
The Company's significant operating leases are for the premises in Dublin,
Ireland; Frankfurt, Germany; San Mateo, California; Austin, Texas; and
Princeton, New Jersey. In Dublin, the Company leases the new corporate
headquarters from John and Cyril McGuire, officers and directors of the
Company. The new facility is held under a lease expiring in 2023, with rent
reviews every five years and an option to exit in 2007. The rent paid by the
company was determined after completion of a survey of the rental market, and
the terms of the lease are no less favorable than those that could be obtained
in arms-length transactions. The Frankfurt facility is under a five year lease
which expires in 2004. The San Mateo facility is under a 5 year lease which
expires in 2004. The Austin facility is under a two year lease which expires in
2001. The Princeton facility is under a five year lease which expires in 2003.
Rent expense under all operating leases was approximately, US$345,000,
US$574,000 and US$1,236,000 for the years ended January 31, 1998, 1999, and
2000, respectively.
Future minimum lease payments under the operating leases as of January 31,
2000, are as follows (U.S. dollars in thousands):
<TABLE>
<S> <C>
Year ending January 31,
2001............................................................. $1,518
2002............................................................. 1,492
2003............................................................. 1,428
2004............................................................. 1,254
2005............................................................. 860
Thereafter....................................................... 1,035
------
Total minimum lease payments..................................... $7,587
======
</TABLE>
7. Capital Leases
The following is an analysis of the property acquired under capital leases,
and included in property and equipment, by major classes:
<TABLE>
<CAPTION>
Asset balances at January 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
(U.S. dollars in thousands)
<S> <C> <C> <C>
Computers and office equipment............ $ 291 $ 309 $ 705
Motor vehicles............................ 51 36 62
Fixtures and fittings..................... 25 14 12
--------- --------- ---------
Total cost.............................. 367 359 779
Accumulated depreciation.................. (263) (118) (218)
--------- --------- ---------
Total, net.............................. $ 104 $ 241 $ 561
========= ========= =========
</TABLE>
F-14
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Capital Leases--(Continued)
The following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of January 31, 2000 (U.S. dollars in thousands):
<TABLE>
<S> <C>
Year ending January 31,
2001............................................................... $175
2002............................................................... 164
2003............................................................... 123
2004............................................................... 88
2005............................................................... 83
----
Total minimum lease payments....................................... 633
Less: Amount representing interest................................. (68)
----
Present value of net minimum lease payments.......................... $565
====
</TABLE>
The current portion and non-current portion of present value of net minimum
lease payments as of January 31, 2000 was US$156,000 and US$409,000,
respectively.
8. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
January 31,
-------------------------
1998 1999 2000
------- ------- -------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
Computers and office equipment.................. $ 1,482 $ 2,233 $ 3,938
Motor vehicles.................................. 251 82 162
Fixtures and fittings........................... 84 766 919
------- ------- -------
Total cost...................................... 1,817 3,081 5,019
Accumulated depreciation........................ (1,078) (1,023) (1,829)
------- ------- -------
Property and equipment, net..................... $ 739 $ 2,058 $ 3,190
======= ======= =======
</TABLE>
9. Redeemable Preference Shares
At January 31, 1997 the Company's authorized share capital included 200,000
redeemable preference shares at a par value of IR(Pounds)1 each.
On January 31, 1997, pursuant to the Company's Articles of Association, the
181,062 redeemable preference shares, then in issue, were redeemed at par, for
a consideration of IR(Pounds)181,062 (approximately US$288,000) out of the
proceeds of a new issue of ordinary shares on that date.
On November 21, 1997 the Company cancelled the authorized redeemable
preference shares.
The redeemable preference shares conferred on the holders thereof upon a
winding up of the Company the right to a repayment of capital in priority to a
repayment of capital to the holders of ordinary shares in the capital of the
Company. Such redeemable preference shares did not, however, confer upon the
holders thereof any further rights to participate in the assets of the Company.
The preference shares conferred on the holders thereof the rights to receive
notice of and to attend all general meetings of the Company, but not the right
to vote on any resolution proposed thereof, nor the right to receive a
dividend, from the Company.
F-15
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Shareholders' Equity and Redeemable Convertible Preference Shares
The Company's authorized share capital comprises 100,000,000 Ordinary shares
of US$0.0027 par value per share and 10,000,000 Series B Redeemable Convertible
Preference Shares of US$0.0027 par value per share.
