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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
CATUITY INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 38-3518829
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2711 E. Jefferson Ave.
Detroit, Michigan, USA 48207
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(Address of Principal Executive Offices) (Zip Code)
313-567-4348
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None.
Securities to be registered pursuant to Section 12(g) of the Act:
Title Of Each Class Name of Each Exchange On Which
To Be Registered Each Class Is To Be Registered
Common Stock, par value $.001 per share Nasdaq National Market
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TABLE OF CONTENTS
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PAGE
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ITEM 1 BUSINESS............................................................. 1
RISK FACTORS......................................................... 13
ITEM 2. FINANCIAL INFORMATION................................................ 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 28
ITEM 3. PROPERTIES........................................................... 34
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................... 35
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS..................................... 37
ITEM 6. EXECUTIVE COMPENSATION............................................... 40
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 49
ITEM 8. LEGAL PROCEEDINGS.................................................... 52
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS............................... 53
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.............................. 55
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.............. 59
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................ 60
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 61
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 62
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.................................... 63
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Our website is www.catuity.com. The information on our website is not
incorporated by reference into this registration statement.
Unless otherwise indicated, all information in this registration statement
gives effect to the one-for-ten reverse stock split of our outstanding capital
stock that occurred in November 1999.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This registration statement contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outline under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievement. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this registration statement to conform such statements to
actual results or to changes in our expectations.
SPECIAL NOTE REGARDING FOREIGN CURRENCY AND EXCHANGE RATES
All dollar figures contained in this registration statement are set forth
in United States dollars (US$), except as otherwise indicated. All Australian
dollars (A$) translated into US$ have been translated at the following rates per
A$, except as otherwise indicated:
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Exchange Rate per Australian Dollar
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For Revenues For Dec. 31 Assets
Year and Expenses(1) and Liabilities(2)
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1999 $0.6455 $0.6571
1998 $0.6290 $0.6126
1997 $0.7430 $0.6503
1996 $0.7830 $0.7943
1995 $0.7402 $0.7437
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(1) These exchange rates represent average exchange rates during the
year.
(2) These exchange rates represent December 31 exchange rates.
When the above rates do not apply, an exchange rate of US$0.65 for each A$ has
been applied, unless otherwise indicated.
ITEM 1. BUSINESS
OVERVIEW
We are a provider of software that allows retailers to establish and
administer customer incentive and loyalty programs. Our software is targeted to
a broad range of sellers of goods and services -- including retailers with store
locations and retailers who sell their products over
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the Internet. Our software is especially useful for retailers who sell both
through store locations and over the Internet.
Our software supports the establishment and administration of a variety of
customer incentive and loyalty programs. Using our software, the retailer may
reward its customers with valuable benefits, hoping to attract and retain
customers and to encourage increased purchases. Due to the flexibility of our
software, rewards may be easily established, targeted and changed. In addition,
the retailer may select from a wide variety of reward options. Our software
directly connects the retailer and its customer so that the customer recognizes
the retailer as the provider of the reward.
Our technology was created and tested in Australia in a company named Chip
Application Technologies Limited, or CAT, which is now our wholly owned
subsidiary. CAT commenced development of the technology in 1992. Initial trials
of a product that incorporated our technology commenced in 1995. CAT was listed
on the Australian Stock Exchange from July 1997 through November 1999, the date
that it became our subsidiary. We were recently incorporated as Catuity Inc. in
Delaware as part of our strategy to launch our product in the US market and
through our US based relationship partners. Catuity's shares have been listed on
the Australian Stock Exchange since November 1999. Catuity's listing on Nasdaq,
under the trading symbol "CTTY," will commence with effectiveness of this
registration statement. All references to "we," "our," the "Company" or the
"company" in this registration statement refer to Catuity Inc., including our
subsidiary, CAT.
INDUSTRY BACKGROUND
CUSTOMER INCENTIVE AND LOYALTY PROGRAMS
Customer incentive and loyalty programs traditionally are used by retailers
to attract and retain customers and to encourage purchases. Examples of typical
customer incentive and loyalty programs are:
- paper coupons;
- airline frequent flyer programs;
- supermarket programs that provide discounts and other special offers at
the check stand to members of the supermarket's club; and
- programs of online retailers that reward customers with cash rebates,
airline mileage and other benefits.
Customer incentive and loyalty programs at retail stores frequently are
tied to presenting a coupon, holding a membership card or providing a personal
identification number or customer registration. In the online world, rewards
frequently are tied to an account number or credit card.
There are few programs that offer multiple reward options or that work both
for retail stores and for the Internet environment interactively. Many programs
are linked to a particular payment card and few can provide multiple programs,
such as a short term incentive program
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and a long term loyalty program, based on a single transaction. Many programs
require paper statements and redemption forms, and few provide instant rewards
based on particular patterns of transactions. Additionally, many existing
programs operate on hardware provided by only one supplier or rewards from only
one source.
According to the AC Nielson Homescan Consumer Panel conducted in December,
1998, approximately 66% of all US households hold a frequent shopper program
card. Based on a 1999 study, Banc Boston Robertson Stephens estimates that $8
billion per year was spent using frequent shopper cards.
According to NCH NuWorld Marketing Ltd, in excess of 160 billion grocery
coupons were distributed in the US in 1998 and approximately 3.5 billion were
redeemed. Based on a 1999 study, Banc Boston Robertson Stephens estimates that
the consumer packaged goods industry spends $20 billion on promotions of which
$6.4 billion was spent on coupons and $4 billion on incentives.
From 1997 to 1998, US merchants selling on the web or planning to do so in
the short term increased from 37% to 76%, as reported in a combined study by
Ernst and Young and the National Retail Federation.
THE MARKET OPPORTUNITY
We believe that many retailers have found it to be difficult and cost
inefficient to create and administer customer incentive and loyalty programs
where the retailer controls the program and customizes the reward. As a result,
we believe that many retailers have:
- either avoided or introduced very simple, single-reward customer
incentive and loyalty programs;
- developed or had developed for them customized solutions that are
expensive to develop and maintain; or
- participated as one of many companies in customer incentive and loyalty
programs created and controlled by the sponsoring company. In these
cases, the rewards may not easily be recognized as having been provided
by the retailer and the programs do not typically offer the option of
using the retailer's own goods and services as rewards.
We believe that there is a significant opportunity for a flexible and easy
to use software tool that permits a retailer to create, target and easily change
customer incentive and loyalty programs that are controlled entirely by that
retailer; can apply to purchases using any payment system at retail stores, over
the Internet or interactively over both; can use the retailer's own goods and
services as rewards; can provide instant rewards; and accommodates all payment
methods. There is also a significant opportunity in providing retailers the
tools to operate customer incentive and loyalty programs cooperatively with
other complimentary retailers, allowing the retailer to provide cross selling
programs that share customers and expand its customer base.
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OUR SOLUTION
We provide retailers with the software tools to establish and administer
customer loyalty and incentive programs, whether the customer's purchases occur
at a retail store location or over the Internet. Our product may be used by a
wide variety of businesses, including retail stores, Internet merchants, banks
and financial institutions, credit card issuers, sporting and entertainment
venues, public transport providers and membership organizations. Our software
provides a single solution for the creation and administration of customer
incentive and loyalty programs that span retail store and Internet sales for
those retailers who operate in both arenas. This single solution also helps the
retailer establish programs that encourage loyalty of customers who shop both at
retail stores and over the Internet.
The combination of incentives and loyalty programs incorporated into our
solution offers a powerful customer acquisition and customer retention solution
for retailers. Incentives are used as short-term, tactical marketing programs to
win new customers and loyalty programs are used as long-term, strategic
marketing programs to retain customers. These programs and rewards, operating
simultaneously, can provide retailers (and others such as payment card issuers
and product suppliers) an important marketing tool.
Customer incentive and loyalty programs created with our software are
entirely controlled by the retailer. Our product provides a software solution
that is easy to use and is flexible. The retailer can reward its customers in
ways that permit the customer to easily recognize the retailer as the provider
of the reward. Retailers can either operate the programs themselves or use one
of our value added resellers on an out-sourced basis, but still retain control
of the programs themselves. In addition, retailers can establish programs with
other complementary retailers that create incentives for one retailer's
customers to purchase goods from the other retailer. Rewards may be provided in
the retailer's own goods and services, or through rewards provided by third
parties. The retailer can select from a variety of program and reward options.
Our solution is not dependent upon one type of customer identification or
method of verification. Customers can use existing cards or a membership number
with a personal identification number, or PIN, and programs can operate with
various payment methods. Customers and retailers can receive on-line reporting
and information services via the Internet.
OUR STRATEGY
Our strategy is to focus on helping the retailer create customer incentive
and loyalty programs that the retailer can control, easily customize and use on
different platforms. We support the retailer's desire to acquire new customers
and to retain existing customers. Our objective is to provide a solution that:
- provides an easy entry, low cost, powerful marketing solution for the
retailer;
- supports customer incentive and loyalty programs whether the customer
purchases at a retail store location or over the Internet; and
- provides the retailer with timely data collection, analysis and customer
information, and provides the customer easily accessible and timely
program information and reports.
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We sell our product indirectly through value added resellers and directly
through our own sales team. These two channels allow us to increase our product
exposure and market coverage. We believe a number of our competitors are also
potential value added resellers for us because our product adds value to their
products.
OUR PRODUCT
Our product is a software tool that provides a retailer the infrastructure
to establish and administer customer incentive and loyalty programs. Our
product's features include:
- multiple customized reward options to meet the needs of a wide range of
retailers;
- the ability to provide programs that offer instant or delayed rewards;
- the ability of the retailer to provide its own goods and services as
rewards or use third party goods and services as rewards;
- the ability of multiple retailers to determine eligibility for rewards
based on purchases from one or multiple retailers;
- an easy to operate, complete, off-the-shelf solution;
- applicability for sales through retail stores and for purchases online;
- on-demand data collection, analysis, customer profiling and behavioral
reporting;
- capacity to change or add incentive and loyalty programs overnight;
- support of a broad range of payment methods;
- scalability for upgrade to larger systems;
- the choice of online or offline processing operations;
- a completely paperless operation;
- security and monitoring systems; and
- support of multi-lingual operations.
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Our product permits the retailer to offer a broad range of reward
eligibility, including rewards that are:
- triggered by reaching preset spending levels or conducting specified
activities based on the value or the frequency of the activities;
- based upon short or long term activity;
- triggered by conducting specified activities at one or a range of
retailers;
- tiered based upon one or a range of activities or activity levels;
- increased based on achieving certain activity levels;
- randomly allocated; and
- triggered by using a particular payment method or particular membership.
The types of rewards that the retailer may choose to offer the customer
include:
- fixed or percentage discounts on the immediate transaction or on the
next transaction;
- rewards comprising goods and services provided by the retailer or by a
complementary retailer at another retail store or over the Internet; and
- multiple rewards such as:
- simultaneously offering an immediate incentive for the next
purchase and a long term loyalty program incentive for repeat
purchases;
- simultaneously offering participation in a local retail store
incentive program, a national chain loyalty program and a
complementary retailer's Internet program; or
- simultaneously offering participation in different programs
offered by a retailer, a payment card issuer and a product
supplier based on the same activity.
In addition to our target market of customer incentive and loyalty
programs, our product also is designed to support other applications. For
example, our product already supports ticketing for travel, entertainment and
sporting venues; issuing and tracking memberships in an organization; and
controlling access to facilities.
SALES AND MARKETING
We sell our product through value added resellers (VARs) and directly
through our own sales force. Because we are at the early stages of
commercializing our product, we currently are dependent on a limited number of
VARs and sales personnel.
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Some VARs integrate or bundle our product with their products, such as an
e-commerce product or a payment product. Certain VARs install our product in
their facilities and offer retailers services that include the functionality
provided by our product. VARs include software providers, integrators and
transaction processors. As of December 31, 1999, six VARs were offering our
product for sale to customers. By selling through VARs, we seek to obtain wide
market coverage of our business customers and obtain access to existing VAR
customers. Our VARs include IBM, Data Pro Accounting Software, Schlumberger,
Global Transaction Company (a subsidiary of Battelle) and Intellect.
We also sell our product directly through our own sales force. As of
December 31, 1999, we employed three persons in our direct sales efforts. In
certain cases, we use the services offered by the VARs to support the sale. We
also use our own sales force to support and train the VAR sales teams.
We are focusing on the US market because of its size, the rapid development
of US on-line businesses and the important role US companies play in the
development of payment systems. We expect to hire additional sales and marketing
staff in the US to increase our US marketing presence.
BUSINESS MODEL
We sell our product to retailers who provide goods and services to their
customers. Our business model is to receive transaction fees paid either by our
VARs or by the retailer. This model is designed to create a recurring revenue
stream, protected by a minimum annual fee, and offers a low initial cost
purchase decision for our customers. In certain markets, we may license
commercialization of our product and technology exclusively to a third party. In
certain situations, we may offer incentive and loyalty program services, based
on our product, to retailers.
We also expect to earn revenue from program customization and
implementation fees paid by our customers. We may also obtain revenue from
sources such as transaction interchange and provision of third-party equipment.
The revenues for these items are expected to be based on time-and-materials or
cost-plus arrangements and are not regarded as significant profit centers.
REVENUE AND ASSETS BY GEOGRAPHIC LOCATION
The product is currently being launched in the US market and 1999 was the
first year US based product license and services revenues were received. All
prior year revenues were based on product sales and services related to trials
or other early stage developments in Australia and New Zealand, research and
development grants and other income. In 1997 and 1998, 100% of our revenues were
generated in Australia and New Zealand and 100% of our assets were located in
Australia and New Zealand. For 1999, 73.6% of our revenues were produced in
Australia and New Zealand and 26.4% of our revenues were produced in North
America. In 1999, 98% of our non-cash assets were located in Australia.
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RELATIONSHIPS AND CUSTOMERS
We have established important relationships with IBM, Visa U.S.A. and Visa
International. Under a software remarketing agreement, IBM sells our product in
the North American market and provides maintenance support. We have installed
our product demonstration systems in most of IBM's e-commerce demonstration
centers in North America and in the IBM development center in Salt Lake City,
Utah. We have completed the demonstration phase of the integration of our
product with the IBM net.commerce product. IBM has a strong market presence in
e-commerce, multi-lane retail and banking.
We are a participant in a seven member working group, organized by Visa
U.S.A. and Visa International Services Association (Visa International), to
define technical specifications to integrate Visa payment systems with loyalty
programs. Under a Partner Program Loyalty Services Agreement with Visa
International, we are one of several suppliers that may offer Visa International
approved loyalty program applications to Visa members.
We have cooperative relationships with hardware and software suppliers
under which we receive technical information and development systems in support
of our development efforts to deploy our software on their hardware and software
platforms. Such relationships exist with Sun Microsystems, Schlumberger,
Verifone, Ingenico, Gemplus, Maosco, De La Rue Cartes et Systemes and Geisecke
and Devrient. Smart Dynamics provides technical support in the US for
implementation of our product at certain customer sites.
As of March 10, 2000, we have appointed six value added resellers in the
US. In addition, we have completed nine demonstration site installations and
have performed two commercial installations in the US in support of two
different groups of retailers and a service provider.
TECHNOLOGY AND INFRASTRUCTURE
Our product is an end to end, software package that allows retailers to
operate a range of powerful incentive and loyalty marketing programs in their
retail stores and in connection with sales over the Internet. Our product offers
a variety of programs and reward options in one product. Features of our
product include:
- integrated modules providing a complete end to end solution;
- the ability to apply multiple programs to an individual customer based
on a single transaction;
- the ability to coexist with traditional (e.g., cash/credit/debit/check)
and emerging (e.g., electronic purse) payment systems;
- the ability to operate loyalty and incentive programs across a variety
of hardware and software platforms;
- comprehensive reporting, program analysis and customer profiling
capability;
- strong system security and multi-lingual support; and
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- online (e-commerce) and in-store (POS) integration.
Our product architecture is based on the following four modules:
CUSTOMER PROFILE
The Customer Profile module is a platform-independent data format which
stores information about a customer's credits toward achieving rewards and about
particular vendor rewards programs. A customer's profile can be stored securely
in online or offline systems. Online systems typically use a magnetic stripe
card or a customer identification number for access from an online device that
permits access to a Web site or through a point of sale terminal. An offline
system could include a smart card or other data storage method.
Each customer is assigned a unique identification number by the system.
Customers may enroll and obtain their identification number over the web or at a
retail store. They may then link their participation in the incentive or loyalty
program to existing credit cards or membership cards. As a result, a credit card
or membership card can be linked to many incentive and loyalty programs. The
smart card form of the Customer Profile is platform independent, meaning that it
has been designed to function on a range of smart card operating systems,
including G&D StarCOS, Multos, Mifare and Java Cards.
PROGRAM ENGINE
The Program Engine module is a platform-independent software module that
implements the eligibility and reward rules for customer incentive and loyalty
programs. The Program Engine may be implemented in a point of sale device, an
online server for in-store transactions or at an online, e-commerce web server.
The Program Engine interprets the program rules sent to it from the Program
Manager, reviews the current status of the program on the Customer Profile and
applies the program rules accordingly. It also records all customer transactions
for transmission to the Program Manager.
PROGRAM MANAGER
At the heart of our product lies the Program Manager, an easy-to-use yet
powerful information management tool. It allows retailers to create and maintain
their customer loyalty and incentive programs. It also supports marketing and
financial analysis, and customer transaction history reports to assist retailers
in establishing dynamic customer loyalty and incentive programs.
Customer loyalty and incentive programs are established by the retailer and
maintained in the Program Manager. These programs are automatically downloaded
to Program Engines at the same time that transaction information is uploaded for
processing and analysis. The Program Manager incorporates analytical and
reporting tools for analysis of the effectiveness of customer loyalty and
incentive programs.
The Program Manager consists of a central server, database management
system and a communications infrastructure. The Program Manager can be installed
on any Microsoft
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Windows NT 4.0 (or higher) compatible server. The Program Manager has been
developed to use the Sybase Adaptive Server Enterprise (ASE) for Microsoft
Windows NT as its database engine and can be configured to use other relational
database management systems. A network of modems, telephone lines, annexes, hubs
and other components are required to allow terminals and remote client PCs to
connect and gain access to the system.
System security is controlled by the Program Manager. First, the system is
protected by means of complex cryptographic techniques (using Triple-DES or
3DES) that seek to prevent unauthorized tampering with the files that are
transmitted between the Program Manager and the Program Engines. Second, access
to the data stored in smart card or other chip devices (where used) is also
secured using cryptographic techniques. User access to the Program Manager also
is controlled by the Program Manager.
INQUIRY SERVER
The Inquiry Server module is a web site which allows retailers and
customers to review the available customer loyalty and incentive programs, check
their current program status, obtain reports and view their transaction history
at their leisure from any web browser. The customer or retailer simply inputs
their identification number (and password if applicable) in order to gain
access. The Inquiry Server program and transaction database is updated regularly
from the Program Manager.
RESEARCH, DEVELOPMENT AND TESTING
We have developed the technology used in our product in our research and
development facility in Sydney, Australia over the last 8 years. We continue to
develop the product by adding new product capabilities and applications. Our
Australian development team is experienced and provides a relatively low cost
development capability. We have tested our product in our facilities and in
field tests in western Sydney. Our expenditures for research, development and
testing were $1,415,837, $1,309,784 and $1,398,489, respectively, for 1997, 1998
and 1999.
Current development plans include creating further enhancements to our
product. We expect to hire additional research and development staff to
accommodate that work.
COMPETITION
Our product faces competition at two levels. First, we compete with
companies that provide software for customer incentive and loyalty programs for
retail store locations and/or Internet retailers. Second, our resellers who
provide services to retailers, compete with providers of incentive and loyalty
programs to retailers. We believe that the principal factors upon which we and
our resellers compete in the marketplace include:
- product functionality;
- product compatibility;
- price;
- service and training;
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- reputation and financial strength; and
- ability to provide other products and services.
Certain suppliers to retail stores of point of purchase terminals and card
and host systems offer software that is useful for incentive and loyalty
programs. Competitors include Cyperpro, with cash based incentive marketing
programs; Smart Card Solutions, with customized smart card incentive programs;
Prio, with credit card based cash back programs; and Welcome Real Time, with a
range of marketing programs for retail stores. Software providers for
e-commerce, such as Yantra Corporation, Talisma Corporation and Symix, are
potential competitors.
Competitors to the services provided by our resellers to retail stores
include the operators of the airline frequent flyer programs and marketing and
ad agencies operating traditional incentive and loyalty programs. Competitors to
the services provided by our resellers to on-line retailers include Netcentives,
with frequent flyer points; MyPoints.com, with targeted on-line incentive
programs; Webstakes, with sweepstakes; Cybergold, with cash back for credit card
transactions; E-centives, with personalized coupons; RewardsPlus with employee
benefit programs and companies such as E-piphany, Datasage and Verbind that
provide customer profiled targeted marketing programs.
We expect competition to increase as companies expand their offerings in
customer incentive and loyalty programs and provide software for retail stores
and the Internet.
Our ability to compete depends upon many factors, including:
- our ability to successfully market our product's features;
- the sales and marketing efforts by us and our competitors;
- the effectiveness of our solution relative to the product offerings of
our competitors;
- our ability to establish the credibility of our product in the
marketplace;
- our ability to effectively reach and sell to target retailers;
- our ability to attract and retain VARs who will sell our product; and
- our ability to timely succeed in our product development efforts.
INTELLECTUAL PROPERTY
We have filed certain patent applications in a number of countries
including the United States. These patent applications relate to the use of
customer profiles and systems for the operation of multiple reward programs in
retail shops and on the Internet in a single solution. We also rely in our
business on the protections afforded our intellectual property under copyright,
trademark and trade secret laws.
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PRODUCT WARRANTIES
In our agreements with VARs and customers, we typically will provide
certain warranties concerning our product. Those warranties may include such
matters as non-infringement of third party rights and our product meeting
certain specifications.
OUR HISTORY
We were incorporated in Delaware in June 1999 as Novatec Inc. and have
since changed our name to Catuity Inc. In November 1999, we acquired 100% of the
stock of Chip Application Technologies Limited, an Australian public company
(CAT). That transaction was approved by the Supreme Court of New South Wales,
Australia and by more than 75% in interest of CAT's shareholders present and
voting at a meeting held in November 1999. From July 1997 through November 1999,
CAT was listed on the Australian Stock Exchange. Since our acquisition of CAT in
November 1999, our shares have been listed on the Australian Stock Exchange.
CAT was incorporated in New South Wales in 1992. In 1995, it commenced
trials of early versions of our product in Western Sydney, Australia, under the
brand name Transcard. Since that time the product has been upgraded and tested
at that location. CAT, which licenses its technology to Catuity Inc., owns all
of the intellectual property rights to our product and employs the research and
development team that continues to develop and support the product at our
development center in Sydney.
EMPLOYEES
As of December 31, 1999, we had 37 full time employees and full time
consultants, comprised of 4 in sales and marketing in North America, 25 in
technology and product development in Australia, 1 in implementation support in
North America and 7 in finance and administration in Australia. None of our
employees is represented by a collective bargaining agreement. We consider our
relations with our employees to be good.
FACILITIES
We have established our corporate headquarters in Detroit, Michigan. Our
technology and product development facilities are in Sydney, Australia. We have
no other material foreign operations. See Item 3, Properties, below.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation concerning claims
arising in the ordinary course of our business. We are not presently a party to
any material legal proceedings.
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RISK FACTORS
You should carefully consider the risks described below and the other
information in this registration statement before making an investment decision.
If any of the following risks occur, our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS PROSPECTS
DIFFICULT.
Catuity was formed in June 1999. In November 1999, Catuity acquired all of
Chip Application Technologies Limited, which was formed in Australia in November
1992. We have only a limited operating history upon which we can be evaluated.
Any investment in the Company must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development of their business, including the risks described below. There can be
no assurance that we will be successful in addressing those risks.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE SIGNIFICANT FUTURE LOSSES.
We incurred net losses of $3,516,840 for the year ended December 31, 1997,
$2,384,148 for the year ended December 31, 1998 and $6,210,084 for the year
ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit
of $19,606,637. To date, we have not achieved profitability, and we expect to
incur significant and increasing net losses for at least the next two years. We
intend to continue to invest significantly in sales and marketing, customer
support, product development and administrative expenses, and as a result, will
need to generate significant revenues to achieve and maintain profitability.
There can be no assurance that any of our business strategies will be successful
or that significant revenues or profitability will ever be achieved. If we do
achieve profitability, we cannot be certain that we can sustain or increase
profitability on an ongoing basis. See "Selected Consolidated Financial Data."
FLUCTUATIONS IN OUR QUARTERLY REVENUE AND OPERATING RESULTS MAY AFFECT
THE PRICE OF OUR COMMON STOCK.
Fluctuations in our quarterly revenue could adversely affect the market
price of our common stock. Any shortfall in our revenue would have a direct
impact on our operating results for a particular quarter.
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside of our control. These factors
include:
- changes in the level of demand for our product;
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- changes in the growth rate of Internet usage;
- changes in the sales, marketing and general business policies and
strategies of our resellers;
- the amount and timing of our operating costs and capital expenditures
relating to the expansion of our business and operations;
- the timing of the introduction of new products or product
enhancements by us, our resellers or our competitors;
- customer order deferrals in anticipation of upgrades and new products
from us, our resellers or our competitors;
- our ability to anticipate and effectively adapt to developing markets
and rapidly changing technologies;
- changes in the mix of international and U.S. revenues and in foreign
currency exchange rates; and
- general economic conditions and specific economic conditions in online
and offline related industries.
We expect that our revenue in the future will be based primarily on a fee
per customer transaction that utilizes our software, subject to a minimum fee
per period. Accordingly, our fees will be dependent on the success of retailers
in implementing customer incentive and loyalty programs. Even when successful,
fees to us will be delayed until customer usage increases. We do not have any
substantial historical basis for predicting the volume of transactions that may
be generated by customers and retailers. A low level of usage by customers or
the cancellation or deferral of retailer contracts could have a material adverse
effect on our quarterly financial performance. In addition, there are no
assurances that retailers will be willing to pay for our software based on a fee
per customer transaction.
WE WILL BE ADVERSELY AFFECTED IF OUR PRODUCT DOES NOT ACHIEVE MARKET
ACCEPTANCE.
To date, our product has not been installed in a large-scale, commercial
deployment, and there can be no assurance that our product will perform desired
functions, offer sufficient price/performance benefits or meet the technical or
other requirements of customers. Despite testing of our product prior to its
commercial release, there can be no assurance that all performance errors or
deficiencies have been discovered and remedied, that additional errors or
deficiencies will not occur, or if they occur, that we will be able to correct
such errors and deficiencies.
In addition, we believe that the time required to deploy our product will
vary significantly depending on a number of factors, including the needs and
skills set of the customer, the size of the deployment, the complexity of the
customer's network environment and any integration required, the quantity of
hardware and degree of hardware configuration necessary to deploy the product
and the customer's installation schedule. We believe that the use of our product
by customers will involve an enterprise wide decision-making process, and that
we or our reseller
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<PAGE> 17
partners will need to provide a significant level of education and information
to prospective customers regarding the uses and benefits of the product. For
these and other reasons, the use and deployment of our product may be
characterized by lengthy sales and implementation cycles. Failure of our product
to achieve market acceptance for these or any other reasons would have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO EXPAND OUR SALES AND SUPPORT
ORGANIZATIONS.
Our sales are conducted through resellers and our sales team. Our reseller
strategy is currently being implemented. We believe that our future success is
dependent upon supporting our resellers and further establishing our direct
sales and sales support capability. Competition for such sales and support
personnel is intense, and there can be no assurance that we will be able to
attract, assimilate or retain additional qualified marketing, sales and sales
support personnel on a timely basis in the future, or at all. In addition, we
believe that our success is dependent upon establishing relationships with a
variety of reseller partners, including original equipment manufacturers,
systems integrators and value added resellers. There can be no assurance that we
will be able to enter into agreements or establish relationships with additional
desired reseller partners on a timely basis or at all, or that such resellers
will devote adequate resources to selling our products. Our failure to
successfully expand the size of our marketing, sales and sales support
organization or establish and maintain appropriate reseller channels for our
products would have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR WORKING CAPITAL REQUIREMENTS.
In order to support our future operating requirements, we will need to
obtain additional funding either by increasing our lines of credit or by raising
additional debt or equity from the public or private capital markets. There can
be no assurance that such additional funding will be available on terms
attractive to us, or at all. Failure by us to raise additional funding when
needed could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through the
issuance of equity securities, the ownership percentages of our stockholders
would be reduced. Furthermore, such equity securities might have rights,
preferences or privileges senior to those of our common stock.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO DEVELOP AND MAINTAIN STRATEGIC
RELATIONSHIPS.
We believe that success in marketing our product will depend in part on our
ability to develop and maintain strategic relationships with key hardware and
software vendors, reseller partners and retailers. We further believe that such
relationships will be important in order to validate our technology, facilitate
broad market acceptance of our products, and enhance our sales, marketing and
distribution capabilities. Our inability to develop and continue strategic
relationships, or the termination of one or more of our current relationships
could have a material adverse effect on our business, financial condition and
results of operations.
We rely on hardware and operating systems provided by third parties as the
platforms on which to operate our product. Failure of such third parties to
maintain or enhance their
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<PAGE> 18
products could impair the functionality of our product. Such failure or our
failure to successfully integrate our product with third party supplier products
could require us to obtain alternative products from other sources or to develop
such hardware and software internally, either of which could involve costs and
delays as well as diversion of our engineering resources.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO ATTRACT AND RETAIN KEY
PERSONNEL.
Our operations will depend to a great extent on our ability to attract new
key personnel and retain existing key personnel in the future. Competition for
employees is intense, particularly for personnel with technical training and
experience in incentive and loyalty programs. We have from time to time in the
past experienced, and we expect to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
If we are unable to hire or retain key employees, our business, results of
operations and financial condition will be harmed.
MANY OF OUR KEY PERSONNEL ARE NEW TO US AND MAY NOT WORK TOGETHER
SUCCESSFULLY.
We are dependent upon the efforts and abilities of our management team,
particularly David L. Mac. Smith, our Chairman, Michael V. Howe, our President
and Chief Executive Officer, and Benjamin Garton, our Vice President of Product
Management and Development. A number of members of the management team,
including Mr. Howe, have joined us in recent months and we are continuing to
recruit new senior managers in North America. Our future performance will
depend, in part, on our ability to integrate successfully our newly hired
executive officers into our management team, and our ability to develop
effective working relationships among management. If our key personnel are
unable to work together successfully, our business, results of operations and
financial condition could be harmed.
WE MAY BE UNABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS.
Our success will depend in part on our ability to manage our operations
successfully, particularly in light of our expansion in the United States. We
have recently established a United States presence and appointed a United States
based president and chief executive officer. In addition, we are in the process
of establishing a United States based senior management team and increasing the
scope of our operations in the United States. Our anticipated future operations
will continue to place a significant strain on our management systems and
resources.
We expect that we will be required to continue to improve our financial and
managerial controls and reporting systems and procedures, and will need to
expand, train and manage our work force. Furthermore, we expect that we will be
required to manage multiple relationships with various resellers, customers and
other third parties. There can be no assurance that we will be able to
effectively manage these tasks, and the failure to do so could have a material
adverse effect on our business, financial condition and results of operations.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES FOR ESSENTIAL PRODUCTS AND
SERVICES.
We rely on services furnished to us by a limited number of third parties,
including our resellers, suppliers of point of sale hardware and operating
systems, and suppliers of customer
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<PAGE> 19
devices, such as magnetic stripe cards and smart cards. Although we can operate
our product on a range of platforms, any interruption, deterioration or
termination of these third-party services could be disruptive to our business.
In the event that any of our agreements with any of these third parties is
terminated, we may not be able to find an alternative source of support on a
timely or commercially reasonable basis, if at all. As a result, any such
interruption, deterioration or termination could have a material adverse effect
on our results of operations and financial condition.
WE DEPEND UPON INDEPENDENT RESELLERS TO SELL OUR PRODUCT.
We have adopted a strategy of selling our product primarily through a
limited number of value added resellers. There can be no assurance that we will
generate sales and revenues through our resellers and any failure to do so, or
any termination or interruption of our relationships with a major reseller or a
significant number of our resellers, would have a material adverse effect on our
business, financial condition and results of operations. There can be no
assurance that our resellers will not price the product at a level that will
adversely affect our product's competitive position. Such pricing would have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY FACE RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
Although we currently conduct most of our technology and product
development operations in Australia, we intend to enter into various
international markets. CAT, our wholly owned Australian subsidiary, currently
conducts product development and trial operations in Australia. We expect that
we will become a primarily North American based entity with North American based
senior management and that we will attempt to market and sell our product in the
UK, Europe, Asia and other selected international markets, including Australia
and New Zealand. Our entry into international markets will require significant
management attention and financial resources. If international revenue is not
adequate to offset the expense of establishing and maintaining foreign
operations, our business, financial condition and results of operations could be
materially adversely affected.
To date, we have only limited experience in developing trial versions of
our product and marketing and distributing our products. There can be no
assurance we will be able to successfully market, sell and deliver our product
in international markets. International operations are subject to inherent
risks, including:
- the impact of possible recession in economies outside the United States;
- the cost of localizing products for foreign markets;
- longer receivables collection periods and greater difficulty in accounts
receivable collection;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- fluctuations in currency exchange rates;
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- tariffs, export controls and other trade barriers;
- potentially adverse tax consequences; and
- political and economic instability.
There can be no assurance that we or our resellers will be able to obtain,
sustain or increase international revenues, or that the foregoing factors will
not have a material adverse effect on our future international revenues and,
consequently, on our business, financial condition and results of operations.
International revenues are generally denominated in local currencies. We do not
currently engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on revenues from international sales and thus our business,
financial condition and results of operations.
OUR OPERATIONS ARE SUSCEPTIBLE TO COMPUTER VIRUSES, SECURITY BREACHES AND
OTHER DISRUPTIONS AND FAILURES.
We currently locate our data center at our development center in Sydney,
Australia and take certain precautions to protect our source code for our
software against loss from fire, earthquakes, floods, power and
telecommunications failures, sabotage, intentional acts of vandalism and similar
events. Despite such precautions, the occurrence of a natural disaster or other
unanticipated problems at current and future data centers could result in
interruptions in the services provided by us. Such interruptions could result in
reduction in, or termination of, service provided to our customers, which could
have a material adverse effect on our business, financial condition and results
of operations.
In addition, our systems may be vulnerable to unauthorized access and
computer viruses. Eliminating computer viruses and other security problems may
require interruptions, delays or cessation of service to users, which could have
a material adverse effect on our business, financial condition and results of
operations. We may be required to expend significant capital or other resources
to protect against the threat of security breaches or to alleviate problems
caused by breaches. Although we intend to continue to implement security
measures, we cannot be certain that measures implemented by us will not be
circumvented.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY IN OUR PRODUCT'S
MARKET ACCEPTANCE.
Our application software is internally complex and may contain defects. If
we are not able to detect and correct errors in our product before commencing
commercial shipments, we may experience loss of revenue or delays in market
acceptance. We continually evaluate our product and its enhancements for errors
and receive information from customers regarding errors they detect. However, we
may encounter product liability claims in the future. Product liability claims
brought against us could divert the attention of management and key personnel,
could be expensive to defend and may result in adverse settlements and
judgments.
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RISKS RELATED TO OUR INDUSTRY
INTENSE AND INCREASING COMPETITION IN THE APPLICATION SOFTWARE INDUSTRY
COULD HARM OUR BUSINESS.
The application software industry is highly competitive, rapidly developing
and subject to constant innovation and change. Numerous other companies operate
incentive marketing programs using both electronic and paper based systems, both
for retail stores and the Internet. Many of these companies have significantly
longer operating histories, greater name recognition, larger customer bases and
greater financial, technical and marketing resources than we do.
Our competitors may respond more quickly than we can to changing
technologies and customer requirements. For example, these competitors may:
- conduct more extensive marketing campaigns to capture market share;
- provide more attractive incentive and pricing packages to customers;
- negotiate more favorable contracts with existing and potential employees
and strategic partners;
- establish cooperative relationships among themselves or with third
parties, including large Internet participants, to increase the ability
of their products and services to address the needs of prospective
customers;
- bundle their products with other software or hardware, including
operating systems and browsers, in a manner that may discourage users
from purchasing products offered by us;
- establish cooperative relationships with our current or potential
competitors, thereby limiting our ability to sell our products through
particular reseller channels; or
- more quickly develop new products and services or enhance existing
products and services.
Our ability, and the ability of our resellers, to compete effectively in
the market for application software for incentive and loyalty marketing programs
will depend upon a variety of factors, including our ability to provide high
quality products and services at prices generally competitive with, or lower
than, those charged by our competitors. There can be no assurance that we will
be able to compete successfully. Moreover, there can be no assurance that
certain of our competitors will not be better situated to negotiate contracts
with retailers and resellers that are more favorable than contracts we
negotiate. In addition, there can be no assurance that the competition from
existing or new competitors or a decrease in the rates charged for products and
services by our competitors will not materially and adversely affect us.
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NEW TECHNOLOGIES COULD RENDER OUR PRODUCT OBSOLETE.
The application software business is characterized by rapid technological
change, new product introduction and evolving industry standards. Advances in
applications software or the development of entirely new technologies to replace
existing applications software could render our product obsolete and
unmarketable. Our success will depend, in significant part, on our ability to
make timely and cost-effective enhancements and additions to our technology and
to introduce new products and services that meet customer demands. There can be
no assurance that we will be successful in developing new products, services and
enhancements. Delay in the introduction of new products, enhancements or
services, the inability to develop such new products, enhancements or services
or their failure to achieve market acceptance could have a material adverse
effect on us.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET COMMERCE.
Our future success depends heavily on the overall continued growth and
acceptance of the Internet, including its use in electronic commerce. Although
our product operates in the offline environment, one of its main competitive
advantages is its capacity to provide programs across both the online and
offline channels. If Internet usage or commerce does not continue to grow or
grows more slowly than expected, our business, operating results and financial
condition could be adversely affected. Customers and businesses may reject the
Internet as a viable medium for a number of reasons. These include potentially
inadequate network infrastructure, slow development of enabling technologies,
security concerns, inadequate customer support and insufficient commercial
support. In addition, delays in the development or adoption of new standards and
procedures required to handle increased levels of Internet activity, or
increased government regulation, could cause the Internet to lose its viability
as a commercial medium. Any government regulation or taxing of the Internet may
result in adverse financial consequences. Even if the required infrastructure,
standards, procedures or related products, services and facilities are
developed, we may incur substantial expenses adapting our solutions to changing
or emerging technologies.
WE MAY FACE RISKS RELATED TO THE STORAGE OR PROVISION OF INACCURATE OR
CONFIDENTIAL INFORMATION.
It is possible that information provided through the use of our product or
information that is copied and stored by customers that have deployed our
product may contain errors. In such event, third parties could make claims
against us for losses incurred in reliance on such information. Although we
carry general liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to indemnify us for all liability that may
be imposed. Any imposition of liability or legal defense expenses that is not
covered by insurance or that is in excess of insurance coverage could have a
material adverse effect on our business, financial condition and results of
operations.
In addition, from time to time, persons may unlawfully obtain information
concerning a customer's or retailer's program by unlawfully utilizing our access
numbers, passwords and personal identification numbers. No assurance can be
given that future losses due to claims by third parties for unauthorized use
will not be material. We maintain no reserves for such risks.
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There can be no assurance that our risk management practices will be sufficient
to protect us from unauthorized thefts of information that could have a material
adverse effect on us.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR USE OR MISUSE OF OUR
PRODUCT.
Retailers rely, and will continue to rely, on our product in connection
with providing promotions that have a direct financial impact on their
businesses and their customers. Use or misuse of our product, whether due to
accident, employee fraud, or otherwise, may result in unintended or undesirable
consequences that could result in financial or other damages to our customers
and to our customers' customers. A product liability claim brought against us,
even if not successful, would likely be time consuming and costly and could have
a material adverse effect on us.
WE MAY FACE RISKS RELATED TO THE USE OF ELECTRONIC PAYMENT CARDS.
Portions of our software may be integrated with or co-reside with a range
of third party payment and other software. For example, our product may be added
to existing or new electronic payment cards, either by the addition of software
to a chip or by using the payment card number as an identifier with our product.
Alternatively, a portion of the software comprising our product may be added to
existing or new payment devices, so that such software co-resides with payment
programs. On the Internet and in other environments, a portion of our software
may be integrated with a third party supplied e-commerce program. There can be
no assurances that such integration or co-residence will not adversely affect
the payment system, potentially giving rise to a claim that may have a material
adverse effect on our business, financial condition and results of operations.
In addition, if our customers experience problems with a payment system, it may
be difficult to determine if those problems originate from our product or other
products with which ours co-reside. Such difficulty may delay resolution of any
such problem and prove costly to us.
WE MAY BE AFFECTED BY POTENTIAL PRIVACY REGULATION.