The Company previously had authorized share capital of IR(Pounds)206,000
comprising 100,000,000 Ordinary shares of IR(Pounds)0.002 par value per share
and 3,000,000 Series A Redeemable Convertible Preference Shares of
IR(Pounds)0.002 par value per share. On August 23, 1999 in connection with the
re-registration of the Company as a public limited company, the Company re-
organised its share capital into Ordinary shares and Series A Redeemable
Convertible Preference Shares of US$0.0027 par value per share in the following
manner:
The authorised share capital was first reduced from IR(Pounds)206,000 to
IR(Pounds)38,431 by the cancellation of 83,744,574 authorised and unissued
Ordinary Shares of IR(Pounds)0.002 each and 40,000 Series A Redeemable
Convertible Preference Shares of IR(Pounds)0.002 each.
The authorised share capital was then increased to IR(Pounds)38,431 plus
US$278,100 by the creation of 100,000,000 Ordinary shares of US$0.0027 each
and 3,000,000 Redeemable Convertible Preference Shares of US$0.0027 each.
The 16,255,426 Ordinary shares of IR(Pounds)0.002 each in issue at that
date were converted to redeemable shares and these shares, together with
the 2,960,000 Series A Redeemable Convertible Preference Shares of
IR(Pounds)0.002 each were redeemed out of the proceeds of a fresh issue of
16,255,426 Ordinary shares of US$0.0027 each and 2,960,000 Series A
Redeemable Convertible Preference Shares of US$0.0027 each.
The authorised share capital was then reduced to US$278,100 by the
cancellation of the authorised shares of IR(Pounds)0.002 each which had
been redeemed.
On the closing of the initial public offering of the Company's shares the
authorised share capital was reduced to US$270,000 by the cancellation of the
3,000,000 Series A Redeemable Convertible Preference Shares of US$0.0027 each.
Immediately thereafter the authorised share capital was increased to
US$297,000 by the creation of 10,000,000 Series B Preference Shares of
US$0.0027 each which may be issued with such special, qualified, preferred,
deferred or other rights or privileges or conditions as to capital, dividends,
rights of voting or other matters as the Directors may decide.
The accompanying financial statements have given effect to this re-
organisation.
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish company law.
During 1998, in connection with the issuance of the Series A Redeemable
Convertible Preference Shares and certain strategic marketing agreements with
VISA International, the Company issued a warrant to purchase 250,000 of the
Company's Ordinary Shares at a price of US$6 per share. The warrant is fully
exercisable upon the date of issuance and expires two years from the date of
the strategic marketing agreement.
The Company has determined the fair value of the warrant at the time of
issuance using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rate of 6%; dividend yields of
0%; volatility factors of the expected market price of the Company's ordinary
shares of 0.325; and a weighted-average expected life of the option of two
years. The determined value of the warrant was debited to prepaid expenses and
other current assets and is being charged to marketing expenses over the two
year term of
F-16
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Shareholders' Equity and Redeemable Convertible Preference Shares--
(Continued)
the strategic marketing agreement. The Company amortised US$83,000 and
US$80,000 of the value of the warrant to sales and marketing expense in the
years ended January 31, 1999 and 2000, respectively.
During 1999, in connection with a strategic alliance with MasterCard, the
Company issued options to purchase 50,000 shares of the Company's Ordinary
Shares at prices ranging from US$11.55 to US$12.50. The options vest eighteen
months from the date of grant and expire two years from the date of issuance.
The Company has determined the fair value of the options at the period end
using a Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest range of 5.5%; divided yields of 0%; volatility
factors of the expected market price of the Company's ordinary shares of 0.4;
and a weighted-average expected life of the options of 1.34 years. The Company
recorded US$587,000 in stock compensation related to these options in the year
ended January 31, 2000.
Also in 1999, in connection with the formation of the Company's Advisory
Board, the Company issued options to purchase 60,000 shares of the Company's
Ordinary Shares at an exercise price of US$11.36 to each of the three Advisory
Board Members. The options vest ratably over 4 years and expire after seven
years from the date of grant.
The Company has determined the fair value of the options at the period end
using a Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate of 5.5%; dividend yields of 0%; volatility
factors of the expected market price of the Company's ordinary shares of 0.4;
and a weighted-average expected life of the options of 1.16 years. The company
recorded US$1,481,000 in stock compensation related to these options in the
year ended January 31, 2000.
The holders of the Series A Redeemable Convertible Preference Shares were
entitled to receive a dividend, when and if declared by the Board of Directors,
on an equal basis with the holders of Ordinary Shares. There were no dividends
declared or payable by the Company in any of the years presented. At January
31, 1998, 1999 and 2000 the Company did not have any profits available for
distribution.