The Federal Trade Commission is considering the adoption of regulations
regarding the collection and use of personal information obtained from
individuals, especially children, when accessing Internet sites. These
regulations could restrict our ability to provide demographic data to retailers.
At the international level, the European Union has adopted a directive that will
impose restrictions on the collection and use of personal data. These
developments could have an adverse effect on our business, results of operations
and financial condition.
WE MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.
There are currently few laws or regulations directly applicable to the use
of our product, either online or offline, other than laws that specifically
regulate lotteries and sweepstakes, two programs that our product could offer.
However, due to the increasing popularity and use of programs similar to those
offered in our product, it is possible that a number of laws and regulations may
be adopted at the local, state, national or international levels with respect to
such programs, covering issues such as user privacy, pricing, advertising,
intellectual property rights, information security or the convergence of
traditional communications services. Changes to such laws or adoption of
additional laws or regulations intended to address these issues could create
uncertainty in the marketplace which could reduce demand for our product,
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could increase our cost of doing business as a result of compliance, could
result in litigation or could in some other manner have a material adverse
effect on our business, financial condition and results of operations.
Congress has held hearings on whether to regulate providers of services and
transactions in the electronic commerce market. Other nations, including those
in the European Union, have taken actions to restrict the free flow of data and
information deemed to potentially be a breach of personal privacy. Any
restrictions on the collection and use of customer information over the Internet
could adversely affect the use of our product. Furthermore, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these companies. This
could increase the cost of transmitting data over the Internet and thereby
reduce the demand for our product.
WE MAY FACE DIFFICULTIES PROTECTING AND ENFORCING OUR INTELLECTUAL
PROPERTY RIGHTS.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyrights, trade secret and trademark laws as well as
confidentiality procedures and contractual provisions. However, any steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive, and there can be no assurance that the steps taken by us will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as do the laws of the
United States. In addition, we may infringe upon the intellectual property
rights of third parties, including third party rights in patents that have not
yet been issued. We expect that third-party infringement claims involving
Internet technologies and software products will increase. Any claims regarding
the rights of third parties, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms favorable to us, if at all. We have agreed, and may agree
in the future, to indemnify certain of our customers against claims that our
products infringe the intellectual property rights of others. We could incur
substantial costs in defending our sellers and our customers against
infringement claims. A successful claim of product infringement against us and
our failure or inability to license the infringed or similar technology could
have a material adverse effect on our business, financial condition and results
of operations.
We have applied for patents in relation to the method of operation of
incentive marketing programs using electronic means. We cannot assure you that
our patent applications will be approved. Moreover, even if approved, they may
not provide us with any competitive advantages or may be challenged by third
parties. In recent times a number of patents have been granted in this area.
Although we are not aware of any issued patent that our product would infringe,
legal standards relating to the validity, enforceability and scope of
intellectual property rights in Internet-related industries and use of
electronic data for granting of benefits and rewards are uncertain and still
evolving, and the future viability or value of any of our intellectual property
rights is uncertain.
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CORPORATE AND MARKET RISKS
OUR PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL STOCKHOLDER
VOTES AND OUR MANAGEMENT AND AFFAIRS.
Our executive officers and directors, and entities affiliated with them, as
at December 31, 1999, beneficially owned, in the aggregate, common stock
representing approximately 11.1% of our voting securities (assuming the exercise
of all outstanding options held by them). As a result, they could act together
to control all matters submitted to stockholders for approval (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets). In addition, their large ownership position
could enable them to effectively control our management and affairs.
Accordingly, such concentration of ownership may delay, defer or prevent a
change in control, impede a merger, consolidation, takeover or other business
combination involving us or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us. This could, in turn, have
an adverse effect on the market price of our common stock.
OUR TRADING VOLUME MAY BE LOW AND OUR STOCK PRICE MAY BE VOLATILE.
There can be no assurance that an active trading market will be maintained
for our common stock. Prior to Catuity's acquisition of CAT in November 1999,
CAT shares were listed on the Australian Stock Exchange (ASX) and since the
acquisition, Catuity's common stock has been listed on the ASX. Trading in CAT
shares from January 1, 1999 to November 22, 1999 averaged 73,995 shares per day
for an average daily value of A$844,427 (US$548,878) and trading in Catuity's
shares for the period November 23, 1999 to March 10, 2000 averaged 32,351 shares
per day for an average daily value of A$559,869 (US$363,915). There can be no
assurance that an adequate volume of trading in our shares will be maintained in
order to provide liquidity for our investors.
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of Internet software or loyalty program
companies;
- announcements by us of significant contracts, reseller arrangements,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock or termination of stock transfer restrictions; and
- fluctuations in stock market price and volume, which are particularly
common among securities of Internet companies.
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The market prices and volumes of the common stock of many publicly held
technology based companies and Internet or Internet related companies have in
the past been, and can in the future be expected to be, especially volatile. The
market price for CAT shares listed on the ASX for the period from January 1,
1999 to November 22, 1999 ranged from A$2.40 (US$1.56) to A$22.00 (US$14.30) per
share, and the market price for Catuity shares on the ASX for the period
November 23, 1999 to March 10, 2000 ranged from A$14.16 (US$9.20) to A$19.98
(US$12.99).
In the past, following a period of volatility in the market price of a
company's securities, securities class action litigation often has been
instituted against such a company. Any such litigation could result in
substantial costs and a diversion of management's attention and our resources.
WE MAY BE SUBJECT TO ARBITRAGE RISKS.
Following registration of our securities in the United States, we expect
that our common stock will be listed on both the ASX, in Australia, and the
Nasdaq National Market, in the United States. Investors may seek to profit by
exploiting the difference, if any, in the price of our stock in these two
markets. Such arbitraging activities could cause our stock price in the market
with the higher value to decrease to the price set by the market with the lower
value.
CERTAIN DELAWARE ANTI-TAKEOVER PROVISIONS MAY PRODUCE RESULTS DISFAVORED BY
OUR STOCKHOLDERS.
Provisions of Delaware law could make it more difficult for a third party
to acquire control of us without the consent of our board of directors, even if
such a change were favored by our stockholders. We are subject to Section 203 of
the Delaware General Corporation Law, which, subject to certain exceptions,
prohibits a publicly held Delaware corporation from engaging in any "business
combination" with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless:
- prior to such date, the board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of our voting stock outstanding at the time the
transaction commenced; and
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least 66% of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines "business combination" to include:
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- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of
our assets involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by us of any of our stock to the interested
stockholder;
- any transaction involving us that has the effect of increasing the
proportionate share of the stock of any class or series beneficially
owned by the interested stockholder; and
- the receipt by the "interested stockholder" of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by us or through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and the notes thereto included
elsewhere in this registration statement.
The selected financial data has been prepared on a consolidated basis so
that our financial data as of and for the year ended December 31, 1999 includes
the financial data as of and for the year ended December 31, 1999 of Chip
Application Technologies Limited ("CAT"), our wholly owned subsidiary acquired
on November 22, 1999 and so that our financial data as of and for the years
ended December 31, 1998, 1997, 1996 and 1995 entirely reflect CAT's historical
financial data. CAT has been operating since November 12, 1992 (having changed
its name from Card Technologies Australia Limited in October, 1997) and has been
the primary operating entity. Our selected financial information as of and for
the year ended December 31, 1999 and the selected historical financial
information of CAT as of and for the years ended December 31, 1998, and 1997,
are derived from audited financial statements of CAT included elsewhere in this
registration statement, which have been audited by Ernst & Young, independent
accountants. The selected financial data set forth below for CAT as of and for
the years ended December 31, 1996 and 1995 are derived from audited financial
statements of CAT not included in this registration statement.
-26-
<PAGE> 29
SELECTED FINANCIAL DATA
CATUITY INC. (INCLUDING CHIP APPLICATION TECHNOLOGIES LIMITED)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating Revenue $ 1,210,903 $ 702,289 $ 888,092 $ 441,322 $ 379,557
Operating Expenses 7,380,307 2,909,758 4,190,050 3,740,354 3,091,505
------------ ------------ ------------ ------------ ------------
Operating (loss) income (6,169,404) (2,207,469) (3,301,958) (3,299,032) (2,711,948)
Other (expense) income (40,680) (176,679) (214,882) (362,721) 16,577
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (6,210,084) $ (2,384,148) $ (3,516,840) $ (3,661,753) $ (2,695,371)
============ ============ ============ ============ ============
Net (loss) income per share
Basic $ (1.05) $ (0.53) $ (1.15) $ (2.81) $ (12.03)
Diluted $ (1.05) $ (0.53) $ (1.05) $ (2.01) $ (12.03)
Weighted average number of
outstanding shares
Basic 5,913,613 4,473,257 3,065,840 1,300,906 223,992
Diluted 5,913,613 4,473,257 3,342,839 1,819,395 223,992
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $ 6,254,324 $ 638,866 $ 1,336,385 $ 495,032 $ 598,318
Short-term debt including
current portion of
long-term debt 1,138,275 656,274 924,307 2,445,937 1,160,955
Long-term debt 874,818 1,593,549 1,691,618 2,028,169 0
Shareholders Equity/
(Capital deficit) 4,241,231 (1,610,957) (1,279,540) (3,979,074) (562,637)
</TABLE>
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward looking statements based upon current
expectations that involve risks and uncertainties. The Company's actual results
and the timing of certain events could differ materially from those anticipated
in these forward looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Form 10.
OVERVIEW
Card Technologies Australia Limited was incorporated on November 12, 1992
and changed its name to Chip Applications Technologies Limited ("CAT") on
October 21, 1997.
NovaTec Inc. ("NovaTec") was incorporated in Delaware on June 23, 1999 as a
special purpose company to facilitate a plan to acquire the outstanding capital
stock and business activities of CAT. Effective November 22, 1999, NovaTec
amended its certificate of incorporation to change the corporation's name to
Catuity Inc. (which we refer to in this registration statement as "Catuity, we,
us, our or the Company"). Following a one-for-ten reverse stock split of the
outstanding capital stock of CAT, Catuity acquired all of the outstanding shares
of CAT pursuant to a plan approved by the Supreme Court of New South Wales and
approved by more than 75% of the stockholders and optionholders present and
voting in person or by proxy at meetings held on November 3, 1999. This
transaction was part of our strategy to launch our product through the US market
and our US based relationship partners including IBM and Visa USA.
Catuity Inc. will continue CAT's existing business as described in this
registration statement. We develop and market software that allows retailers to
establish and administer customer incentive and loyalty programs. Our software
is targeted to a broad range of sellers of goods and services, including
retailers with store locations and retailers who sell their products over the
Internet. Our software is especially useful for retailers who sell both through
store locations and over the Internet.
Our software supports the establishment and administration of a variety of
customer incentive and loyalty programs (and a range of other programs such as
ticketing, memberships and access controls). With our software, the retailer may
reward its customers with valuable benefits, hoping to attract and retain
customers and to encourage increased purchases. Because of the flexibility of
our software, rewards may be easily established, targeted and changed. In
addition, a wide variety of rewards may be used by the retailer. Our software
directly connects the retailer and the retailer's customer so that the customer
recognizes the retailer as the provider of the reward. Our software operates
with all payment systems and allows the retailer to simply and easily offer its
goods and services as a reward, in preference to buying rewards from third
parties, such as air miles from an airline.
A major element of our marketing strategy has been to forge key
international strategic alliances with organizations that provide market access,
and organizations that incorporate our software into their products. We have
structured our role in these partnering arrangements as an independent third
party supplier of system software. To date, we have formed relationships
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<PAGE> 31
with a number of international companies including IBM, VISA, Sun Microsystems,
Smart Dynamics, Data Pro and a range of hardware and operation system suppliers
such as Schlumberger, Verifone and Ingenico.
RESULTS OF OPERATIONS
The following table sets forth the composition of our revenues and selected
statements of operations data:
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product License & Services $ 638,382 $ 291,533 $ 761,039
Research, Development & 572,521 410,756 127,053
Grants
---------- ---------- ----------
Total Net Operating Revenues 1,210,903 702,289 888,092
Costs and Expenses:
Research, Development & 1,398,489 1,309,784 1,415,837
Testing
Selling & Relationship 956,911 914,622 708,921
Development
General and Administrative 1,255,096 693,979 998,061
Stock Compensation 2,475,175 (8,627) 218,646
Non Recurring Charges 1,294,636 -- 848,585
---------- ---------- ----------
Total Costs and Expenses 7,380,307 2,909,758 4,190,050
---------- ---------- ----------
Operating Loss (6,169,404) (2,207,469) (3,301,958)
Other Income (Expense) 40,680 176,679 214,882
---------- ---------- ----------
Net loss (6,210,084) (2,384,148) (3,516,840)
</TABLE>
REVENUES
Our product is currently being launched in the US market and 1999 was the
first year US-based product license revenues were received. All prior year
revenues were based on product license and services related to trials or other
early stage developments in Australia and New Zealand.
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<PAGE> 32
In 1999, operating revenues were $1,210,903. These revenues were derived
from $638,382 in product licenses and services, $572,521 in research and
development grants. In addition, interest received in the amount of $115,631 is
included in Other income (expenses). Comparatively, 1998 revenues totaled
$702,289, which was derived from $291,533 in product licenses and services and
$410,756 in research and development grants, with interest received in the
amount of $20,186 included in income (expense). In 1997, operating revenues were
$888,092, which was derived from $761,039 in product licenses and services and
$127,053 in research and development grants, with interest of $57,601 included
in income (expense).
Our current research and development grant, granted to us by the
Commonwealth of Australia, covers a project running from July 23, 1999 to
December 31, 2000. Under certain circumstances, including a change in control of
CAT or an attempt by us to assign the intellectual property created under the
grant, the Commonwealth has a right to require repayment of the grant amount. We
anticipate that we may seek additional research and development grants from the
Commonwealth and/or other sources in the future.
FISCAL YEAR ENDED 1999 COMPARED TO 1998
Operating revenues increased by $508,614, or 72%, from $702,289 for the
year ended December 31, 1998 to $1,210,903 for the year ended December 31, 1999.
The increase arose as a result of increased product licenses and services
revenue to $638,382 for the year ended December 31, 1999 from $291,533 for the
year ended December 31, 1998, an increase of 119%. Research and development
grant revenue increased to $572,521 for the year ended December 31, 1999 from
$410,756 for the year ended December 31, 1998, an increase of 39%.
Research and development and testing expenses increased $88,705, or 7%, to
$1,398,489 for the year ended December 31, 1999 from $1,309,784 for the year
ended December 31, 1998. This increase was due to increased research and
development expenses which was partially offset by the lower cost and use of
resources to support testing of our product.
Selling and relationship development expenses increased $42,289, or 5%,
from $914,622 for the year ended December 31, 1998 to $956,911 for the year
ended December 31, 1999. Selling and relationship development expenses were
primarily attributable to continued overseas strategic relationship development
and support. As a percentage of net revenue, these amounts represented 130% for
1998 as compared to 79% for 1999, which reflects increased sales rather than
increased selling and relationship development expenditure. Selling and
relationship development expenditure in the U.S. significantly increased as US
sales and marketing activities increased, while expenditure in other markets was
minimal.
General and administrative expenses increased $561,117, or 81%, from
$693,979 for the year ended December 31, 1998 to $1,255,096 for the year ended
December 31, 1999. The expense increase partially relates to the increased
resources required to implement the restructuring of CAT and Catuity and
increased compliance costs related to the increase in our issued capital stock
and in our number of stockholders to 4,380 at December 31, 1999, compared to 955
at December 31, 1998. During the year ended December 31, 1999, an additional
provision of $104,929 was made
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<PAGE> 33
against assets related to testing of our product, compared to a provision of
$30,669 made for the year ended December 31, 1998. Depreciation and amortization
expense increased $23,383 from $78,426 for the year ended December 31, 1998 to
$101,809 for the year ended December 31, 1999.
Stock compensation is charged in relation to a limited recourse loan to a
Mr. Mac. Smith in the amount of $2,475,175 for the year ended December 31, 1999,
compared to ($8,627) for the year ended December 31, 1998. This difference
reflects changes in our share price to $11.37 (reflecting a per share price of
A$17.30 converted at US$/A$ rate of 0.6571) at December 31, 1999 from $1.50
(reflecting a per share price of A$2.45 converted at US$/A$ rate of 0.6126) at
December 31, 1998.
Non-recurring charges have been incurred in the amount of $1,294,636 and
relate to our efforts to relocate our domicile to the US under the restructure.
Included in this amount were stock transfer taxes of $244,785. The balance of
costs related primarily to legal, accounting and financial advisors and court
costs.
Other income (expense) decreased by $135,999, or 77%, to $40,680 for the
year ended December 31, 1999 from $176,679 for the year ended December 31, 1998.
This decrease was attributable to a reduction in borrowings during 1999 and an
increase in interest income on cash reserves of $95,445.
Principally as a result of the factors described above, we incurred a net
loss of $6,210,084 for the year ended December 31, 1999 as compared to a net
loss of $2,384,148 for the year ended December 31, 1998.
FISCAL YEAR ENDED 1998 COMPARED TO 1997
Operating revenue decreased by $185,803, or 21%, to $702,289 for the year
ended December 31, 1998 from $888,092 for the year ended December 31, 1997. Of
this decrease, $279,276 was due to termination of a trial license agreement with
a local Australian bank that assisted with our Western Sydney pilot tests. An
increase in Research and Development Grants of $283,703 from $127,053 for the
year ended December 31, 1997, to $410,756 for the year ended December 31, 1998
served to offset the effect of our reduced product license revenue. Other
product license and services revenue decreased as the Western Sydney pilot was
consolidated.
Research and development and testing expenses decreased $106,053, or 7%, to
$1,309,784 for the year ended December 31, 1998 from $1,415,837 for the year
ended December 31, 1997. This decrease was due to a consolidation and reduction
in product testing activities and reflected in a reduction in business inputs
including staffing and field testing operating expenses.
Selling and relationship development expenses increased $205,701, or 29%,
to $914,622 for the year ended December 31, 1998 from $708,921 for the year
ended December 31, 1997. This increase represents increased overseas market
development and research efforts. Significant expenditure occurred in Asia,
Europe and the U.S., but following the Asian financial crisis, all Asian
expenditure ceased.
General and administrative expenses decreased $304,082, or 30%, to $693,979
for the year ended December 31, 1998 from $998,061 for the year ended December
31, 1997. The decrease in general and administrative expenses was primarily
attributable to reorganizing the
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<PAGE> 34
finance staff following a reduction in our product testing activities and
completion of the initial listing of CAT on the Australian Stock Exchange in
July 1997. Depreciation and amortization expense increased $22,702 or 41%, to
$78,426 for the year ended December 31, 1998 from $55,724 for the year ended
December 31, 1997. The increase was attributable to additional capital
expenditure on primarily research and development and was in accordance with our
management's expectations.
Stock compensation in relation to a limited recourse loan to a director was
credited in the amount of $8,627 for the year ended December 31, 1998 compared
to a cost of $218,646 for the year ended December 31, 1997. This difference
reflects changes in our share price to $1.50 (reflecting a per share price of
A$2.42 converted at US$/A$ rate of 0.6126) at December 31, 1998 from $2.44
(reflecting a per share price of A$3.30 converted at US$/A$ rate of 0.7430) at
December 31, 1997.
Other income (expense) decreased by $38,203, or 18%, to $176,679 for the
year ended December 31, 1998 from $214,882 for the year ended December 31, 1997.
This decrease was due to higher interest income on cash reserves.
Principally as a result of the factors described above, we incurred a net
loss of $2,384,148 for the year ended December 31, 1998 as compared to a net
loss of $3,516,840 for the year ended December 31, 1997.
LEASE OBLIGATIONS
We have obligations under non-cancellable operating leases in relation to
office equipment expiring June 28, 2000 and an office lease expiring December
14, 2003. Minimum future annual lease payments under these leases as of December
31, 1999 was $372,139.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations through debt and equity
investment from our founders, private share placements to institutional
investors, a public issuance of shares to non-US citizens and operating cash
flows.
In 1999, our net loss was $6,210,084. The net cash used in operating
activities was $3,524,804 after adjustments for stock-based compensation of
$2,504,224, an increase in accounts receivable of $576,072, amortization and
depreciation of $101,809 and minor adjustments to accrued expenses, provisions,
accounts payable and inventory. The net cash used in operating activities
includes non-recurring expenditure of $1,294,636 related to the costs of the
restructure and move to the US. We obtained an exchange rate benefit of
$100,097. Cash reserves increased from $148,789 to $5,269,757 during this
period. Net cash provided from the issuance of shares of common stock was
$9,521,278.
In 1998, our net loss was $2,384,148. The net cash used in operating
activities was $1,749,495 after adjustments for stock-based compensation credit
of $8,627, a decrease in accounts receivable of $193,015, amortization and
depreciation of $150,744 and minor adjustment to accrued expenses, provisions,
accounts payable and inventory. The net cash used in operating activities
includes no non-recurring expenditures. We incurred capital expenditures on
equipment of $175,951 and incurred an exchange rate loss of $23,411. Cash
reserves
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<PAGE> 35
decreased from $593,196 to $148,789 during the period. Net cash provided from
the issuance of shares of common stock was $1,504,570.
In 1997, our net loss was $3,516,840. The net cash used in operating
activities was $3,604,850 after adjustments for stock-based compensation of
$218,646, an increase in accounts receivable of $214,500, amortization and
depreciation of $55,724 and minor adjustment to accrued expenses, provisions,
accounts payable and inventory. The net cash used in operating activities
includes non-recurring expenditures of $848,585. We incurred capital
expenditures on equipment of $156,540 and incurred an exchange rate loss of
$88,193. Cash reserves increased from $48,807 to 593,196 during the period. Net
cash provided from the issuance of shares of common stock was $4,291,287.
MARKET RISK
To date, we have not utilized any foreign currency hedging or other
derivative financial instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. Following
registration of our securities in the United States, investors may seek to
profit by exploiting the difference, if any, in the price of our stock on the
ASX, in Australia, and the Nasdaq National Market, in the United States. Such
arbitraging activities could cause our stock price in the market with the higher
value to decrease to the price set by the market with the lower value. We cannot
estimate the amount or extent of this type of market risk.
We currently invest our cash and cash equivalents in interest bearing term
deposits with Australian banks. We believe these investments are subject to
minimal credit and market risk.
FUTURE ADOPTION OF NEW ACCOUNTING STATEMENTS
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2" ("SOP
98-9"), which amends certain provisions of Statement of Position 97-2 "Software
Revenue Recognition with Respect to Certain Transactions" ("SOP 97-2") and
extends the deferral of the application of certain passages of SOP 97-2 provided
by Statement of Position 98-4 ("Deferral of Effective Date of SOP 97-2") until
the beginning of our fiscal year 2000. We do not expect the adoption of this
standard to have a material effect on our consolidated operating results or
financial position.
YEAR 2000 COMPLIANCE
As scheduled, we have completed our testing related to the year 2000
phenomenon including the impact, if any, of the recent change in the century on
our internally developed software as well as on computer technology and other
services provided to us by third-party vendors. Our testing included addressing
leap year calendar date calculation concerns. The possibility of significant
interruptions of normal operations has been reduced. As of March 15, 2000, we
have operated without significant or material year 2000-related problems. We
believe that all of our critical systems are year 2000 ready. However, there is
no guarantee that we have discovered all possible failure points.
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<PAGE> 36
We are fairly dependent on third party vendors to provide us services and
equipment. A significant year 2000-related disruption of services or equipment
that third party vendors provide to us could harm our business. We are not aware
that any of our third party vendors have experienced significant year
2000-related problems.
To date, we have incurred a minimal amount of expenses on the year 2000
phenomenon because we developed our systems and technology in light of the
phenomenon. All of our expenses have related to the operating costs associated
with time spent by employees and consultants in the evaluation process for year
2000 readiness matters.
ITEM 3. PROPERTIES
Our corporate headquarters and principal executive offices in North America
are located in leased facilities in Detroit, Michigan consisting of
approximately 1000 square feet of office space. Our lease expires in March 1,
2001, but can be renewed for a further one year period. Our current facilities
in the United States will not be sufficient to meet our anticipated growth.
Our offices and development center in Australia are located in leased
facilities in Sydney, New South Wales, Australia consisting of approximately
2,060 square feet. Our lease agreement expires on December 14, 2003. We believe
that our Australia facilities are sufficient to meet our immediate foreseeable
operating needs in Australia.
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<PAGE> 37
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of our capital stock as of December 31, 1999 by:
- each person who is known by us to beneficially own more than five
percent of our common stock;
- our Chief Executive Officer and each of our executive officers for the
year ended December 31, 1999;
- each of our directors; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Percentage of
Shares of Common
Common Stock Stock
Beneficially Beneficially
Name and Address of Beneficial Owner Owned(1) Owned(2)
- ------------------------------------ ------------ ------------
<S> <C> <C>
Lance D. O'Connor(3)
6-8 Kangaroo Point Road
Kangaroo Point, NSW 2224 794,564 11.34%
Australia
Alexander S. Dawson(4)
52 St Marks Road
Randwick, NSW 2031 201,484 2.99%
Australia
David L. Mac. Smith(5)
58 View Street
Woollahra, NSW 2025 276,667 4.05%
Australia
Duncan P.F. Mount(6)
9 Ithica Road
Elizabeth Bay, NSW 2011 200,000 2.97%
Australia
John M. Weihen(7)
17 Bayswater Road
Lindfield, NSW 2070 34,200 *
Australia
</TABLE>
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<PAGE> 38
<TABLE>
<CAPTION>
Number of Percentage of
Shares of Common
Common Stock Stock
Beneficially Beneficially
Name and Address of Beneficial Owner Owned(1) Owned(2)
- ------------------------------------ ------------ ------------
<S> <C> <C>
Benjamin A. Garton(8)
65 Wilson Street
Newtown, NSW 2042 21,384 *
Australia
Jonathan R.E. Adams(9)
10 Willows Lane
Walingford, Pennsylvania 19806 1,500 *
Carl H. Fisher(10)
1607 Damon Way
Salt Lake City, Utah 84117 2,500 *
Justin C.A. Wescombe(11)
14/339 Edgecliff Road
Edgecliff NSW 2027 76,107 1.12%
Australia
All directors and executive
officers as a group 813,842 11.71%
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options,
warrants or other rights to purchase which are currently exercisable or are
exercisable within 60 days after December 31, 1999 are deemed outstanding for
purposes of computing the percentage ownership of any other person. Except as
indicated by footnotes and subject to community property laws, where applicable,
the persons named above have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
(2) Percentage of Beneficial Ownership is calculated on the basis of the
amount of outstanding securities plus those securities of the named person
deemed to be outstanding under Rule 13-d3 (promulgated under the Securities and
Exchange Act of 1934, as amended) by virtue of such securities being subject to
rights to acquire beneficial ownership within 60 days after December 31, 1999.
An asterisk indicates beneficial ownership of less than 1% of the common stock
outstanding.
(3) Includes 222,134 vested but unexercised options held by Mr. O'Connor.
Also includes 55,000 vested but unexercised options held by Jenolan Pty Limited
of which Mr. O'Connor is a shareholder and director.
(4) Includes 16,484 vested but unexercised options held by Mr. Dawson. Also
includes 25,000 shares held by Glomore Pty Limited, a family investment company
of which Mr. Dawson is a shareholder and director.
(5) Includes 100,000 vested but unexercised options.
(6) Includes 178,087 shares held by Boom Australia Pty Limited which is the
Trustee of the Mount Family Trust, the directors of which are Mr. Mount and his
wife.
(7) Includes 30,000 vested but unexercised options.
(8) Includes 16,111 vested but unexercised options.
(9) Includes 1,500 vested but unexercised options.
(10) Includes 2,500 vested but unexercised options.
(11) Includes 50,000 vested but unexercised options.
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<PAGE> 39
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, and their ages as of January 1, 2000,
are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
David L. Mac. Smith 49 Director and Chairman
Michael V. Howe 51 Director, President and Chief Executive Officer
Alexander S. Dawson 56 Director(1)
Duncan P.F. Mount 52 Director(1)
John M. Weihen 53 Vice President -- Finance and Administration, Treasurer and Secretary
Benjamin A. Garton 33 Vice President -- Product Development
Jonathan R.E. Adams 37 Vice President -- Implementation and Technical Support
Carl H. Fisher 45 Vice President -- Business Development
Justin C.A. Wescombe 37 Vice President -- Sales and Marketing
</TABLE>
(1) Member, Audit Committee
David L. Mac. Smith is our founder and currently our Chairman of the Board.
He has been the Chief Executive Officer and Managing Director of CAT, our wholly
owned subsidiary, since November 1992. In December 1999, he became our President
and CEO pending the appointment of a new President and CEO. In January 2000, he
resigned as our President and CEO and became our Chairman. He was the founder
and, from 1982 to 1991, CEO of Technology Investment Management Limited, a funds
management company with specific focus on technology related businesses. He has
a Bachelor of Law degree from the Australian National University.
Michael V. Howe has served as our President and Chief Executive Officer
since January 2000. From 1995 through 1999, he was the Director of Marketing
Communications for United Airlines, responsible for the United Mileage Plus
loyalty rewards program and the United partnership program. Prior to joining
United Airlines, he served as the Chief Executive Officer of Young and Rubicam
Advertising in Detroit, Michigan from 1990 to 1995. He has a Bachelor of
Business Administration from John Carroll University and a Master of Business
Administration from Michigan State University.
Alexander S. Dawson is currently one of our non-employee Directors. He
served as our Chairman of CAT, our wholly owned subsidiary, from November 1992
to December 1999. From 1987 to 1990, he was Chief Executive Officer of Arnotts
Ltd., Australia's largest biscuit and snack food manufacturing company. From
1988 to 1990, he was a member of the Business
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<PAGE> 40
Council of Australia. He served as Chairman of United Distillers (Australasia)
Limited from 1994 to 1996. He has a Bachelor of Commerce degree from the
University of New South Wales and a Master of Business Administration from
Columbia University.
Duncan P.F. Mount is currently one of our non-employee Directors. He served
as a non-employee Director of CAT, our wholly owned subsidiary, from March 1999
to December 1999. From 1990 to 1998, he was the Asian adviser to CEF.TAL
Investment Management Limited, a Hong Kong based joint venture between the
Canadian Imperial Bank of Commerce, Cheung Kong Holdings Limited and TAL
Investment Counsel. He spent 17 years in Hong Kong as the Managing Director of
Gartmore Investment Management Limited from 1980 to 1988 and as managing
director of CEF Investment Management Limited from 1988 to 1996, entities which
are fund management and investment companies. From 1996 to 1999 he was Managing
Director of CEF.TAL Australia Limited. He holds a Bachelor and Master of Arts
degree in Economics and Law (Hons) from Cambridge University.
John Weihen is currently our Vice President--Finance and Administration and
Secretary. He served in the same role in CAT, our wholly owned subsidiary, from
November 1998 to December 1999. From October 1995 to November 1998, he served as
General Manager Operations and Business Development for CAT. From 1993 to 1995,
he was Senior General Manager Northeast Asia for the Australian Shipping Line,
and from 1991 to 1993, he was Chief Operating Officer for Intag Limited, a
proximity card technology company based in Sydney, Australia. From 1988 to 1991,
he was an investment manager for Technology Investment Management Limited, a
venture capital funds management group. Mr. Weihen holds a Diploma in
Accountancy.
Benjamin A. Garton is currently Vice President--Product Management &
Development. He served in the same role with CAT, our wholly owned subsidiary,
from March 1999 to December 1999. From November 1996 to February 1999 he was
Manager Development for CAT and from September 1994 to October 1996 he was a
Senior Systems Analyst for CAT. From October 1992 to August 1994, he was
Development Manager at Citibank Australia with responsibilities for electronic
funds transfer switching systems.
Jonathan R.E. Adams is our Vice President--North American Implementation
and Technical Services. From 1996 to 1998 he was the Director, Financial
Markets, for Schlumberger Smart Cards and Systems based in New Jersey. From 1994
to 1996 he worked with MBNA America Corporation in strategic planning, involved
with card system implementation and electronic commerce. He holds a Bachelor of
Arts degree from Washington College and Master of Business Administration from
Georgetown University.
Carl H. Fisher is our Vice President--Business Development. From 1997
to 1998, he was a director and Vice President, Finance of ICOne, a smart card
loyalty program company based in Salt Lake City, Utah. From 1995 to 1997, he was
Chief Financial Officer and Chief Information Officer for Morinda Inc., a $100
million per year revenue wholesale sales company, From 1987 to 1995, he was
founder and President of a financial consulting firm, Fisher Associates,
assisting clients in areas of financial and computerized accounting systems.
Prior to establishing his own business, for eight years he worked with Arthur
Andersen and Price Waterhouse, specializing in areas of financial consulting
with high growth technology companies in the Silicon Valley. He holds a Bachelor
of Economics degree from Westminster College and a Bachelor of Accounting degree
from the University of Utah.
Justin C.A. Wescombe is our Vice President-Sales and Marketing, but will be
leaving our employ in April, 2000. He served in the same role with CAT, our
wholly owned subsidiary from 1997 to 1999. From 1994 to 1997, he was Vice
President Sales and Marketing for International Financial Systems of Ireland, a
provider of financial services software.
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<PAGE> 41
Each of our directors holds office until the next annual meeting of
stockholders or until his successor has been duly elected or qualified or until
his earlier death, resignation or removal. Executive Officers are appointed by,
and serve at the discretion of, our board of directors.
Our board of directors has an audit committee. The audit committee, among
other things, makes recommendations to the board of directors concerning the
engagement of independent public accountants, monitors and reviews the quality
and activities of our internal audit functions, and monitors the results of our
operating and internal controls as reported by management and the independent
public accountants. We expect to add a third member to the audit committee in
the future in order to meet NASDAQ audit committee rules.
Our board of directors does not have a compensation committee. Compensation
for our Chief Executive Officer is determined by our board as a whole.
Compensation for all of our other senior executives is recommended by our CEO to
our board, which reviews all senior executive employment agreements. In
recommending and determining compensation, our CEO and our board consider
independent studies of comparable remuneration packages. Incentives in the form
of stock options are generally offered.
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<PAGE> 42
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the last three fiscal years, all
compensation of our executive officers who were serving as executive officers at
the end of 1999 and in addition the compensation of our President and CEO, who
commenced employment on January 4, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------
Other Annual
Name and Compensation
Principal Position Year Salary($) Bonus($) ($)(1)
- ------------------ ---- --------- -------- -------------
<S> <C> <C> <C> <C>
Michael V. Howe
President and CEO 2000 240,000 60,000
David L. Mac. Smith
Director and Chairman 1999 172,640 0 4,425
1998 163,275 0 25,041(2)
1997 185,750 0 4,214
John M. Weihen
Vice President -
Finance and
Administration,
Secretary 1999 129,100 0 4,425
1998 125,800 0 4,311
1997 148,600 0 4,214
Benjamin A. Garton
Vice President - Product
Development 1999 88,936 0 11,969(3)
1998 64,783 0 11,611(3)
1997 85,148 0 4,214
Jonathan R.E. Adams
Vice President --
Implementation and
Technical Services 1999 125,000 0 0
Carl H. Fisher
Vice President --
Business Development 1999 150,000 0 0
Justin C.A. Wescombe
Vice President - Sales and
Marketing 1999 92,400 0 36,700(4)
1998 90,039 0 35,761(4)
1997 107,236 0 41,364(4)
</TABLE>
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<PAGE> 43
(1) Includes Australian Superannuation Guarantee Levy, a compulsory
payment that funds retirement benefits.
(2) Also includes payout of unused vacation.
(3) Also includes motor vehicle lease payments.
(4) Includes shares of common stock issued in accordance with Mr.
Wescombe's employment agreement valued as follows: 1999 - $32,275;
1998 - $31,450; 1997 - $37,150.
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to each of our
executive officers for the year ended December 31, 1999.
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<PAGE> 44
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of
Securities Total Options Stock Price Appreciation
Underlying Granted to Exercise for Option Term(4)
Options Employees in Price Per Expiration ------------------------
Name Granted(1) Fiscal Year(2) Share(3) Date 5% 10%
- ---- ----------- ------------- --------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
David L. Mac. Smith 50,000 14.20% $ 6.50 Jun 24, 2000 $ 16,250 $ 32,500
50,000 14.20 $ 7.48 Jun 24, 2001 $ 38,335 $ 78,540
50,000 14.20 $ 7.80 Jun 24, 2003 $ 84,047 $180,999
50,000 14.20 $10.40 Jun 24, 2004 $143,666 $317,465
------- -------
200,000 56.80%
John M. Weihen 5,000 1.42% $ 6.18 Sep 30, 2001 $ 3,167 $ 6,489
5,000 1.42 $ 6.18 Jun 30, 2002 $ 3,167 $ 6,489
5,000 1.42 $ 1.95 Mar 31, 2001 $ 1,526 $ 3,227
------- -------
15,000 4.26%
Benjamin A. Garton 15,000 4.26% $ 6.18 Jun 30, 2001 $ 9,502 $ 19,467
7,500 2.13 $ 6.18 Jun 30, 2002 $ 4,751 $ 9,733
7,500 2.13 $ 6.18 Jun 30, 2003 $ 4,751 $ 9,733
20,000 5.68 $ 6.18 Jun 30, 2004 $ 12,669 $ 25,956
------- -------
50,000 14.20%
Jonathan R.E. Adams 1,500 0.43% $ 6.18 Jun 30, 2001 $ 706 $ 1,436
2,500 0.71 $ 6.18 Jun 30, 2001 $ 772 $ 1,544
3,500 0.99 $ 6.18 Jun 30, 2002 $ 1,648 $ 3,350
3,500 0.99 $ 6.18 Jun 30, 2002 $ 2,215 $ 4,539
------- ------
11,000 3.12%
Carl H. Fisher 1,250 0.36% $ 6.18 Jun 30, 2001 $ 759 $ 1,553
1,250 0.36 $ 6.18 Jun 30, 2001 $ 657 $ 1,341
1,250 0.36 $ 6.18 Jun 30, 2001 $ 556 $ 1,128
1,250 0.36 $ 6.18 Jun 30, 2001 $ 455 $ 916
------- ------
5,000 1.44%
Justin C. A. Wescombe -- -- -- -- -- --
</TABLE>
- ----------
(1) Each such option will become fully vested as follows:
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<PAGE> 45
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------
Number of
Securities
Underlying Exercise
Options Vesting Price Per Expiration
Name Granted(1) Date Share $ Date
- ---- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
David L. Mac. Smith 50,000 Jul 1, 1999 6.50 Jun 24, 2000
50,000 Jul 1, 2000 7.48 Jun 24, 2001
50,000 Jul 1, 2001 7.80 Jun 24, 2003
50,000 Jul 1, 1999 10.40 Jun 24, 2004
John M. Weihen 5,000 Sep 30, 1999 6.18 Sep 30, 2001
5,000 Jun 30, 2000 6.18 Jun 30, 2002
5,000 Mar 10, 1999 1.95 Mar 31, 2001
Benjamin A. Garton 15,000 Jul 1, 1999 6.18 Jun 30, 2001
7,500 Jul 1, 2000 6.18 Jun 30, 2002
7,500 Jun 30, 2001 6.18 Jun 30, 2003
20,000 Jun 30, 2002 6.18 Jun 30, 2004
Jonathan R.E. Adams 1,500 Dec 31, 1999 6.18 Jun 30, 2001
2,500 Jun 30, 2000 6.18 Jun 30, 2001
3,500 Dec 31, 2000 6.18 Jun 30, 2002
3,500 Jun 30, 2001 6.18 Jun 30, 2002
Carl H. Fisher 1,250 Jul 31, 1999 6.18 Jun 30, 2001
1,250 Oct 31, 1999 6.18 Jun 30, 2001
1,250 Jan 31, 2000 6.18 Jun 30, 2001
1,250 Apr 30, 2000 6.18 Jun 30, 2001
</TABLE>
(2) Based on a total of 352,254 option shares granted to our employees
during fiscal year 1999.
(3) The exercise price per share of each option was equal to or greater
than the fair market value of the common stock on the date of grant as
determined by the board of directors. The exercise price may be paid in cash, or
in shares of our common stock valued at the market value of such stock on the
exercise date.
(4) The potential realizable value is calculated based on the term of the
option at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and does
not represent our predictions of our future stock price performance. The
potential realizable value at 5% and 10% appreciation is calculated by assuming
that the exercise price on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated price.
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<PAGE> 46
FISCAL YEAR END-OPTION VALUES
The following table sets forth, for each of our executive officers, the
number and value of securities underlying options that were held by such
executive officers as of December 31, 1999. In 1999, 14,172 options were
exercised by such executive officers.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At December 31, 1999(1) at December 31, 1999(2)
----------------------- -------------------------
Name Vested Unvested Vested Unvested
- ---- ------- -------- -------- --------
<S> <C> <C> <C> <C>
David L. Mac. Smith 100,000 100,000 $280,000 $361,000
John M. Weihen 30,000 5,000 $257,850 $ 25,350
Benjamin A. Garton 16,111 35,000 $121,152 $139,425
Jonathan R.E. Adams 1,500 9,500 $ 7,605 $ 48,165
Carl H. Fisher 2,500 2,500 $ 12,675 $ 12,675
Justin C. A. Wescombe 50,000 25,000(3) $401,500 $120,250
</TABLE>
(1) The heading "Vested" refers to shares that were exercisable as of
December 31, 1999; the heading "Unvested" refers to shares that were
unexercisable as of December 31, 1999.