The Series A Redeemable Convertible Preference Shares were redeemable on a
change of control and accordingly were classified outside shareholders' equity
at their redemption value.
The Series A Redeemable Convertible Preference Shares were convertible at
any time at the option of the holder into Ordinary Shares at the then effective
conversion price. The Series A Redeemable Convertible Preference Shares
automatically converted into Ordinary Shares: upon the closing of a firmly
underwritten public offering under the Securities Act of 1933 (IPO) of Ordinary
Shares of the Company at a per share price not less than US$10.50 per share and
for a total offering of not less than US$20 million; or at such time as the
Company received the consent of not less than two-thirds of the holders of the
Series A Redeemable Convertible Preference Shares; or in the event that fewer
than one-third of the originally issued Series A Redeemable Convertible
Preference Shares remained outstanding.
Each Series A Redeemable Convertible Preference Share had a number of votes
equal to the number of Ordinary Shares then issuable upon conversion of such
Series A Redeemable Convertible Preference Shares. Upon liquidation, the
holders of the Series A Redeemable Convertible Preference Shares were entitled
to receive a per share amount equal to the Original Purchase Price plus any
declared but unpaid dividends, before any distribution was made to the holders
of the Ordinary Shares.
In August 1998, 40,000 Series A Redeemable Convertible Preference Shares
were converted to 40,000 Ordinary Shares at a conversion price of US$6 each. In
September 1999, the remaining 2,960,000 Series A Redeemable Convertible
Preference Shares were converted to 2,960,000 Ordinary Shares.
F-17
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Net Income (Loss) Per Ordinary Share
<TABLE>
<CAPTION>
Year ended January 31,
---------------------------------
1998 1999 2000
---------- ---------- ----------
(U.S. dollars in thousands,
except share and per share data)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income
(loss) per ordinary share--Income (loss)
available to ordinary shareholders......... $ 175 $ (6,873) $ (12,111)
Denominator:
Denominator for basic earnings per share--
weighted average Ordinary Shares........... 15,688,335 16,157,831 19,309,964
Effect of employee stock options............ 60,826 -- --
---------- ---------- ----------
Denominator for diluted net income (loss)
per Ordinary Share......................... 15,749,161 16,157,831 19,309,964
---------- ---------- ----------
Basic net income (loss) per Ordinary Share.. $ 0.01 $ (0.43) $ (0.63)
---------- ---------- ----------
Diluted net income (loss) per Ordinary
Share...................................... $ 0.01 $ (0.43) $ (0.63)
---------- ---------- ----------
ADSs used in computing basic net income
(loss) per equivalent ADS.................. 31,376,670 32,315,662 38,619,928
---------- ---------- ----------
ADSs used in computing diluted net income
(loss) per equivalent ADS.................. 31,498,322 32,315,662 38,619,928
---------- ---------- ----------
</TABLE>
12. Employee Benefit Plans
The Company has elected to follow Accounting Principles Board Opinion Number
25, "Accounting for Stock Issued to Employees", ("APB 25") and related
interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
Number 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB 25, the Company has not recognized compensation expense
during the years ended January 31, 1998, 1999 and 2000, respectively, as the
Company believes the exercise price of the Company's share options at the date
of grant was equal to or greater than the estimated fair value of the
underlying shares on the date of grant.
The Company established a share option scheme in January 1990, which was
available to all employees of the Company. Options granted under this scheme
generally had a three year vesting period. All options granted under this
scheme were granted prior to 1994. There are no options outstanding under the
scheme. This scheme was terminated in October 1998.
In May 1997 the Company established the Trintech Group Limited Share Option
1997 Scheme (the "1997 Scheme"). The 1997 Scheme initially provided for the
issuance of up to 1,200,000 of the Company's Ordinary Shares. In June 1998,
Trintech's Board of Directors and shareholders approved an amendment to the
1997 Scheme, providing for an increase in the number of Ordinary Shares that
may be issued under the 1997 Scheme to an aggregate of 2,200,000. In July 1999,
Trintech's Board of Directors and shareholders approved an amendment to the
1997 Scheme, providing for an increase in the number of Ordinary Shares that
may be issued under the 1997 Scheme to an aggregate of 3,700,000. All options
granted have a seven year term and generally commence vesting at a rate of one
twelfth of the total.
During 1998, the Company's Board of Directors and shareholders also approved
the Directors and Consultants Share Option Scheme which provides for the grant
of options to purchase a maximum of 200,000 Ordinary Shares of the Company to
non-employee directors and consultants of the Company. In July 1999,
F-18
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Employee Benefit Plans--(Continued)
Trintech's Board of Directors and shareholders approved an amendment to the
1998 Scheme, providing for an increase in the number of Ordinary Shares that
may be issued under the 1998 Scheme to an aggregate of 600,000.