(2) Based on a fair market value of our common stock as of December 31,
1999 of $11.25 per share.
(3) Will not vest due to termination of employment as of April 30, 2000.
POST FISCAL YEAR END-OPTION GRANTS
Since the end of our last fiscal year, we retained a new President and
Chief Executive Officer, Mr. Michael Howe. Associated with his employment, we
are committed to issue options to Mr. Howe to purchase 315,000 shares of common
stock. Of the shares underlying those options, 75,000 shares vested with the
grant of the option and the balance vests quarterly over a five year period
ending December 31, 2004. The expiration date of the options generally is
December 31, 2008, or six months after cessation of employment, if earlier. The
option exercise price will be the lowest of the volume-weighted average trading
price of our shares on the Australian Stock Exchange for 30 days prior to
listing on the Nasdaq National Market (converted to US$ at 0.65 per A$); the
volume-weighted average trading price of our shares on the Nasdaq National
Market for the 30 days immediately following listing on such Nasdaq Market; and
the volume-weighted average trading price of Catuity shares on the Australian
Stock Exchange for the month of January, 2000 (converted to US$ at 0.65 per A$).
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives an annual director's fee of
$16,138. Our Chairman and our President and CEO, who are executives and
directors, receive only the executive compensation referred to above.
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<PAGE> 47
EMPLOYMENT AGREEMENTS
MICHAEL V. HOWE. We entered into a five year employment agreement with our
President and Chief Executive Officer, Michael Howe, effective January, 2000.
Under the agreement, Mr. Howe is entitled to receive a base salary of $240,000,
which is subject to annual review for possible increase by the Board in
conjunction with performance. Mr. Howe is also entitled to receive a performance
based bonus which will be determined by the Board each year as part of the
budget review. For the first year, the bonus is fixed at $60,000 to be paid in
four equal installments on March 31; June 30; September 30 and December 31,
2000. Mr. Howe received options to purchase up to 315,000 shares of common
stock, which will vest 75,000 on commencement of employment and 12,000 at the
end of each calendar quarter through the quarter ending December 31, 2004
contingent upon his continued employment at the quarter end. The option exercise
price will be the lowest of the weighted average trading price of our shares on
the Australian Stock Exchange for 30 days prior to listing on the Nasdaq
National Market (converted to US$ at 0.65 per A$); the weighted average trading
price of our shares on NASDAQ for the 30 days immediately following listing on
NASDAQ; and the weighted average trading price of Catuity shares on the
Australian Stock Exchange for the month of January, 2000 (converted to US$ at
0.65 per A$), but in no event less than 85% of the fair market value of our
shares on date of grant. All options expire on the earlier of December 31, 2008
or the date six months after cessation of employment.
If the agreement is terminated by us without cause, Mr. Howe is entitled
to one year's written notice. We have the right to pay one year's base salary
and accelerate 50% of the stock options scheduled to vest for that year to
effect immediate termination. Mr. Howe may voluntarily terminate the agreement
at any time provided we are given 6 months' advance written notice.
DAVID L. MAC. SMITH. We entered into a three year employment agreement
with our Chairman, David L. Mac. Smith, effective June 1, 1999. Under the
agreement, Mr. Mac. Smith is entitled to receive a base salary of $174,282,
subject to annual review for possible increase based on consideration of cost of
living, level of responsibility, competitive remuneration, performance and
increases awarded to our other employees. Mr. Mac. Smith is also entitled to
payment by us of certain required Australian withholding amounts. During the
term of his employment agreement and for various periods thereafter, Mr. Mac.
Smith will have the right to purchase up to 200,000 shares of common stock as
detailed above.
The agreement may be terminated by Mr. Mac. Smith by giving six months'
notice in writing. If a person or party gives notice of its intention to
acquire, or acquires, more than 30% of the issued capital of the Company or any
parent of the Company, all unvested shares and options will vest and Mr. Mac.
Smith may terminate the agreement at any time within a period of six months
following such event by giving three months' notice. We may terminate the
agreement for cause or if Mr. Mac. Smith becomes unable to perform his duties or
agreement has not been reached prior to June 1, 2001 on continued employment
after the term. On termination of the agreement by either party for any reason,
we shall pay Mr. Mac. Smith the then prevailing basic salary package for 12
months from the effective date of termination, payable monthly in arrears in
equal installments secured by a bank guarantee or such other installments and
security as may be mutually agreed. If the agreement is terminated by us, Mr.
Mac. Smith must resign as a Director.
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<PAGE> 48
Under Mr. Mac. Smith's previous employment contract, entered into on
May 1, 1995, he was entitled to the equivalent of 10% of any shares issued
until the time we became listed on the ASX. A loan from us was made
available to acquire these shares. At December 31,1999, this non-interest
bearing loan to Mr. Mac. Smith amounted to $593,043. Our recourse for
repayment of the loan is limited to dividends and share sale proceeds. Mr.
Mac. Smith may transfer shares subject to the loan to members of his family
or entities controlled by one or more members of his family without any
obligation to repay the loan. However, the sale or any transfer or any
disposal of the shares to any other person will trigger repayment of the loan
applicable to such shares.
JOHN WEIHEN. We entered into an employment agreement with the Vice
President - Finance and Administration, Treasurer and Secretary, Mr. J. Weihen,
effective November 1, 1996. The employment agreement was extended through June
30, 2001. Under the agreement, Mr. Weihen is entitled to receive annual
remuneration of $130,000, subject to annual CPI increases. During the term of
his employment and for various periods thereafter, Mr. Weihen will have the
right to purchase 35,000 shares of common stock as detailed above at $6.18 and
$1.95 per share. If the agreement is terminated by us without cause, Mr. Weihen
is entitled to a minimum of 9 months written notice. Mr. Weihen may terminate
the agreement for significant and serious personal or family reasons upon 4
months written notice.
BENJAMIN GARTON. We entered into a two year employment agreement with our
Vice President - Product Development, Mr. B. Garton, effective April 1, 1999.
Under the agreement, Mr. Garton is entitled to receive annual remuneration of
$107,250 subject to annual CPI increases. Mr. Garton will have the right to
purchase 51,111 shares of common stock as detailed above. If the agreement is
terminated by us without cause, Mr. Garton is entitled to a minimum of 9 months
written notice. Mr. Garton may terminate the agreement for significant and
serious personal or family reasons upon 6 months written notice.
JONATHAN R.E. ADAMS. We entered into a one year employment agreement
year with our Vice President - Implementation and Technical Services, Mr. J.
Adams, effective August 9, 1999. Under the agreement, Mr. Adams is entitled to
receive annual remuneration of $125,000. During the term of his employment and
for various periods thereafter, Mr. Adams will have the right to purchase 11,000
shares of common stock as detailed above at $6.18 per share. If the agreement is
terminated by us without cause, Mr. Adams is entitled to a minimum of 2 months
written notice. Mr. Adams may voluntarily terminate the agreement at any time
provided we are given 2 months written notice.
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<PAGE> 49
CARL H. FISHER. We entered into a one year employment agreement with
our Vice President - Business Development, Mr. C. Fisher, effective May 1, 1999.
Under the agreement, Mr. Fisher is entitled to receive annual remuneration of
$150,000. During the term of his employment and for various periods thereafter,
Mr. Fisher will have the right to purchase 5,000 shares of common stock as
detailed above at $6.18 per share. If the agreement is terminated by us without
cause, Mr. Fisher is entitled to a minimum of 2 months written notice. Mr.
Fisher may voluntarily terminate the agreement at any time provided we are given
2 months written notice.
JUSTIN WESCOMBE. We entered into a three year employment agreement with
our Vice President - Sales and Marketing, Mr. J. Wescombe, effective August 1,
1998. Under the agreement, Mr. Wescombe is entitled to receive annual
remuneration of $130,000, subject to annual CPI increases. That remuneration
includes shares in us valued at $2,690 per month issued at the end of each
quarter at the last sale price on the ASX at the end of each month. During the
term of his employment and for various periods thereafter, Mr. Wescombe will
have the right to purchase 75,000 shares of common stock as detailed above.
-47-
<PAGE> 50
We and Mr. Wescombe have mutually agreed to terminate his employment
agreement, effective April 30, 2000 as a result of Mr. Wescombe being unable to
relocate to the US due to family reasons. As a result of the termination, Mr.
Wescombe's 25,000 unvested shares will not vest.
Catuity, Inc. Stock Option Plan
In March 2000, the Board adopted, and the stockholders approved, our
Catuity Inc. Stock Option Plan. The plan provides for the grant of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and of nonstatutory stock options to employees,
non-employee directors and consultants. The plan is administered and
interpreted by the Board or a committee designated by the Board. It will
terminate in 2010.
As of March 10, 2000, the plan authorized the issuance of options to
purchase up to 750,000 shares of common stock, and no options were outstanding.
The plan administrator has discretion, within the limits of the plan, to
select optionees and to determine the number of shares to be subject to each
option and the exercise price and vesting schedule of each option. The exercise
price of incentive stock options granted under the plan must at least be equal
to the fair market value per share of the common stock on the date of grant and
the exercise price of nonstatutory stock options granted under the plan must be
greater than or equal to 85% of the fair market value per share of the common
stock on the date of grant. With respect to any participant who is a 10%
stockholder, the per share exercise price of any stock option granted under the
plan must equal at least 110% of the fair market value of the common stock on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the plan may not exceed ten years.
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<PAGE> 51
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 6 "EXECUTIVE COMPENSATION" sets forth the details of employment
agreements with our executive officers, Messrs. Howe, Mac. Smith, Weihen,
Wescombe, Garton, Adams and Fisher. ITEM 6 also sets forth details concerning
the grant of options to those executive officers.
In September, 1999 we entered into a three year Service Contract with Mr.
Lance O'Connor, who was a director of CAT at that time, to provide assistance
and management of our advisors in the United States. The services related to
establishment of the US office, general management of our affairs in the United
States, development of administration and financial reporting systems,
preparation of budgets and accounting reporting procedures and capital markets.
On March 1, 2000, the arrangement with Mr. O'Connor was terminated as a result
of our decision to establish our principal U.S. office in Detroit, rather than
San Francisco (where Mr. O'Connor is located) and completion of certain
projects. Under the contract, Mr. O'Connor received an annual service fee
(including Australian fringe benefits tax) of $20,000 plus an annual
accommodation allowance of $40,000 and an accountable expense allowance of
$40,000.
In January 1999 we entered into a share placement agreement with BNP
Equities (Australia) Limited, (BNP) to place 300,000 shares at $2.71 per share
to institutional clients of BNP, raising $813,333. One of the sub-underwriters
in the placement was Boom Australia Pty Limited, which subscribed for 25,000
shares or 8.33% of the shares placed. Boom Australia Limited is an investment
company of which Mr. Mount is a Director. At that time Mr. Mount was not a
Director of Catuity or CAT.
On March 19, 1999, Mr. Mount became a Director of CAT and in December 1999
became a Director of Catuity. On March, 26 1999, we entered into an agreement
with BNP to underwrite the exercise of up to 941,088 options due to expire June
30, 1999 and exercisable at $4.84 each and the placement of 150,000 shares at
$4.84 per share to clients of BNP,
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<PAGE> 52
$726,188. Boom Australia Limited subscribed for 100,000 shares, or 66.67% of
the shares placed and received a sub-underwriting fee for sub-underwriting the
exercise of the options.
In September 1999, CAT requested approval from The Supreme Court of New
South Wales, Australia, to hold shareholder and optionholder meetings to
consider, and if thought fit approve arrangements to restructure CAT's share
capital. Under the restructure shareholders and optionholders in CAT would
exchange their securities and entitlements (following a reverse stock split of 1
for 10) for an equal number of securities and entitlements in a newly formed
Delaware company (NovaTec Inc, which subsequently changed its name to Catuity
Inc.). The restructure was approved at Court-ordered meetings of shareholders
and optionholders and implemented in November, 1999. Implementation of the
restructure has resulted in Catuity Inc. acquiring all CAT shares for an
equivalent number of shares in Catuity. All employees holding options in CAT
received an equivalent number of options, with the same terms and conditions, in
Catuity. Non-employee options were restructured differently, but with the
resulting effect that they were placed in the same position as all other
optionholders. Mr. O'Connor and Mr. Dawson, two directors of CAT, were part of
the non-employee optionholder arrangements under share option and put and call
share deeds.
In August 1996, Heath Fielding Australia Pty Limited, Jenolan Pty Limited
and Krislan Pty Limited entered into a loan agreement with CAT which loan was
secured by the assets of CAT. At the time of the agreement, Len Hanning was a
director of CAT and a director of Heath Fielding Australia Pty Limited. Mr.
Hanning resigned as a director of CAT in March 1998. At the time, Mr. O'Connor
was a director of CAT and a director and shareholder in both Jenolan Pty Limited
and Krislan Pty Limited. In March 1997, Jenolan and Krislan agreed to release
the security and convert their outstanding loan balance of $1,004,556 into
450,675 shares of CAT at $2.23 per share. Heath became the sole security holder
for their loan of $1,691,618. In May 1999, CAT entered into an agreement with
Heath Group Australasia Pty Limited (HGA) (formerly Heath Fielding Australia Pty
Limited) and Industrial Superannuation Administrative Services Limited (ISAS)
whereby HGA and ISAS agreed to grant CAT an option to buy-back 332,588 shares at
$5.50 per share any time up to July 18, 2000. The buy-back option was contingent
upon CAT undertaking to immediately repay $839,981 of the outstanding loan
amount of $1,593,549 and the balance pro rata to the percentage of shares
purchased under the option. In addition HGA and ISAS undertook to exercise all
their June 30, 1999 options and to sell the 263,233 shares resulting from the
option exercise together with the balance of 220,921 shares they held by June
30, 1999. All these transactions were completed. The buy back option now applies
to Catuity shares. CAT can exercise the option to buy-back shares in a maximum
of three payments subject to making pro rata repayments of the outstanding
balance of the loan. At the end of the option exercise period any balance of the
loan remaining outstanding will be subject to the terms and conditions of the
original loan agreement which provides for repayment when in the opinion of the
directors of CAT, CAT has sufficient surplus fund available to permit repayment
of the loan balance. The
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<PAGE> 53
outstanding loan balance after July 18, 2000 may be called by HGA in the event
of default by CAT in performance of the loan terms.
-51-
<PAGE> 54
ITEM 8. LEGAL PROCEEDINGS
There is no action, suit, proceeding or investigation pending or, to our
knowledge, threatened against us, including any investigation of any
governmental authority or body.
-52-
<PAGE> 55
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
CAT was listed on the Australian Stock Exchange (ASX) under the trading
symbol "CAT" from July 11, 1997 to November 22, 1999. On November 23, 1999, upon
our acquisition of CAT, we replaced CAT as the listed entity on the ASX under
the same trading symbol. We continue to be traded on the ASX. We are applying
for listing on the Nasdaq National Market in conjunction with the filing of this
registration statement. There previously has been no United States market for
our common stock.
Our high and low sales prices on the ASX for each quarter within the last
two fiscal years are shown below, both in Australian dollars and in United
States dollars.
As of December 31, 1999, 821,623 shares of our common stock were subject to
outstanding options, warrants or other securities convertible into our common
stock.
<TABLE>
<CAPTION>
High Low High Low
Period (Australian $) (Australian $) (United States $) (United States $)
- ------ -------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Fiscal Year 1998:
First Quarter 1998 $4.50 $3.00 $2.98 $1.99
Second Quarter 1998 $4.40 $2.60 $2.73 $1.62
Third Quarter 1998 $3.50 $2.10 $2.08 $1.25
Fourth Quarter 1998 $2.60 $2.05 $1.59 $1.26
Fiscal Year 1999:
First Quarter 1999 $9.90 $2.40 $6.28 $1.52
Second Quarter 1999 $15.10 $7.60 $9.98 $5.03
Third Quarter 1999 $12.50 $8.00 $8.16 $5.22
Fourth Quarter 1999 $24.40 $11.70 $16.03 $7.69
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C> <C> <C> <C>
Fiscal Year 2000
First Quarter (through
March 10, 2000) $20.00 $14.55 $13.00 $9.46
</TABLE>
All currency conversions are based on the prevailing A$ to US$ rate
applicable on the last day of each respective quarter.
As of December 31, 1999, there were approximately 4,380 stockholders of
record of our common stock as reported to us by Computershare Registry Services
Pty Limited, our transfer agent.
To date, we have not paid any dividends on our common stock and do not
expect to do so in the foreseeable future. We expect to retain all earnings to
finance the growth and development of our business.
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<PAGE> 57
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The sales described in this Item occurred outside of the United States and
were not required to be registered under United States securities laws.
CURRENT FISCAL YEAR TO DATE
In January, 2000, we issued 500 shares at $6.18 per share as a result of
the exercise of stock options. In February, 2000, we issued 1,526 shares at
$8.87 per share in connection with an employment agreement; 500 shares at $6.18
and 2,000 shares at $1.95 as a result of the exercise of stock options; and
6,667 shares of common stock at $4.88 per share as a result of the exercise of
stock options.
On March 2, 2000 Zip/Gun D.O.A. Pty. Limited was issued 610 shares at a
price of $10.66 per share as payment for services rendered under a services
contract which concluded in December, 1999.
FISCAL YEAR ENDED DECEMBER 31, 1999
In December, we issued 340,000 shares at $11.17 per share to institutional
clients of BNP Equities (Australia) Limited, raising $3,798,038 to provide
working capital.
In November, we concluded the Court-approved restructure, which resulted
in the issue of 125 shares by CAT as free bonus shares for the purpose of
rounding following the one-for-ten reverse stock split. This bonus issue was
immediately followed by the issue of 6,389,269 shares in us to CAT's
shareholders under the restructure in exchange for 100% of the shares
outstanding of CAT.
Prior to the restructure, the formation of Catuity and CAT becoming our
wholly owned subsidiary, CAT sold the following unregistered securities in the
fiscal year ended December 31, 1999:
- - In January, CAT issued 300,000 shares at $2.76 per share to clients of
BNP Equities (Australia) Limited, raising $827,946 to be used for
working capital.
- - In March, CAT entered into an underwriting agreement with BNP Equities
(Australia) Limited to underwrite the exercise of 941,088 options. Between
April 1 and June 30, a total of 921,458 options were exercised by option
holders resulting in the issue of 921,458 shares at $4.93 per share. In July,
19,630 shares were issued at a per share price of $4.93 to the underwriters
representing the shortfall in options exercised. As part of the underwriting
agreement there was a placement of 150,000 shares at $4.93 per share to the
sub-underwriters, raising $739,238.
-55-
<PAGE> 58
- - During the year, the following shares of common stock were issued as a result
of the exercise of employee options:
<TABLE>
<CAPTION>
Month Number of Shares Exercise Price
------- ---------------- --------------
<S> <C> <C>
January 41,500 $1.97
February 1,500 $1.97
March 6,559 $4.93
May 2,500 $1.97
August 1,500 $1.97
September 4,000 $1.97
October 7,000 $1.97
November 6,500 $1.97
</TABLE>
- - In August, CAT issued 6,657 shares to Justin C.A. Wescombe in accordance with
his employment agreement. These shares were issued as follows: 4,082 shares
at $2.04 per share; 1,450 shares at $5.65 per share and 1,125 shares at $7.29
per share.
FISCAL YEAR ENDED DECEMBER 31, 1998
In 1998, CAT issued to Cabcharge Australia Pty Limited shares as
consideration due under an agreement for the purchase of the business and assets
of Transcard Australia Pty Ltd. The consideration was payable in 4 tranches of
shares at a value of $153,150 determined by the average sale price of shares in
the preceding quarter. The first tranche was paid in 1997 (see below). In
January, CAT issued 49,420 shares at $3.12 per share, in April CAT issued 68,177
shares at $2.67 per share and in July CAT issued 69,897 shares at $2.21 per
share to Cabcharge Australia Pty Limited, all under the terms of the purchase
agreement.
In February, CAT issued 3,364 shares at a per share price of $2.28 to
Justin C.A. Wescombe and 11,858 shares at a per share price of $1.84 to M.
Spooner, in accordance with their employment service contracts.
In May, CAT issued 3,363 shares at a per share price of $2.28 to Justin
C.A. Wescombe and 14,294 shares at a per share price of $1.84 to M. Spooner, in
accordance with their employment service contracts.
In August, CAT issued 4,140 shares at a per share price of $1.85 to Justin
C.A. Wescombe and 14,502 shares at a per share price of $2.11 to M. Spooner, in
accordance with their employment service contracts.
In November, CAT issued 5,388 shares at a per share price of $1.42 to
Justin C.A. Wescombe and 19,459 shares at a per share price of $1.57 to M.
Spooner, in accordance with their employment service contracts.
In May, 1,500 shares were issued at $1.84 per share to employees following
the exercise of options.
-56-
<PAGE> 59
In May, CAT issued 750,000 shares at $1.84 per share to clients of
Prudential-Bache Securities (Australia) Limited, raising $1,378,350 to be used
for working capital.
FISCAL YEAR ENDED DECEMBER 31, 1997
In March, CAT issued 1,333,333 shares at $1.95 per share to clients of
Prudential-Bache Securities (Australia) Limited, raising $2,601,200 to be used
for working capital.
In May, CAT issued 450,675 shares at $1.95 per share to Jenolan Pty Ltd on
conversion of $879,222 in convertible notes. Also in May, 136,282 shares were
issued at $1.95 per share to Mr. Mac. Smith in accordance with his employment
service agreement. In that purchase, Mr. Mac. Smith executed a non-recourse loan
in the amount of $303,773 repayable from dividends and the sales proceeds of the
shares.
In May, CAT conducted a public offering of shares at $1.95 per share,
underwritten by Prudential-Bache Securities (Australia) Limited. A total of
399,800 shares were issued, raising $779,970 for working capital.
In September, CAT issued 142,858 shares at $4.55 per share which raised
$650,300 to fund initial overseas marketing expenses. Also in September, 6,867
shares were issued to employees at $1.95 per share following the exercise of
employee options.
In October, CAT issued 35,714 shares at $4.55 per share to Cabcharge
Australia Pty Limited, being the first tranche of consideration due under an
agreement for the purchase of the business and assets of Transcard Australia Pty
Ltd. The consideration was payable in 4 tranches of shares to be valued at
$162,575 determined by the average sale price of shares in the preceding quarter
(see above for additional payments).
In October, CAT issued 25,632 shares following the exercise of 5,006
options at $3.12 per share by Alexander S. Dawson; 16,666 options at $3.12 per
share by Heath Fielding Australia Pty Ltd and 3,960 options at $1.95 per share
by employees.
In November, CAT issued 1,669 shares at $4.10 per share to Justin C.A.
Wescombe in accordance with his employment service contract.
Also in November, 1,500 shares were issued to employees following the
exercise of employee options at $1.95 per share.
GENERAL
All of the above CAT shares were exercised for Australian dollars; the
exchange rates used to convert Australian dollars to United States dollars are
the same as those used to
-57-
<PAGE> 60
convert balance sheet figures for the respective fiscal years. The respective
exchange rates are US$0.65 for 2000, US$0.6571 for 1999, US$0.6126 for 1998 and
US$0.6503 for 1997 per $A.
All share numbers reflect the impact of the one for ten reverse stock
split completed in November 1999. All share prices have been rounded to the
nearest cent. Where underwriters' fees were paid, the fees have been deducted
from the issued capital in the financial statements, but the gross receipts
before such fees are indicated above.
At December 31, 1999, we had 6,729,269 shares of common stock outstanding.
-58-
<PAGE> 61
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our authorized capital consists of 110,000,000 shares, of which 100,000,000
shares are denominated common stock, par value $0.001 per share and of which
10,000,000 shares are denominated preferred stock, par value $0.001 per share. A
total of 6,741,072 shares of common stock were issued and outstanding as of
March 10, 2000. Also outstanding as of that date were options held by third
parties to purchase an aggregate of 821,623 shares of common stock. No preferred
stock has been issued.
Holders of common stock are entitled to one vote for each share standing in
his or her name. The holders of common stock may receive cash dividends as
declared by the Board of Directors out of funds legally available therefor. Each
share of common stock is entitled to share pro rata in distributions upon
liquidation. Holders of common stock are entitled to participate in the election
of all directors. The holders of common stock do not have cumulative voting
rights in the election of directors. The outstanding shares of common stock are
fully paid and non-assessable. Holders of common stock do not have subscription,
redemption, conversion, liquidation or preemptive rights. The rights of the
holders of common stock will also be subject to the rights and preferences of
the holders of the company's preferred stock, as designated by our Board of
Directors.
-59-
<PAGE> 62
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our Certificate of
Incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws further provide that we must indemnify our directors and
executive officers and may indemnify our other officers and employees and agents
to the fullest extent permitted by Delaware law. We currently maintain liability
insurance for our officers and directors.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents as to which indemnification is being
sought. We are not aware of any pending or threatened litigation or proceeding
that might result in a claim for such indemnification.
We have entered into indemnification agreements with each of our
directors. These agreements require us, among other things, to indemnify each
director for certain expenses (including attorneys' fees), judgments, fines,
penalties and settlement amounts incurred by any such person in any threatened,
pending or completed action, suit or proceeding or by reason of any event or
occurrence arising out of such person's services as a director. Under various
employment agreements, we also have agreed to indemnify various officers for
any cost, loss, damage or liability (including legal fees) incurred in
connection with any action brought against the officer arising from the
performance of his duties.
-60-
<PAGE> 63
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
filed as part of this Form 10. See Index to Financial Statement Information at
page F-1 of this Form 10.
-61-
<PAGE> 64
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-62-
<PAGE> 65
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
1. Our financial statements are filed as part of this Registration
Statement on Form 10. See Index to Financial Statement Information at page F-1.
2. The following financial schedules are included for the three years ended
December 31, 1999: Schedule II -- Valuation and Qualifying Accounts, at page
F-22. Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes.
(b) EXHIBITS
2.1++ Implementation Agreement between Chip Application Technologies
Limited and NovaTec Inc.
3.1++ Certificate of Registration of Card Technologies Australia Limited
3.2++ Certificate of Registration on Change of Name from Card
Technologies Australia Limited to Chip Application Technologies
Limited
3.3++ Certificate of Incorporation of NovaTec Inc.
3.4++ Certificate of Amendment to the Certificate of Incorporation of
NovaTec Inc.
3.5++ Bylaws of NovaTec Inc.
10.1++ Put and Call Option Deed of A.S. Dawson in Respect of Shares of
Chip Application Technologies Limited
10.2++ Share Option Deed of A.S. Dawson in Respect of Shares of NovaTec
Inc.
10.3++ Employment Agreement of Michael V. Howe
10.4++ Executive Services Agreement of David L. Machattie Smith
10.5++ Deed of Employment of Benjamin Garton
10.6++ Employment Contract of Justin Wescombe and Employment Contract
Amendment
10.7++ Deed of Employment of John Weihen
10.8++ Services Agreement of Jonathan Adams
10.9++ Services Agreement of Carl H. Fisher
10.10++ Lease for premises located at 68-72 Wentworth Avenue Surry Hills,
New South Wales, Australia
10.11++ Lease for premises located at 2711 East Jefferson Avenue, Detroit,
Michigan
10.12* Research and Development Start Grant for Chip Application
Technologies Limited
10.13 Smart Loyalty Technical Work Group Agreement between Visa U.S.A.
and Chip Application Technologies Limited
10.14 Partner Program Loyalty Services Agreement between Visa
International Service Association and Chip Application
Technologies Limited
10.15* Software Remarketing Agreement between IBM and Chip Application
Technologies Limited
10.16* Marketing Support Plan between IBM and Chip Application
Technologies Limited
10.17++ Operation Reseller Agreement between Catuity Inc. and Data Pro
Accounting Software, Inc.
10.18++ Sun Microsystems Computer Company and Chip Application
Technologies Limited Joint Marketing Agreement
10.19++ Cooperative Agreement between Chip Application Technologies
Limited and Global Transaction Company
10.20++ Technology Partnership Agreement between Chip Application
Technologies Limited and Gemplus Technologies Asia Pte Ltd.
10.21++ Memorandum of Understanding between De La Rue Cartes et Systemes
and Chip Application Technologies Limited
10.22++ Loan Repayment and Option Agreement among Chip Application
Technologies Limited, Health Group Australia Pty Limited and
Industrial Superannuation Administration Services Limited
10.23++ Form of Indemnification Agreement
10.24++ Form of Stock Option Plan and Form of Stock Option Agreement under
Plan
27.1++ Financial Data Schedule
* Confidential treatment requested.
+ To be filed by amendment.
++ Previously filed.
-63-
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
CATUITY INC.
Dated: April 7, 2000
----------------- By: /s/ Michael V. Howe
-----------------------------------
Name: Michael V. Howe
Title: President and Chief
Executive Officer
-64-
<PAGE> 67
CATUITY INC
INDEX TO FINANCIAL STATEMENTS(9)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors Report................................................................... F-2
Consolidated Balance Sheets as at December 31, 1998 and 1999.................................. F-3
Consolidated Statement of Operations for the years ended December 31, 1997, 1998 and 1999..... F-4
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1998
and 1999...................................................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1998 and 1999..... F-6
Notes to Consolidated Financial Statements.................................................... F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Catuity Inc.
We have audited the accompanying consolidated balance sheets of Catuity
Inc., as at December 31, 1998 and 1999 and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Catuity Inc., at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material aspects to the
information set forth therein.
ERNST & YOUNG
Sydney, Australia
February 18, 2000
F-2
<PAGE> 69
CATUITY INC.
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
F-3
<PAGE> 70
CATUITY INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 148,789 $ 5,269,757
Accounts receivable, less allowance of
nil in 1998 and $157,704 in 1999 10,791 429,159
Inventories, net 151,187 65,781
Prepaid expenses 33,495 67,016
Restricted cash 72,164 178,054
Other 38,234 2,519
------------ ------------
Total current assets 454,660 6,012,286
Non-Current Assets:
Property, plant and equipment, net 170,890 242,038
Other 13,316 --
------------ ------------
Total non-current assets 184,206 242,038
============ ============
Total assets $ 638,866 $ 6,254,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 310,066 $ 560,906
Accounts payable to shareholders 17,650 --
Accrued expenses 116,846 301,630
Deferred income 58,359 --
Accrued compensation 81,189 118,054
Trust liability 72,164 157,685
------------ ------------
Total current liabilities 656,274 1,138,275
Non-Current Liabilities:
Borrowings from shareholders 1,593,549 854,230
Accrued compensation -- 20,588
------------ ------------
Total non-current liabilities 1,593,549 874,818
Commitments and Contingencies (Note 6) -- --
Stockholders' equity:
Ordinary shares - par value nil in 1998 and
$0.001 in 1999
Authorized shares - 100 million in 1998 and 1999
Issued and outstanding shares - 4,920,340 in 1998
and 6,729,269 in 1999 11,969,007 21,519,333
Additional paid-in capital 210,019 2,685,195
Shareholder loans (806,146) (757,733)
Foreign currency translation reserve 412,716 401,073
Accumulated deficit (13,396,553) (19,606,637)
------------ ------------
Total stockholders' equity (1,610,957) 4,241,231
------------ ------------
$ 638,866 $ 6,254,324
============ ============
</TABLE>
See accompanying notes
F-4
<PAGE> 71
CATUITY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product license revenue $ 581,769 $ 135,235 $ 540,759
Product service revenue 179,270 156,298 97,623
Grant revenue 127,053 410,756 572,521
------------ ------------ ------------
Total revenues 888,092 702,289 1,210,903
Costs and expenses:
Research and development and testing 1,415,837 1,309,784 1,398,489
Selling and relationship development 708,921 914,622 956,911
General and administrative 998,061 693,979 1,255,096
Stock compensation 218,646 (8,627) 2,475,175
Non-recurring charges 848,585 -- 1,294,636
------------ ------------ ------------
Total costs and expenses 4,190,050 2,909,758 7,380,307
------------ ------------ ------------
Operating loss (3,301,958) (2,207,469) (6,169,404)
------------ ------------ ------------
Other income (expense):
Interest income 57,601 20,186 115,631
Interest expense - related party (272,483) (196,865) (156,311)
------------ ------------ ------------
Total other income (expense) (214,882) (176,679) (40,680)
------------ ------------ ------------
Loss before taxes (3,516,840) (2,384,148) (6,210,084)
Provision for Income taxes -- -- --
------------ ------------ ------------
Net Loss $ (3,516,840) $ (2,384,148) $ (6,210,084)
============ ============ ============
Net loss per share - basic $ (1.15) $ (0.53) $ (1.05)
============ ============ ============
Net loss per share - diluted $ (1.05) $ (0.53) $ (1.05)
============ ============ ============
Weighted average shares outstanding - basic 3,065,840 4,473,257 5,913,613
============ ============ ============
Weighted average shares outstanding - diluted 3,342,839 4,473,257 5,913,613
============ ============ ============
</TABLE>
See accompanying notes
F-5
<PAGE> 72
CATUITY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ISSUED CAPITAL ADDITIONAL
---------------------- PAID IN SHAREHOLDER
SHARES AMOUNT CAPITAL LOANS
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 1,370,648 $3,166,463 $ 964,108 $(502,373)
Issuance of common stock 1,877,660 4,209,862 428,640
Shares issued through loans to employees 136,282 303,773
Shareholder loans (303,773)
Exercise of options 33,999 79,509 29,065
Issuance of shares in consideration
for acquisition of Transcard assets 35,714 79,602 106,143
Share issuance costs (379,033)
Conversion of note to common stock 450,675 1,004,555
Stock based compensation 218,646
Comprehensive income
Net loss
Foreign currency translation reserve
Comprehensive income
--------- ----------- ----------- ---------
Balances at December 31, 1997 3,904,978 $8,843,764 $ 1,367,569 $(806,146)
Issuance of common stock 826,368 1,463,999 108,503
Restructure of par value of shares 1,279,258 (1,279,258)
Exercise of options 1,500 2,831
Share issuance costs (70,763)
Issuance of shares in consideration
for acquisition of Transcard assets 187,494 379,155 92,595
Stock based compensation (8,627)
Comprehensive income
Net loss
Foreign currency translation reserve
Comprehensive income
--------- ----------- ----------- ---------
Balances at December 31, 1998 4,920,340 $11,969,007 $ 210,019 $(806,146)
Issuance of common stock 796,782 5,294,713
Exercise of options 1,012,147 4,731,445
Share issuance charges (475,832)
Stock based compensation 2,475,176
Shareholder loans 48,413
Comprehensive income
Net loss
Foreign currency translation reserve
Comprehensive income
--------- ----------- ----------- ---------
Balances at December 31, 1999 6,729,269 $21,519,333 $ 2,685,195 $(757,733)
========= =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
FOREIGN TOTAL
COMPREHENSIVE ACCUMULATED CURRENCY SHAREHOLDERS
INCOME DEFICIT TRANSLATION EQUITY
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $(7,495,565) $(111,707) $(3,979,074)
Issuance of common stock 4,638,502
Shares issued through loans to employees 303,773
Shareholder loans (303,773)
Exercise of options 108,574
Issuance of shares in consideration
for acquisition of Transcard assets 185,745
Share issuance costs (379,033)
Conversion of note to common stock 1,004,555
Stock based compensation 218,646
Comprehensive income
Net loss (3,516,840) (3,516,840) (3,516,840)
Foreign currency translation reserve 439,386 439,386 439,386
-----------
Comprehensive income $(3,077,454)
=========== ------------ -------- -----------
Balances at December 31, 1997 $(11,012,405) $327,679 $(1,279,539)
Issuance of common stock 1,572,502
Restructure of par value of shares --
Exercise of options 2,831
Share issuance costs (70,763)
Issuance of shares in consideration
for acquisition of Transcard assets 471,750
Stock based compensation (8,627)
Comprehensive income
Net loss (2,384,148) (2,384,148) (2,384,148)
Foreign currency translation reserve 85,037 85,037 85,037
-----------
Comprehensive income $(2,299,111)
=========== ------------ -------- -----------
Balances at December 31, 1998 $(13,396,553) $412,716 $(1,610,957)
Issuance of common stock 5,294,713
Exercise of options 4,731,445
Share issuance charges (475,832)
Stock based compensation 2,475,176
Shareholder loans 48,413
Comprehensive income
Net loss (6,210,084) (6,210,084) (6,210,084)
Foreign currency translation reserve (11,643) (11,643) (11,643)
-----------
Comprehensive income $(6,221,727)
=========== ------------ -------- -----------
Balances at December 31, 1999 $(19,606,637) $401,073 $ 4,241,231
============ ======== ===========
</TABLE>
See accompanying notes
F-6
<PAGE> 73
CATUITY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,516,840) $ (2,384,148) $ (6,210,084)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Stock based compensation 218,646 (8,627) 2,504,224
Depreciation and amortization 55,724 78,425 101,809
Amortization of prepaid license fees -- 72,319 --
Provision for doubtful accounts -- -- 157,704
Provision for obsolete inventory -- 30,669 104,929
Changes in assets and liabilities:
Accounts receivable (214,500) 193,015 (576,072)
Inventories (119,756) 104,940 (19,523)
Accounts payable (35,687) 164,585 250,840
Accrued expenses and other liabilities 7,563 12,881 166,229
Other assets, net -- (13,554) (4,860)
------------ ------------ ------------
Net cash used in operating activities (3,604,850) (1,749,495) (3,524,804)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (156,540) (175,951) (135,622)
Net advances to shareholders 88,429 (120) --
Deposits lodged (14,864) -- --
------------ ------------ ------------
Net cash used in investing activities (82,975) (176,071) (135,622)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings from related parties 47,305 -- --
Payments on borrowings from related parties (18,185) -- (839,981)
Issuance of common stock, net of expenses 4,291,287 1,504,570 9,521,278
------------ ------------ ------------
Net cash provided by financing activities 4,320,407 1,504,570 8,681,297
------------ ------------ ------------
Foreign exchange effect on cash (88,193) (23,411) 100,097
------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents
544,389 (444,407) 5,120,968
Cash and cash equivalents, beginning of year 48,807 593,196 148,789
------------ ------------ ------------
Cash and cash equivalents, end of year $ 593,196 $ 148,789 $ 5,269,757
============ ============ ============
Supplemental disclosure of cash flow information
Interest paid during the year $ 252,631 $ 178,241 $ 156,311
============ ============ ============
Common stock issued for purchase of
Transcard assets $ 185,750 $ 471,750 --
============ ============ ============
Conversion of notes to common stock $ 1,018,306 $ -- --
============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 74
NOTE 1. DESCRIPTION OF BUSINESS
Catuity Inc. (the "Company" or "Catuity") is a Delaware Corporation
incorporated in 1999. The Company listed on the Australian Stock Exchange
("ASX") on November 23, 1999. In November 1999, under court approved Schemes of
Arrangement, Catuity acquired all the shares on issue in Chip Application
Technologies Limited ("CAT"), a company which had been listed on the ASX since
July 1997 (Refer Note 7). Catuity is the parent company of the group and will
continue the business activities of CAT. The Company designs, develops, operates
and markets multi-program systems that provide loyalty and incentive marketing
solutions for retail shops and the Internet. These solutions aim to increase
customer retention, increase the customer base and reduce costs for merchants in
the rapidly converging physical and virtual worlds. Catuity provides full
program services and network system software that directly connects the seller
and the buyer across all purchasing channels, irrespective of payment method.
The Company's operations had been predominantly located in Australia but will
now be expanded into North America.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are presented in US dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"), which differ in certain respects from
accounting principles applied by the Company in its local currency financial
statements, which are prepared in accordance with accounting principles
generally accepted in Australia ("Australian GAAP").
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidation of accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the consolidated financial
statement and the reported amount of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash flows, the Company
considers all cash and highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories comprising of validators, keypads and cards used in pilots are
stated at the lower of cost (first in first out method) or market value (net
realizable value) (Refer Note 5).
F-8
<PAGE> 75
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the shorter of the estimated
useful lives of the respective assets (which ranges from three to seven years)
or the applicable lease term. Maintenance and repairs are expensed as incurred
and improvements are capitalized. Depreciation expense was $100,703, $75,368 and
$52,634 for the years ended December 31, 1999, 1998, and 1997 respectively.
Amortization expense was $1,106, $3,057, and $3,090 for the years ended December
31, 1999, 1998, and 1997 respectively.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company are translated in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation". The
Company's management has elected to present these consolidated financial
statements in U.S. dollars. The financial statements of the Company and its
subsidiaries are translated from their functional currency into the reporting
currency, the U.S. dollar, utilizing the current rate method. Accordingly the
assets and liabilities are translated at the exchange rates in effect at the end
of the reporting period.