In August, 1999, the Company obtained shareholder approval for the
establishment of the Trintech 1999 employee savings related share option scheme
for our Irish employees. The Company may issue an aggregate of 350,000 shares
under the 1999 savings related scheme. The scheme will be adopted shortly by
the board following the receipt of approval by the Irish Revenue Commissioners.
The 1999 savings related scheme applies to all of the Company's qualifying
Irish employees and is intended to be an approved scheme under Schedule 12A to
the Taxes Consolidation Act 1997 of the Republic of Ireland. The eligible
employees may apply for an option to purchase ordinary shares at a discount of
15% to the market value of ordinary shares on the last day on which the
ordinary shares were traded before grant. Participants must enter into approved
savings arrangements the purpose of which is to fund the cost of the exercise
of the option. As of January 31, 2000 no shares had been issued under this
plan.
On August 23, 1999, the Company obtained shareholder approval for the
establishment of the Trintech 1999 employee share purchase plan for Trintech's
U.S. employees. The Company may issue an aggregate of 350,000 ordinary shares
under the 1999 share purchase plan. The 1999 share purchase plan is intended to
qualify under Section 423 of the Code and contains consecutive, overlapping,
twenty-four month offering periods. Each offering period includes four six-
month purchase periods. The offering periods generally start on the first
trading day on or after March 1 and September 1 of each year. The 1999 share
purchase plan permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's compensation. As of January 31,
2000 no shares had been issued under this plan.
In the fourth quarter of fiscal year 2000, the Company recorded a stock
compensation charge of US$2.1 million in relation to stock options granted at
market value to the members of Trintech's advisory board and to a strategic
alliance partner with the Company.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its stock options under the
fair value method of SFAS 123. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1999 and 2000: risk free
interest rate of 6%, 5% and 6% respectively; dividend yields of 0%; volatility
factors of the expected market price of the Company's ordinary shares for
options granted following the initial public offering of 0.4 and volatility
factors of 0.001 (to approximate to the minimum value method appropriate for
non-public companies) for options granted prior to the initial public offering
and a weighted-average expected life of the option of three years.
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
F-19
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Employee Benefit Plans--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows for the years ended January 31, 2000 (in
thousands of U.S. dollars):
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------
1998 1999 2000
----- ------- --------
<S> <C> <C> <C>
Pro forma net income (loss)...................... $ 115 $(7,014) $(12,835)
===== ======= ========
Pro forma net income (loss) per ordinary share
Basic.......................................... $0.01 $ (0.43) $ (0.66)
Diluted........................................ $0.01 $ (0.43) $ (0.66)
Pro forma net income (loss) per equivalent ADS
Basic.......................................... $0.00 $ (0.22) $ (0.33)
Diluted........................................ $0.00 $ (0.22) $ (0.33)
</TABLE>
A summary of the Company's stock option activity and related information for
the years ended January 31, 1998, 1999 and 2000 follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999 January 31, 2000
------------------ -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of Period.............. 31,651 $1.00 912,393 $2.12 1,486,681 $ 3.40
Granted................. 903,420 $2.15 756,220 $4.59 2,471,358 16.36
Lapsed.................. (18,538) $1.78 (166,967) $2.02 (281,033) 7.45
Exercised............... (4,140) $1.00 (14,965) $1.34 (65,679) 2.41
------- ----- --------- ----- --------- ------
Outstanding at end of
period................. 912,393 $2.12 1,486,681 $3.40 3,611,327 $11.96
======= ===== ========= ===== ========= ======
Exercisable at end of
period................. 23,573 $1.00 129,257 $2.27 438,116 $ 3.79
======= ===== ========= ===== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
average average average
Fair exercise Fair exercise Fair exercise
Value price Value price Value price
----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average fair value of
options granted during the
year for options whose
exercise price exceeds the
market price of the Ordinary
Shares on the date of grant.. $0.26 $2.20 $ -- $ -- $ -- $ --
Weighted-average fair value of
options granted during the
year for options whose
exercise price equals the
market price of the Ordinary
Shares on the date of grant.. $0.45 $2.14 $0.83 $4.59 $3.91 $16.36
</TABLE>
F-20
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Employee Benefit Plans--(Continued)
Exercise prices for options outstanding as of January 31, 2000 ranged from
$1.55 to $60.00 per share. The breakdown of outstanding options at January 31,
2000 by price range is as follows:
<TABLE>
<CAPTION>
Weighted average Options Options
Price range remaining life (years) outstanding exercisable
- ----------- --------------------- ----------- -----------
<S> <C> <C> <C>
$ 1.55-- 2.99.................... 4.57 758,390 306,235
$ 3.00-- 9.99.................... 5.73 564,779 79,190
$10.00--11.49.................... 6.42 1,219,125 46,908
$11.50--48.99.................... 6.44 979,833 5,783
$49.00--60.00.................... 6.93 89,200 --
--------- -------
3,611,327 438,116
========= =======
</TABLE>
Options have been granted in US dollars since September 1999, previously
options were granted in Irish pounds. The U.S. dollar equivalents for
disclosures above have been determined using the U.S. dollar rate at the date
of each grant.
13. Income Taxes
<TABLE>
<CAPTION>
Year ended January
31,
----------------------
1998 1999 2000
---- ------- --------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
Income (loss) before provision for income taxes
consists of the following:
Ireland....................................... $161 $(2,887) $(16,172)
Foreign....................................... 64 (3,986) 4,604
---- ------- --------
Total....................................... $225 $(6,873) $(12,108)
==== ======= ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended
January 31,
--------------
1998 1999 2000
---- ---- ----
(U.S. dollars
in thousands)
<S> <C> <C> <C>
Current:
Ireland................................................... $50 $ -- $ 3
Foreign................................................... -- -- --
--- ---- ---
Total current........................................... $50 $ -- $ 3
=== ==== ===
Deferred:
Ireland................................................... $-- $ -- $--
Foreign................................................... -- -- --
--- ---- ---
Total deferred.......................................... $-- $ -- $--
=== ==== ===
Total provision for income taxes........................ $50 $ -- $ 3
=== ==== ===
</TABLE>
F-21
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Income Taxes--(Continued)
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income before taxes. The sources and tax
effects of the differences are as follows:
<TABLE>
<CAPTION>
Year ended January
31,
-----------------------
1998 1999 2000
----- ------- -------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
Income taxes computed at the Irish statutory
income tax rate of 38% for 1998, 31.66% for
1999 and 27.66% for 2000....................... $ 82 $(2,176) $(3,349)
Income (losses) from Irish manufacturing
operations (taxed) relieved at lower rates..... 159 657 2,456
Income (losses) subject to (relieved at) higher
rates of tax................................... (4) (504) 707
Income (losses) subject to (relieved at) lower
rates of tax................................... (15) -- --
Operating losses utilized....................... (9) -- (1,530)
Operating losses not utilized................... 61 2,477 1,737
Income not subject to tax....................... (302) (648) (1,003)
Foreign withholding tax......................... 21 -- --
Non-deductible expenses......................... 57 194 345
Non-deductible stock compensation............... -- -- 640
----- ------- -------
Total provision for income taxes.............. $ 50 $ -- $ 3
===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended January
31,
---------------------
1998 1999 2000
----- ------ ------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards.................... $ 965 $3,584 $3,305
----- ------ ------
Total deferred tax assets........................... 965 3,584 3,305
Valuation allowance................................. (965) (3,584) (3,305)
----- ------ ------
Net deferred tax assets............................. -- -- --
===== ====== ======
</TABLE>
At January 31, 2000, the Company had Irish manufacturing, German, U.S. and
U.K. net operating loss carryforwards of approximately US$20,661,000,
US$295,000, US$2,660,000 and US$111,000 respectively. The utilization of these
net operating loss carryforwards is limited to the future profitable operations
of the Company in the related tax jurisdictions in which such carryforwards
arose. The Irish, German and U.K. losses carry forward indefinitely. The U.S.
loss carryforwards will expire in 2014 if not previously utilized. 100%
valuation allowances have been provided against the net operating loss
carryforwards because of the history of operating losses in the related tax
jurisdictions.