The rates used to translate assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C>
$0.6571 $0.6126
</TABLE>
Revenues and expenses are translated at the average exchange rate during the
year. The rates used to translate revenues and expenses were:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
----------- ----------- -----------
<S> <C> <C>
$0.6455 $0.6290 $0.7430
</TABLE>
All cumulative translation gains and losses from the translation into the
Company's reporting currency are included as a separate component of
stockholders' equity in the consolidated balance sheets.
Currency transaction gains and losses are recognized in current operations and
have not been significant to the Company's operation results in any period.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which requires the use of the liability method in accounting for income taxes.
Under SFAS No.
F-9
<PAGE> 76
109, deferred tax assets and liabilities are measured based on differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
REVENUE RECOGNITION
Product Sales Revenue is recognized upon the execution of the sale or license
agreement provided the company has no additional performance criteria. If
significant customization is part of the transaction, such revenues are
recognized over the period of delivery. Product sales payments received which
are related to future performance are deferred and recorded as revenues as they
are earned over specified future performance periods.
Revenues from transaction processing services are recorded at the time the
service is utilized by the customer.
Research and development grants are recorded as revenue when the underlying
performance objective has been attained or services have been provided or costs
incurred as per the grant agreement.
NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128") and Staff Accounting Bulletin No. 98 ("SAB
98") during the year ended December 31, 1997. SFAS 128 replaced the calculation
of primary and fully diluted net loss per share with basic and diluted loss per
share. Under SFAS No. 128, basic net income per share excludes dilutive common
stock equivalents and is calculated by dividing net loss by the weighted average
number of shares outstanding. Diluted net loss per share is calculated by
dividing the net loss by the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period.
Common equivalent shares from stock options are excluded from the calculation of
diluted net loss per share as their effect is anti dilutive. SAB 98 applied to
pre IPO issuances of shares and potential common equivalent shares that are
considered to be nominal issuances. SAB 98 requires nominal issuances of shares
and common equivalent shares to be included in diluted net loss per share for
all years presented even if the impact is antidilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income," ("SFAS No. 130")
which
F-10
<PAGE> 77
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's consolidated financial position, shareholders equity, results of
operation or cash flows. SFAS. No. 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, cash equivalents, accounts
receivable, accounts payable and loans from a related party. The carrying values
of cash, cash equivalents and accounts payable approximate fair value due to
their short-term nature. The fair value of the related party loan is estimated
on current rates available for similar debt with similar maturity and
collateral. The related party loan has a carrying value that is not
significantly different than its estimated fair value.
CONCENTRATIONS OF RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and accounts receivable. The Company
maintains its cash with Australian financial institutions. The company conducts
business with companies throughout Australia and the Australian Government and
with companies throughout Australia and the United States. The Company performs
ongoing credit evaluations of its corporate customers and generally does not
require collateral. As the Company derives its revenue from a limited number of
customers, they are exposed to credit risk if the customers are unable to pay.
For the year ended December 31, 1999, three customers accounted for 26%
($314,757), 16% ($190,222) and 47% ($572,521) of net revenue and accounted for
84% ($491,453) of the accounts receivable balance at year end. In 1998, two
customers accounted for 58% ($410,756) and 19% ($132,090) of net revenue. In
1997, three customers accounted for 66% ($581,769), 14% ($127,053) and 11%
($96,246) of net revenue.
SEGMENT REPORTING
Effective January 1, 1998 the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 superseded SFAS Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. The adoption of SFAS No. 131 did not affect results of
operations, financial position or disclosures of the company.
STOCK SPLIT
At November 22, 1999, the Company completed a one-for-ten reverse stock split of
the outstanding shares of issued capital. All share information and per share
amounts in the accompanying consolidated financial statements has been
retroactively adjusted to reflect the effect of this stock split.
F-11
<PAGE> 78
NEW ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9 "Modification of SOP 97-2" ("SOP
98-9"), which amends certain provisions of Statement of Position 97-2 "Software
Revenue Recognition with Respect to Certain Transactions" ("SOP 97-2") and
extends the deferral of the application of certain passages of SOP 97-2 provided
by Statement of Position 98-4 ("Deferral of Effective Date of SOP 97-2") until
the beginning of the Company's fiscal year 2000. The Company does not expect the
adoption of this standard to have a material effect on its consolidated
operating results or financial position.
F-12
<PAGE> 79
NOTE 3. NON-RECURRING CHARGES
In the year ended December 31, 1999 the Company incurred non recurring charges
of $1,294,636. These costs relate to the scheme of arrangement the Company
undertook to relocate its corporate structure from Australia to the United
States of America. These costs include legal, consulting and stamp duty fees.
In early 1997 the Company acquired the operation of Transcard Australia Pty Ltd
(Transcard) the Company's partner in the pilot of its multi-program software
product, for a fixed price of $743,000. This acquisition was settled in cash and
shares in the Company. This acquisition was part of the Company's
rationalization of its Transcard pilot.
In late 1997 the Company decided not to expand the Western Sydney pilot and, as
a result, the Company recorded charges of $364,813 relating to the write down of
inventory associated with the Transcard pilot and $483,772 in relation to the
goodwill costs incurred and the write-down of its investment in Transcard.
NOTE 4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Finished goods $ 215,478 $ 235,001
Provision for obsolete inventory (64,291) (169,220)
--------- ---------
$ 151,187 $ 65,781
========= =========
</TABLE>
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Computer equipment $ 235,759 $ 346,666
Buildings and improvements 7,261 63,485
Office furniture and equipment 50,413 60,566
--------- ---------
$ 293,433 $ 470,717
Less accumulated depreciation
and amortization (122,543) (228,679)
--------- ---------
$ 170,890 $ 242,038
========= =========
</TABLE>
F-13
<PAGE> 80
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has commitments under non-cancelable operating
leases in relation to office equipment expiring June 28, 2000 and an office
lease expiring December 14, 2003. Minimum future annual lease payments under
these leases as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $103,497
2001 85,347
2002 89,412
2003 93,883
--------
$372,139
========
</TABLE>
Total rent expense on all operating and office leases was $121,701, $126,605 and
$142,422 for 1999, 1998 and 1997 respectively.
Under the terms of a Grant Agreement with the Commonwealth of Australia, the
Company must meet certain obligations with regard to the development and
commercialization of a Multi Card Acceptance Device. In the event that these
obligations are not met the Company may be required to repay all or part of the
grant monies received. The Directors do not believe that any liability will
materialize. Management believe they have complied with and will continue to
comply with the terms of the Grant Agreements. The maximum potential liability
at December 31, 1999 was $222,042.
NOTE 7. STOCKHOLDERS' EQUITY
LIMITED RECOURSE LOANS
The Company has provided limited recourse loans to a director (1999: $593,043
and 1998: $598,826) and related companies (1999: $68,168 and 1998: $63,551) for
the purpose of purchasing shares in the Company. The loans have been offset
against issued capital. The loans will only be repaid from the proceeds of
dividends paid by the Company and from the proceeds from the sale of the shares.
The Company's recourse for repayment of the loan is limited to after-tax
dividends and sale proceeds from the shares. As a result, the recoverability of
the loan is dependent upon the value of the shares. The loans do not have a
specified repayment date. The loans provided are interest-free. Consequently,
the loans have been treated as variable option and variable accounting has been
adopted. Based on the movement in the share price of common stock from the date
of the loan to December 31, 1999, the Company has recorded an expense of
$2,459,523 and $31,713 for the years ended December 31, 1999 and 1997. The
Company has recorded a credit of $26,847 for the year ended December 31, 1998.
ESCROW SHARES
As a prerequisite to the Company's initial public offering in July 1997 the
Australian Stock Exchange requested the Company restrict the trading of 293,848
shares of common stock and 1,174,822 options held by existing shareholders for a
period of two years from the date of the initial public offering. In addition as
a result of negotiations with our underwriter 374,739 shares of common stock
were voluntarily held in escrow until July 2000.
F-14
<PAGE> 81
NOTE 7. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its ordinary shares.
EMPLOYEE STOCK OPTIONS
The Company has provided employees who have worked for more than 12 months share
options at an exercise price as determined by the Board of Directors at the time
of issuance. Option vesting schedules are determined by the Board of Directors
at the time of issuance. Stock options issued by the Company vest at the end of
a specified period of time, which is linked to the employees' continuing
employment, ranging from one to three years. Employees must exercise the options
within three months of terminating their employment with the Company or the
options lapse. The Company has recorded an expense of $15,653, $16,543, and $0
for the years ended December 31, 1999, 1998 and 1997, for the difference between
the exercise price and the issue price of the Company's shares at the date of
the option grant. The number of unissued shares of common stock subject to
options issued to employees at December 31, 1999 was 655,102.
OPTIONS ISSUED TO THIRD PARTIES
The Company granted options to purchase 512,353 shares of common stock to third
parties and outside directors at an exercise price ranging from $2.23 to $5.57
per share during the period January 1, 1997 to December 31, 1999. These options
were issued to encourage investors to invest in the Company now and in the
future. These options were issued at the same terms and conditions as other
options issued to employees. The Company valued these options using the
Black-Scholes option pricing model which amounted to $0, $1,677, and $186,933
for the years ended December 31, 1999, 1998, and 1997 respectively. The expense,
in respect of the options, was charged to the profit and loss in the year they
were granted as they vested immediately. There were 166,521 of options issued to
third parties outstanding at December 31, 1999.
Had compensation costs for these plans been determined consistent with SFAS No.
123, "Accounting for Stock Based Compensation," the Company's net loss and net
loss per share would have been reported as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss as Reported $(3,516,840) $(2,384,148) $(6,210,084)
=========== =========== ===========
Pro Forma $(3,529,991) $(2,436,292) $(6,865,434)
=========== =========== ===========
Pro Forma basic earnings per share $ (1.15) $ (0.54) $ (1.16)
=========== =========== ===========
Pro Forma diluted earnings per share $ (1.06) $ (0.54) $ (1.16)
=========== =========== ===========
</TABLE>
Because the SFAS No. 123 method of valuation has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation costs may
not be representative of amounts to be expected in future years.
F-15
<PAGE> 82
For disclosure purposes, the fair value of stock based compensation was computed
using the Black-Scholes option pricing model with the following weighted average
assumptions used for 1997, 1998, and 1999 grants:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Risk Free Interest Rate 5.80% 4.65% 5.96%
Expected Dividend Yield -- -- --
Expected Lives (years) 2.45 3.38 3.04
Expected Volatility 0.683 0.749 0.796
</TABLE>
Activity in the Plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARE OPTIONS EXERCISE PER SHARE
------------- ------------------
<S> <C> <C>
Outstanding at December 31, 1996 836,280 $ 5.61
Granted 597,318 5.37
Cancelled/lapsed (3,101) 2.92
Exercised (33,999) 3.08
---------- ------
Outstanding at December 31, 1997 1,396,498 5.57
Granted 125,500 3.59
Cancelled/lapsed (33,000) 1.89
Exercised (1,500) 1.89
---------- ------
Outstanding at December 31, 1998 1,487,498 5.49
Granted 352,254 7.00
Cancelled/lapsed (5,982) 4.76
Exercised (1,012,147) 5.64
---------- ------
Outstanding at December 31, 1999 821,623 $ 5.96
========== ======
</TABLE>
The weighted average fair value of options granted during the year ended
December 31, 1999, 1998 and 1997 are $3.19, $1.07, and $0.33 respectively.
The following is additional information relating to options outstanding as of
December 31, 1999:
F-16
<PAGE> 83
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER EXERCISE
RANGE SHARES PRICE LIFE (YEARS) OF SHARES PRICE
- ------------- --------- --------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
$ 1.95-$ 2.20 64,000 $ 2.05 1.38 56,500 $ 2.06
$ 3.15-$ 4.35 39,668 $ 3.94 2.09 39,668 $ 3.94
$ 4.90-$ 6.50 517,955 $ 5.35 1.28 415,703 $ 5.12
$ 6.55-$ 8.00 150,000 $ 7.34 1.83 50,000 $ 6.57
$10.00-$11.00 50,000 $10.51 4.50 50,000 $10.51
</TABLE>
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 10 million shares of
preferred stock, with a par value of $0.001 per share, none of which is issued
or outstanding. The Board of Directors has the authority to issue the preferred
stock in one or more series and to fix rights, preferences, privileges and
restrictions, including dividends, and the number of shares constituting any
series or the designation of such series, without any further vote or action by
the stockholders.
F-17
<PAGE> 84
OPTION AGREEMENT
In May 1999, the Company entered into an Agreement with Heath Group Australasia
Pty Limited ("HGA") (formerly Heath Fielding Australia Pty Limited) and
Industrial Superannuation Administrative Services Limited ("ISAS") whereby HGA
and ISAS agreed to grant the Company an option to buy-back 332,588 shares at
$5.50 per share any time up to July 18, 2000 ("Option Agreement"). The buy-back
option was contingent upon the Company immediately repaying $839,981 of the
outstanding loan amount of $1,593,549.
Under the Option Agreement, the balance of the loan is to be repaid pro rata to
the percentage of shares purchased. The Company can buy-back shares in a maximum
of three tranches, subject to making payments on the loan. Interest will
continue to be payable on any outstanding balance of the loan at a rate of 12
percent. At the end of the option exercise period, any balance of the loan
remaining outstanding will be subject to the terms and conditions of the
original Loan Agreement which provides for:
i) the repayment of the loan when, in the opinion of the Directors, the
Company has sufficient surplus funds available and
ii) a Deed of Charge giving HGA a fixed and floating charge over the
assets of the Company.
As part of the Option Agreement, HFA and ISAS exercised 263,233 options expiring
on June 30, 1999.
SCHEMES OF ARRANGEMENT
In September 1999 the Company sought approval from The Supreme Court of New
South Wales to hold a stockholder and optionholder meeting to consider and
approve schemes of arrangement to restructure the Company. Under the schemes,
stockholders and optionholders would exchange their securities and entitlements
in a newly formed Delaware registered Company (NovaTec Inc.) which would seek
listing on the ASX. As part of the schemes the Company completed a one-for-ten
reverse share and option split. The schemes were approved at Court ordered
meetings of stockholders and optionholders held on November 3, 1999 and
implemented on November 22, 1999 when trading in CAT shares ceased and commenced
the trading in Catuity Inc. (formerly NovaTec Inc.) shares on November 23, 1999.
Implementation of the Restructure has resulted in Catuity becoming the parent
company of the group acquiring all CAT shares on issue and issuing an equivalent
number of shares in Catuity. Options were treated in the same way and
optionholders received an equivalent number of options with the same terms and
conditions, in Catuity.
LOSS OF PAR VALUE
Due to changes in Australia's corporate tax law, effective July 1, 1998,
companies in Australia no longer have par values. Consequently, $1,279,258
previously included in
F-18
<PAGE> 85
"Additional Paid In Capital" and relating to share premiums was transferred to
"Issued Capital" on July 1, 1998.
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in dollars, except share and per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $ (3,516,840) $ (2,384,148) $ (6,210,084)
============ ============ ============
Weighted average shares 3,065,840 4,473,257 5,913,613
Effect of dilutive securities:
Employee stock options 276,998 -- --
------------ ------------ ------------
Dilutive potential common shares 3,342,838 4,473,257 5,913,613
------------ ------------ ------------
Net loss per share $ (1.15) $ (0.53) $ (1.05)
============ ============ ============
Net loss per share - assuming dilution $ (1.05) $ (0.53) $ (1.05)
============ ============ ============
</TABLE>
NOTE 9. SEGMENT INFORMATION
The Company operates in the computer technology industry. Its major operations
are based in Australia. In June 1999, the Company established operations in the
United States of America (USA). In 1999, 1998 and 1997 all of the Company's
revenues relate to the Australian operations. In 1999 revenues included $314,757
(26%) of export sales to the USA. In 1998 revenues included export sales of
$56,610 (8% of total sales) to New Zealand. No export sales were made in 1997.
In 1999, $462,044 of the operating loss of $6,169,404 is attributable to the
operations in the USA. The costs relating to the operations in the USA represent
direct costs of executives and consultants and their related costs and does not
include costs incurred by non resident personnel in the USA. In 1998, $343,726
of the operating loss of $2,207,758 was attributable to operations in Asia. The
Australian operations accounted for 100 percent of the operating loss in 1997.
All major assets of the Company were held in Australia in 1999, 1998 and 1997.
F-19
<PAGE> 86
NOTE 10. INCOME TAXES
There has been no provision for income taxes for any period as the Company has
incurred operating losses.
The provision for income tax on operating loss is reconciled to the reported
provision for income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1998 1999
----------- --------- -----------
<S> <C> <C> <C>
Net loss at statutory tax rate $(1,266,062) $(858,293) $(2,235,630)
Stock compensation 78,713 (3,106) 891,063
Abnormal item 174,156 -- 466,069
R&D grant 25% deduction (97,002) (56,805) (84,678)
Grant revenue -- (147,872) (206,108)
Over provision of losses -- 313,813 --
Effect of change in corporate tax rate
on loss and FITB not recognized -- -- 336,699
Non-deductible branch costs -- 101,907 --
Other 1,507 44 409
----------- --------- -----------
Valuation allowance $ 1,108,688 $ 650,312 $ 832,176
----------- --------- -----------
Provision for income tax -- -- --
---------- --------- -----------
</TABLE>
The statutory tax rate was 36% for the years 1997, 1998 and 1999. The statutory
tax rate will change to 34% effective July 1, 2000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry-forwards $ 4,452,486 $ 5,235,117
Provisions 93,933 143,478
----------- -----------
Total deferred tax assets 4,546,419 5,378,595
----------- -----------
Valuation allowance (4,546,419) (5,378,595)
----------- -----------
Total net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
F-20
<PAGE> 87
NOTE 10. INCOME TAXES (CONTINUED)
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance
As of December 31, 1999, the Company had operating loss carry-forwards of
$5,235,117. There can be no assurance that the Company will realize the benefit
of the net operating loss carryforwards.
The valuation allowance increased by $832,176 and $650,312 in 1999 and 1998,
respectively. Management has determined, based on the Company's history of prior
operating losses and its expectations for the future, that a full valuation
allowance for deferred tax assets should be provided.
Utilization of the net operating loss may be subject to an annual limitation due
to the ownership change limitations in accordance with Division 165 and Division
166 of the Australian Income Tax Assessment Act 1997. The limitation may result
in the expiration of net operating losses before utilization.
NOTE 11. PENSION PLANS
On behalf of its employees, the Company contributes to a defined contribution
plan on the basis of varying percentages of employees' salaries. The Company is
only obliged to make contributions while the members remain employees of the
Company. The Company contributed $85,421, $92,235, and $76,915 for the years
ended December 31, 1999, 1998 and 1997 respectively.
NOTE 12. RESTRICTED CASH
The Company is the Trustee of a bank account related to trials of its
multi-program software in the Transcard card system in Western Sydney. When
consumers using the system transfer funds to their cards, the funds are
deposited into this trust account. The funds are debited from the account
electronically and paid to merchants when transaction information relating to
card holder usage is downloaded from merchants through a central host processing
system. The Company is not entitled to the funds other than in specified
circumstances whereas cards are inactive or expired. Consequently, an amount
corresponding to the trust account balance is recorded
F-21
<PAGE> 88
as a current liability. The trust account had an ending balance of $72,164 in
1998 and $157,685 in 1999.
In addition, the Company had restricted cash of $20,369 and $0 as of December
31, 1999 and 1998, respectively, related to an amount held as security for an
operating lease.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION (IN THOUSANDS) PERIOD EXPENSES DEDUCTIONS(1) PERIOD
- -------------------------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful debts $0 $158 $0 $158
Year ended December 31, 1998
Allowance for doubtful debts $0 $ 0 $0 $ 0
Year ended December 31, 1997 $0 $ 0 $0 $ 0
</TABLE>
- ---------
(1) Write-offs of uncollectible amounts, net of recoveries.
F-22
<PAGE> 89
NOTE 13. SUBSEQUENT EVENTS
There have been no significant events since December 31, 1999.
F-23
<PAGE> 90
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1++ Implementation Agreement between Chip Application Technologies
Limited and NovaTec Inc.
3.1++ Certificate of Registration of Card Technologies Australia Limited
3.2++ Certificate of Registration on Change of Name from Card
Technologies Australia Limited to Chip Application Technologies
Limited
3.3++ Certificate of Incorporation of NovaTec Inc.
3.4++ Certificate of Amendment to the Certificate of Incorporation of
NovaTec Inc.
3.5++ Bylaws of NovaTec Inc.