F-22
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segment Information
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available that is evaluated by the
chief operating decision maker or decision making group to make decisions about
how to allocate resources and assess performance. The Company's chief operating
decision maker is the Chief Executive Officer. To date, the Company has viewed
its operations as principally two segments:
Year ended January 31, 1998
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Licenses Segments All Consolidated
Product & Services Total Other Total
------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... 10,824 5,822 16,646 -- 16,646
Cost of Sale................ 8,352 1,342 9,694 -- 9,694
Gross Profit................ 2,472 4,480 6,952 -- 6,952
Operating Expenses.......... 783 2,204 2,987 3,746 6,733
Operating Profit (Loss)..... 1,689 2,276 3,965 (3,746) 219
Non-operating Income
(expense), net............. -- -- -- (44) (44)
------ ------ ------ ------- -------
Net Income (Loss)........... 1,689 2,276 3,965 (3,790) 175
====== ====== ====== ======= =======
Segment Assets.............. 3,146 1,764 4,910 2,093 7,003
====== ====== ====== ======= =======
Year ended January 31, 1999
(U.S. dollars in thousands)
<CAPTION>
Licenses Segments All Consolidated
Product & Services Total Other Total
------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... 14,554 6,479 21,033 -- 21,033
Cost of Sale................ 10,851 3,062 13,913 -- 13,913
Gross Profit................ 3,703 3,417 7,120 -- 7,120
Operating Expenses.......... 1,913 6,260 8,173 5,771 13,944
Operating Profit (Loss)..... 1,790 (2,843) (1,053) (5,771) (6,824)
Non-operating Income
(expense), net............. -- -- -- (49) (49)
------ ------ ------ ------- -------
Net Income (Loss)........... 1,790 (2,843) (1,053) (5,820) (6,873)
====== ====== ====== ======= =======
Segment Assets.............. 3,708 1,420 5,128 15,133 20,261
====== ====== ====== ======= =======
Year ended January 31, 2000
(U.S. dollars in thousands)
<CAPTION>
Licenses Segments All Consolidated
Product & Services Total Other Total
------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... 18,457 11,787 30,244 -- 30,244
Cost of Sale................ 12,034 3,973 16,007 1,250 17,257
Gross Profit................ 6,423 7,814 14,237 (1,250) 12,987
Operating Expenses.......... 3,410 14,770 18,180 8,965 27,145
Operating Profit (Loss)..... 3,013 (6,956) (3,943) (10,215) (14,158)
Non-operating Income
(expense), net............. -- -- -- 2,047 2,047
------ ------ ------ ------- -------
Net Income (Loss)........... 3,013 (6,956) (3,943) (8,168) (12,111)
====== ====== ====== ======= =======
Segment Assets.............. 4,695 3,944 8,639 65,656 74,295
====== ====== ====== ======= =======
</TABLE>
F-23
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segment Information--(Continued)
The Company only reports direct operating expenses under the control of the
Chief Operating Decision Maker in the Segmental Information disclosed. The
Company does not report indirect operating expenses, depreciation and
amortization, interest income (expense), income taxes, capital expenditures, or
identifiable assets by industry segment, other than inventories and accounts
receivable, to the Chief Executive Officer.
The following tables reconcile segment income (loss) before income taxes to
consolidated income (loss) before income taxes and segment assets to
consolidated total assets.
<TABLE>
<CAPTION>
Year ended January
31,
-----------------------
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Total income (loss) before taxes for reportable
segments............................................ 3,965 (1,053) (3,943)
Unallocated amounts:
Central overheads.................................. (3,407) (5,205) (7,938)
Depreciation and amortization...................... (339) (566) (2,277)
Interest income (expense), net..................... 18 272 1,208
Exchange gain (loss), net.......................... (12) (321) 842
------ ------ -------
Income (loss) before income taxes.................. 225 (6,873) (12,108)
------ ------ -------
Total assets for reportable segments............. 4,910 5,128 8,639
Unallocated amounts:
Cash............................................... 272 1,691 10,862
Marketable securities.............................. -- 7,178 48,830
Value added taxes.................................. 420 407 192
Prepaid expenses and other current assets.......... 662 1,299 1,332
Property and equipment, net........................ 739 2,058 3,190
Software development costs......................... -- 2,500 1,250
------ ------ -------
Total Assets..................................... 7,003 20,261 74,295
====== ====== =======
</TABLE>
The distribution of net revenue by geographical area was as follows:
<TABLE>
<CAPTION>
January 31,
--------------------
1998 1999 2000
------ ------ ------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
Germany................................................... 11,242 14,724 18,005
United States of America.................................. 835 368 3,600
Ireland................................................... 2,465 2,435 3,085
Europe (excluding Germany and Ireland).................... 1,858 2,130 2,640
Rest of World (excluding United States of America)........ 246 1,376 2,914
------ ------ ------
Total................................................. 16,646 21,033 30,244
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
January 31,
------------------
1998 1999 2000
---- ------ ------
(U.S. dollars in
thousands)
<S> <C> <C> <C>
Long lived Assets:
Country of Domicile:
Ireland.................................................... 506 4,107 3,233
Foreign Countries:
United States.............................................. 121 298 1,026
Germany.................................................... 91 153 181
Other...................................................... 21 -- --
---- ------ ------
Total.................................................... $739 $4,558 $4,440
==== ====== ======
</TABLE>
F-24
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Government Grants and Related Loans
Under employment agreements between the Company and Enterprise Ireland (the
Irish Development Authority, Forbairt) the Company has offset against related
payroll expense amounts of US$252,000, US$249,000 and US $10,000 in the years
ended January 31, 1998, 1999 and 2000, respectively. Under the terms of the
agreements between the Company and Enterprise Ireland, these grants may be
repaid to Enterprise Ireland in certain circumstances, principally the failure
to maintain the related jobs for a period of five years from the payment of the
first installment of the related employment grant. The Company has complied
with the terms of the grant agreements through January 31, 2000.
Under research and development agreements between the Company and Enterprise
Ireland the Company has offset US$248,000, US$80,000 and US$174,000 against
related research and development expenditure for the years ended January 31,
1998, 1999 and 2000, respectively. Under the terms of the agreements between
the Company and Enterprise Ireland, these grants may be repaid to Enterprise
Ireland in certain circumstances, principally the disposal by the Company of
intellectual property arising from the grant aided research and development.
The Company has not disposed of any such intellectual property through January
31, 2000.
Under agreements between the Company and the Irish Trade Board, the Company
has offset against related sales and marketing expense amounts of US$139,000,
US$nil and US$nil in the years ended January 31, 1998, 1999 and 2000,
respectively. In the years ended January 31, 1998, 1999 and 2000 the Company
received US$139,000, US$530,000 and US$100,000 respectively in the form of non-
interest bearing loans which are repayable at rates linked to future revenues
earned in the related markets. The loan is repayable at a rate of 1.4% of total
export sales in the period January 1999 to December 2001 with payments to
commence in January 2000 and end in July 2002. If the repayments calculated as
a percentage of sales are not sufficient to repay the loans in full Enterprise
Ireland may write off the balance provided they are satisfied with the
information provided about the sales achieved. The Company has credited all
such loan amounts to the balance sheet liability account "Government Grants
repayable and related loans" as the Company believes such loans will be repaid
in full.
16. Selected Statement of Operating Data
The following customers accounted for more than 10% of revenue in any one of
the years ended January 31, 1998, 1999 and 2000 respectively.
<TABLE>
<CAPTION>
Year Ended
January 31
----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Deutsche Verkehrs Bank Zentrale............................... -- 1% 11%
--- --- ---
Bank of Ireland............................................... 11% 11% 5%
--- --- ---
GRK........................................................... 10% 8% 1%
--- --- ---
Easycash...................................................... 12% 9% --
--- --- ---
Which......................................................... 26% 33% 20%
--- --- ---
</TABLE>
The customers identified in the above table all relate to the product
segment described in note 14.
17. Related Party Transactions
Huttoft Company, an unlimited company which is wholly-owned by certain
directors of the Company owns a special non-voting class of shares in Trintech
Limited, one of the Company's Irish subsidiaries. All of
F-25
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Related Party Transactions--(Continued)
the voting shares in the subsidiary are owned by the Company. The shares do not
entitle the holders thereof to receive any share of the assets of the Company
on a winding up. Trintech Limited may, from time to time, declare dividends to
Huttoft Company and Huttoft Company may declare dividends to its shareholders
out of these amounts. Any such dividends paid by Trintech Limited are treated
as compensation expense by the Company in its financial statements prepared in
accordance with generally accepted accounting principles in the United States
notwithstanding their legal form of dividends to minority interests in order to
correctly reflect the substance of the transactions.
The amount of dividends included in compensation expenses are as follows:
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
(U.S. dollars in thousands)
<S> <C> <C> <C>
215 241 312
--------- --------- ---------
</TABLE>
As described in Note 6 the Company leases the new corporate headquarters in
Dublin, Ireland from John and Cyril McGuire, officers and directors of the
Company. The rent paid by the company was determined after completion of a
survey of the rental market, and the terms of the lease are no less favorable
than those that could be obtained in arms-length transactions.
The Company has a strategic relationship with VISA International covering
Europe, the United States, Latin America and the Asia Pacific region. VISA
markets and recommends certain of the Company's products throughout the world.
Member organizations of VISA license products from the Company. In August 1998
VISA International subscribed $1,500,000 for 250,000 of the Series A Redeemable
Convertible Preference Shares and in September 1998 appointed a representative
to the board of directors. In addition, in August 1998 the Company issued to
VISA a warrant to purchase 250,000 ordinary shares at a price of $6 per
ordinary share exercisable for a two-year period. The value of the warrant was
determined to be $163,000, has been included in prepaid sales and marketing
costs and is being amortized rateable over the two year period of the strategic
agreement with VISA to pursue opportunities in the Internet marketplace entered
into at the time.
Revenues from the supply of products and services to VISA, and balances due
from VISA at the ends of the related accounting period were as follows:
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------------
1998 1999 2000
--------- --------- ---------
(U.S. dollars in thousands)
<S> <C> <C> <C>
Revenues...................................... 1,157 1,777 2,005
Balances due from VISA........................ 53 414 399
</TABLE>
Trintech has entered into a number of development and marketing agreements
with VISA. The development agreements comprise the customization of certain
Trintech products to meet VISA specifications. The development element of such
arrangements are accounted for in accordance with the Company's revenue
recognition policy for services using the percentage-of-completion contract
accounting method. Trintech has no obligation to repay funds received under the
agreements and bears the financial risks and rewards of the development
projects as well as retaining title to the intellectual property rights of the
developed technology. The marketing agreements entered into between Trintech
and VISA have no accounting value.
On March 31, 1998 the Company licensed the source code for S/Pay and J/Pay
from RSA Data Security for a consideration of $2.5 million and entered into a
joint marketing activities agreement with RSA Data Security. On the same date,
Security Dynamics Technologies, Inc., the parent company of RSA Data Security
F-26
<PAGE>
TRINTECH GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Related Party Transactions--(Continued)
purchased 482,765 ordinary shares in the Company for $2 million and appointed a
representative to the Company's board of directors. On June 30, 1998 Security
Dynamics Technologies Limited purchased 500,000 Series A Redeemable Convertible
Preference Shares for $3 million.
During the year ended January 31, 1998, 1999 and 2000 respectively, the
Company incurred expenditure of $0, $50,000 and $0 on joint marketing
activities with RSA. There were no balances due to or from RSA or Security
Dynamics at any period end.
18. Subsequent Events
On March 10, 2000 the Company announced a two-for-one split of its issued
and outstanding ADSs. Basic and diluted net income (loss) per equivalent ADS is
therefore calculated using twice the weighted average number of ordinary shares
outstanding during the period. All amounts shown per equivalent ADS have been
retroactively adjusted to give effect to the split.
F-27
<PAGE>
SCHEDULE II
TRINTECH GROUP PLC
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and Exchange end of
Description of period expenses differences Deductions period
----------- ---------- ---------- ----------- ---------- ----------
(U.S. dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended January 31,
2000
Deducted from asset
account:
Provision for bad and
doubtful debts....... 241 127 (19) (19) 330
Year ended January 31,
1999
Deducted from asset
account:
Provision for bad and
doubtful debts....... 98 138 5 -- 241
Year ended January 31,
1998
Deducted from asset
account:
Provision for bad and
doubtful debts....... 114 -- (16) -- 98
Year ended January 31,
2000
Warranty Reserve........ 876 76 (107) (289) 556
Year ended January 31,
1999
Warranty Reserve........ 922 162 53 (261) 876
Year ended January 31,
1998
Warranty Reserve........ 780 275 (133) -- 922
</TABLE>
Schedules not listed above have been omitted because the information
required to be described in the schedules is not applicable or is shown in the
financial statements.
F-28
<PAGE>
EXHIBIT 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-11598) pertaining to the 1990 Share Option Scheme, the 1997
Share Option Scheme, the 1998 Directors and Consultants Option Scheme, the 1999
Employee Share Purchase Plan and the 1999 U.S. Employee Share Purchase Plan of
Trintech Group PLC of our report dated March 16, 2000, with respect to the
consolidated financial statements of Trintech Group PLC included in this Annual
Report (Form 20-F) for the year ended January 31, 2000.
/s/ Ernst & Young
Ernst & Young
Dublin, Ireland
April 28, 2000
<PAGE>
EXHIBIT 3
Subsidiaries of Trintech Group PLC
<TABLE>
<CAPTION>
Voting Equity Ownership
Subsidiary Held by Trintech Group PLC Country of Incorporation
---------------- -------------------------- ---------------------------
<S> <C> <C>
Trintech
Technologies
Limited 100% Republic of Ireland
Trintech Limited 100% Republic of Ireland
Trintech GmbH 100% Federal Republic of Germany
Trintech, Inc. 100% United States (California)
Trintech (U.K.)
Limited 100% U.K.
Trintech Group
Finance Limited 100% Cayman Island
</TABLE>