10.1++ Put and Call Option Deed of A.S. Dawson in Respect of Shares of
Chip Application Technologies Limited
10.2++ Share Option Deed of A.S. Dawson in Respect of Shares of NovaTec
Inc.
10.3++ Employment Agreement of Michael V. Howe
10.4++ Executive Services Agreement of David L. Machattie Smith
10.5++ Deed of Employment of Benjamin Garton
10.6++ Employment Contract of Justin Wescombe and Employment Contract
Amendment
10.7++ Deed of Employment of John Weihen
10.8++ Services Agreement of Jonathan Adams
10.9++ Services Agreement of Carl H. Fisher
10.10++ Lease for premises located at 68-72 Wentworth Avenue Surry Hills,
New South Wales, Australia
10.11++ Lease for premises located at 2711 East Jefferson Avenue, Detroit,
Michigan
10.12* Research and Development Start Grant for Chip Application
Technologies Limited
10.13 Smart Loyalty Technical Work Group Agreement between Visa U.S.A.
and Chip Application Technologies Limited
10.14 Partner Program Loyalty Services Agreement between Visa
International Service Association and Chip Application
Technologies Limited
10.15* Software Remarketing Agreement between IBM and Chip Application
Technologies Limited
10.16* Marketing Support Plan between IBM and Chip Application
Technologies Limited
10.17++ Operation Reseller Agreement between Catuity Inc. and Data Pro
Accounting Software, Inc.
10.18++ Sun Microsystems Computer Company and Chip Application
Technologies Limited Joint Marketing Agreement
10.19++ Cooperative Agreement between Chip Application Technologies
Limited and Global Transaction Company
10.20++ Technology Partnership Agreement between Chip Application
Technologies Limited and Gemplus Technologies Asia Pte Ltd.
10.21++ Memorandum of Understanding between De La Rue Cartes et Systemes
and Chip Application Technologies Limited
10.22++ Loan Repayment and Option Agreement among Chip Application
Technologies Limited, Health Group Australia Pty Limited and
Industrial Superannuation Administration Services Limited
10.23++ Form of Indemnification Agreement
10.24++ Form of Stock Option Plan and Form of Stock Option Agreement under
Plan
27.1++ Financial Data Schedule
* Confidential treatment requested.
+ To be filed by amendment.
++ Previously filed.
<PAGE> 1
EXHIBIT 10.12
Project No: .... GRA01530..........
R&D START GRANT DEED
INDUSTRY
RESEARCH AND
DEVELOPMENT
BOARD PARTICULAR CONDITIONS
---------------------
PARTIES
THE BOARD INDUSTRY RESEARCH AND DEVELOPMENT BOARD on
behalf of the Commonwealth of Australia
- - postal address Mr A B Baker
Regional Director NSW
AusIndustry
GPO Box 9839
Sydney NSW 2001
- - street address Mr A B Baker
Regional Director NSW
AusIndustry
Level 17, MSB Tower
207 Kent Street
Sydney NSW 2000
THE GRANTEE Chip Application Technologies Limited
- - ACN ACN 057 883 333
- - postal address Level 4, Ballarat House
68 Wentworth Avenue
Surry Hills
NSW 2010
- - street address Level 4, Ballarat House
68 Wentworth Avenue
Surry Hills
NSW 2010
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<PAGE> 2
2
OPERATIVE PROVISIONS
This Grant is made under the R&D Start Program to the Grantee respect of the
Project described in schedule 1. The Grant is made on the terms and conditions
contained in this deed, which incorporates the GENERAL CONDITIONS applying to
R&D Start Program grants as at 1 September 1998, as modified by the Special
Conditions in schedule 6.
The Grantee acknowledges receipt of a copy of the General Conditions.
If there is an inconsistency between these Particular Conditions and the General
Conditions these Particular Conditions prevail to the extent of the
inconsistency.
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<PAGE> 3
3
ACCEPTANCE OF TERMS
EXECUTED AS A DEED
Date of deed: 17th February 2000
BOARD
SIGNED, SEALED AND
DELIVERED on behalf of the
COMMONWEALTH OF
AUSTRALIA By A B Baker a delegate
of the INDUSTRY RESEARCH AND
DEVELOPMENT BOARD in the
presence of:
/s/ M. CHENG
- -----------------------------------------
Signature of witness /s/ [SIGNATURE ILLEGIBLE]
M Cheng -----------------------------------
- -----------------------------------------
Name Of Witness (block letters)
Level 17, 207 Kew Street, Sydney, ???
- -----------------------------------------
Address of witness
Customer Service Manager
- -----------------------------------------
Occupation of witness
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4
GRANTEE
SIGNED, SEALED AND
DELIVERED by CHIP APPLICATION [COMMON SEAL LOGO]
TECHNOLOGIES LIMITED ACN 057 883
333 whose COMMON SEAL is
affixed in accordance with its Articles
of Association in the presence of
/s/ DAVID C. MAC SMITH /s/ JOHN WEIHEN
- ----------------------------------- -----------------------------------
Signature of director Signature of secretary
(director/secretary)
David C. Mac Smith John Weihen
- ----------------------------------- -----------------------------------
Name of director (block letters) Name of secretary (block letters)
58 View Street 17 Bayswater Road
[Illegible] Lindfield, NSW
- ----------------------------------- -----------------------------------
Address of director Address of director/secretary
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5
SCHEDULES
SCHEDULE 1 PROJECT SUMMARY
SCHEDULE 2 REFERENCE SCHEDULE
SCHEDULE 3 PROJECT BUDGET
SCHEDULE 4 FUNDING OF PROJECT AND PAYMENT DATES
SCHEDULE 5 REPORTING REQUIREMENTS
SCHEDULE 6 SPECIAL CONDITIONS
SCHEDULE 7 COMMERCIALISATION STRATEGY
SCHEDULE 8 REPAYMENT OF REPAYABLE CONTRIBUTION
UNDER START PREMIUM
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SCHEDULE 1 - PROJECT SUMMARY
1.1 PROJECT TITLE Internet Capable Multi Application Smartcard System
1.2 PROJECT REFERENCE NUMBER GRA 01530
1.3 PROJECT DURATION 18 months
Agreed Start Date 23 July 1999
Agreed Completion Date 31 December 2000
1.4 PROJECT DESCRIPTION
This project researches and develops systems for a multi application smartcard
scheme that operates in the internet and real world domains. It enables
cardholders to use the same smartcard on the Internet as they use in day to day
store transactions. Functions such as electronic purse, loyalty tickets,
membership and access are available seamlessly to the customer wherever they
are. Merchants can maximise their brand awareness and link their customers
whether they are on-line or in-store. This expands the merchant's marketing
possibilities and increases benefits to their customers.
1.5 COMPANY TURNOVER
- - Grantee and Related Bodies Corporate have a combined turnover of less
than $50 million in each Relevant Year--Core Start
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1.6 MAJOR ACTIVITIES
<TABLE>
<CAPTION>
Activity
Finish Eligible
Major Activity Start Date Date Expenditure $
-------------- ---------- ------ -------------
<S> <C> <C> <C>
1 Proof of concept model research [*] [*] [*]
2 System architecture design; [*] [*] [*]
3 Phase 1 Product Development, Integration & [*] [*] [*]
Testing
4 Phase 2 Product Development, Integration & [*] [*] [*]
Testing
5 In house trials [*] [*] [*]
6 Beta site trials [*] [*] [*]
Total [*]
</TABLE>
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confidential treatment filed separately with the Securities and Exchange
Commission.
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8
1.7 MAJOR MILESTONES
<TABLE>
<CAPTION>
Milestone
Eligible
Achievement Cumulative
Major Milestone Date Expenditure $
--------------- ----------- -------------
<S> <C> <C>
1 Demonstrable Proof of Concept model [*] [*]
2 System design documentation complete: [*] [*]
- functional specification
- high level design documentation
3 Phase 1 Products Development complete: [*] [*]
- Java Card applets and card creation,
- POS terminal integration,
- Web enquiries for members and
merchants,
- Web transactions for members.
4 Phase 2 Products Development complete: [*] [*]
- Merchant maintenance via web
- Online customer database product,
- Online member POS transactions,
- Online member internet enquiries and
transactions.
5 In house Trials complete: [*] [*]
- Phase 1 and phase 2 demonstrations plus
evaluation reports
6 Beta site Trials complete: [*] [*]
- Phase 1 and phase 2 installations
complete plus evaluation reports
</TABLE>
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confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 9
9
1.8 MAJOR ACTIVITIES
1. PROOF OF CONCEPT MODEL
The major activities for this part of the project include;
- - Development of a Functional Requirement Specification detailing the
required functionality of the final system.
- - Research of the likely approaches to implement requirements,
- - Develop functional prototypes to demonstration standard for the Web
Enquiries, Web transactions and PDA (Personal Digital Assistants)
products.
- - Evaluate the effectiveness and update Functional Requirements as needed.
- - Demonstrate prototypes to key potential clients and enhance
specifications according to market feedback.
2. SYSTEM ARCHITECTURE DESIGN
The prime activities here are to;
- - Refine the Functional Requirements Specification so it can be used as the
source document for project plans and test plans.
- - Design the system architecture to ensure interoperability between products
and adequate security.
- - Generate high level designs of the software for each product.
PHASE 1 PRODUCT DEVELOPMENT, INTEGRATION & TEST
Phase 1 of the Product Development activities includes software and system
development, integration and testing of the following products;
- - Java Card applets and card creation process.
- - Point of Sale terminal integration.
- - Web enquiries for members and merchants.
- - Web transactions for members.
PHASE 2 PRODUCT DEVELOPMENT, INTEGRATION & TEST
Phase 2 of the Product Development activities includes software and system
development, integration and testing of the following products;
- - Merchant maintenance of their application programs via the web.
- - Online customer database.
- - Online member point of sale transactions.
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10
- - Online member internet enquiries and transactions.
IN HOUSE TRIALS
The activities for in house trials include;
- - Installation of phase 1 products in house at arms length from the
development team.
- - Testing the individual products by setting up a simulated environment and
exercising the product with life like operational activity.
BETA TRIALS
Beta trials of the various products include the following activities;
- - Installation of the products at a friendly Beta site.
- - Operation of the products by people not involved in the development of
the products.
- - Evaluation of the products to assess usability and functional
completeness.
1.9 INELIGIBLE ASSOCIATED WORK
The majority of ineligible work is associated with bringing the products to the
marketplace. This includes;
- - Marketing documentation, sales force training, trade show presentations
and sales campaigns.
- - Enhancements to the existing system patents and their registration in
other countries,
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<PAGE> 11
11
Schedule 2 - Reference Schedule
2.1 TYPE OF GRANT
Core Start
2.2 GRANT
A maximum amount of $860,150
2.3 GRANT PERCENTAGE
50%
2.4 REPAYABLE CONTRIBUTION (IF ANY).
0 %
2.5 INTEREST RATE
7.7 % (FIXED RATE), but for any period that the bank variable small business
loan rate set out in Table F4 (Indicator Lending Rates) published in the Reserve
Bank Bulletin (FLOATING RATE) is less than the Fixed Rate, the Interest Rate
will be the Floating Rate from time to time during that period.
If the Floating Rate index referred to above is no longer published, the
Floating Rate will reflect another index determined by the Commonwealth.
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12
2.6 ADDRESSES FOR SERVICE OF NOTICES
COMMONWEALTH
Regional Director NSW
Ausindustry
GPO Box 9839
Sydney NSW 2001
Facsimile: (02) 9252 3652
GRANTEE
Project Manager: Mark Hallinan
Address: Level 4 Ballarat House
68 Wentworth Avenue
Surry Hills
NSW 2010
Facsimile: 02 9281 1242
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SCHEDULE 3 - PROJECT BUDGET
3. 1 SUMMARY OF PROJECT ELIGIBLE EXPENDITURE
<TABLE>
<CAPTION>
ESTIMATED EXPENDITURE
$
-------------------------- TOTAL
HEAD OF EXPENDITURE 99-00 00-01 $
------------------- --------- ------- ----------
<S> <C> <C> <C>
R&D Salary Expenditure [*] [*] [*]
Contract Expenditure [*] [*] [*]
Plant Expenditure [*] [*] [*]
Prototype Expenditure [*] [*] [*]
Other Expenditure [*] [*] [*]
PROJECT ELIGIBLE EXPENDITURE [*] [*] [*]
</TABLE>
3. 2 GLOBAL BUDGET
<TABLE>
<CAPTION>
ESTIMATED EXPENDITURE
$
-------------------------- TOTAL
99-00 00-01 $
--------- ------- ----------
<S> <C> <C> <C>
Project Eligible Expenditure [*] [*] [*]
Project Ineligible Expenditure [*] [*] [*]
TOTAL PROJECT COST [*] [*] [*]
</TABLE>
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 14
14
SCHEDULE 4 - FUNDING OF PROJECT AND PAYMENT DATES
4. 1 PROJECT FUNDING
<TABLE>
<CAPTION>
CONTRIBUTION
SOURCE 99-00 00-01 TOTAL
------------ --------- ------- ---------
<S> <C> <C> <C>
R&D Start Grant [*] [*] [*]
Grantee [*] [*] [*]
TOTAL PROJECT EXPENDITURE [*] [*] [*]
</TABLE>
Note: The amount to be paid by the Commonwealth to the Grantee under this
deed will not exceed the Grant Percentage of Eligible Expenditure
incurred on the Project. At any stage of the Project the Grantee must
contribute towards the Eligible Expenditure an amount which equals or
exceeds the Grant Percentage and must pay for 100% of the ineligible
expenditure of the Project.
4.2 INITIAL GRANT PAYMENT
4.2.1 The initial Grant payment will be the total of:
(a) the Grant Percentage of Eligible Expenditure incurred between the
date of the Application and the last day of the quarter
immediately before the quarter in which this deed is executed (if
any); and
(b) the Grant Percentage of Eligible Expenditure for the quarter in
which this deed is executed set out in the Budget approved under
clause 4.15.
4.2.2 The Commonwealth must make the initial Grant payment on the later of:
(a) 30 days of the date of this deed; and
(b) if the initial Grant payment includes a component under item 4.2
1(a), the provision of a Project Progress Report which is
accepted as satisfactory by the Commonwealth and, where necessary,
an Audited Acquittal Report.
4.2.3 The Commonwealth may pay the component of the initial Grant payment under
item 4.2. 1(a) before the time set out in item 4.2.2.
4.3 SUBSEQUENT PAYMENTS
FOR GRANTEES WITH A QUARTERLY REPORTING SCHEDULE
The amount of each subsequent payment will be calculated in accordance with the
following:
Quarterly payment = Total Eligible Expenditure (cumulative) to the end
of the quarter which has just been completed,
multiplied by the Grant Percentage
Minus Total amount of Grant paid to date
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<PAGE> 15
15
Plus Quarterly Budget for the quarter in which the
payment is intended to be made, multiplied by the
Grant Percentage.
and reduced if necessary to allow for withholding of the Retention Amount given
in item 4.5 of schedule 4.
4.4 RETENTION PERCENTAGE
5% of the amount given in 2.2 of schedule 2.
4.5 RETENTION AMOUNT [*]
The total Retention Amount is withheld from the final payment(s) and the amount
will be paid to the Grantee upon satisfactory provision and acceptance of the
audited Final Financial Acquittal Report and the End of Project Report.
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confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 16
16
SCHEDULE 5 - REPORTING REQUIREMENTS (CLAUSES 4.8 AND 4.9)
5.1 QUARTERLY REPORTING SCHEDULE
<TABLE>
<CAPTION>
DUE REPORTS FOR PERIOD
- --- ------- ----------
<S> <C> <C>
[*] Project Progress Report [*]
[*] Project Progress Report [*]
[*] Draft budget by quarter [*]
(Clause 4.14)
[*] Project Progress Report [*]
[*] Audited Acquittal Report [*]
[*] Project Progress Report [*]
Within 6 weeks of End-of Project Report N/A
Agreed Completion Audited Final Financial
Date or termination Acquittal Report
date
</TABLE>
Note: The reporting schedules above represent the preference of the Board.
The guiding principle is that larger projects will report more
frequently. This also means that they will be paid more frequently
(that is, quarterly). During agreement-making, Grantees will indicate
their preferred reporting schedule and delete the one which is not
applicable. The Commonwealth reserves the right to require a
quarterly or half-yearly reporting REGIME from a Grantee.
5.2 REPORTS
PROJECT PROGRESS REPORT
The Project Progress Report is made up of:
1. The Technical Progress Report;
2. The Financial Acquittal Report; and
3. A report on Commercialisation Progress.
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<PAGE> 17
17
1. The Technical Progress Report must set out:
(a) progress of the Project (including milestones achieved, progress
on Project activities, the expected completion date, and expected
progress of the Project for the next reporting period); and
(b) any other matters required by the Commonwealth.
2. The financial Acquittal Report must set out:
(a) details:
(i) of Eligible Expenditure by the Grantee on the Project;
(ii) of other expenditure on the Project;
(iii) explaining any variation between Eligible Expenditure
incurred and budgeted Eligible Expenditure; and
(iv) of revised budgeted expenditure if the total Eligible
Expenditure is expected to change by 20% or more; and
(b) any other matters required by the Commonwealth.
3. The report on Commercialisation Progress must set out:
(a) progress achieved in the reporting period towards the
commercialisation of the Project with reference to the
commercialisation strategy in schedule 7 (if any);
(b) details of domestic and export sales relating directly to the
Project;
(c) any other matters required by the Commonwealth.
AUDITED ACQUITTAL REPORT
The Audited Acquittal Report means a Financial Acquittal Report which has been
audited in accordance with clause 4.10.
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18
SCHEDULE 6 - SPECIAL CONDITIONS
The is no condition specified by the Board at the time of approval
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<PAGE> 19
SCHEDULE 7 - COMMERCIALISATION STRATEGY (CLAUSE 6)
COMMERCIALISATION
Income generated by the comnmercialisation of this project will arise in two
ways The first is by the direct sale of software licences to use the products
and systems. The second is by way of revenue derived from Chip Application
Technologies (C.A.T.) operating the system and providing clients with bureau
services. Software licences for the products the system only extend a right to
use. They do not confer any rights to the Intellectual Property or the software
source code.
IMPLEMENTATION
As each of the products in this project reaches a commercial standard, it is
transferred to the sales and marketing teams who will use the technical
documentation and their own marketing material to present the products to
prospective customers. Many of these customers have already been approached and
have indeed contributed to the definition of the products.
Demonstration sites will be established in Australia and the US. These will be
used by the sales teams to demonstrate the complete feature set of the products
in a fully functional environment. C.A.T. will market the products in Australia
and New Zealand while Catuity Inc. will market them in North America. Catuity
Inc. is the US registered parent company of C.A.T.
Catuity Inc. will make use of the reseller network already established in the US
by C.A.T. This includes resellers such as IBM and associates such as Visa and
FDC.
Clients may wish to run the system themselves, in which case they would purchase
an operating software licence. Alternatively they may wish to have C.A.T. run
the system, in such cases they would purchase bureau services. In both
situations income is derived by charging clients based on the number of
cardholders or members and the volume of transactions run by the system. In
addition, there is a setup charge to cover installation at the client's site or
configuration bureau services.
The majority of clients are expected to use the products for the direct benefit
of their own customers. However, a small number may set themselves up as service
providers and run the system for other people's customers. Either way, the
commercialisation process is progressed and income is generated.
COMPLETION
The income derived from the commercialisation process continues for as long as
the clients are using the products. The licences are renewed annually with
provisions to adjust the agreements for fees and service charges. Further
commercial opportunities present themselves by way of system maintenance fees
and consulting charges. In time, the installed systems will be upgraded,
providing further income streams from business analysis and software
enhancements.
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INTELLECTUAL PROPERTY
Chip Application Technologies is the owner of the Intellectual Property for
these products and the underlying technology. Australian and New Zealand sales
are conducted directly by C.A.T. while Catuity Inc conducts North American and
European sales. An agreement exists between C.A.T. and Catuity Inc. allowing
Catuity to licence the products to its clients. There is no transfer of IP or
source code. These remain the property of C.A.T.
COMMERCIALISATION TIMETABLE
The first products of this project will begin commercialisation early in 2000.
As subsequent products are released from development, they also proceed into the
commercialisation phase. It is expected that each product will start
commercialisation within a matter of weeks of being released from development.
<TABLE>
<CAPTION>
PRODUCT SCHEDULED RELEASE FROM DEVELOPMENT
------- ----------------------------------
<S> <C>
Java Card applets and card creation [*]
POS terminal integration, [*]
Web enquiries for members and merchants, [*]
Web transactions for members. [*]
Merchant maintenance via web [*]
Online customer database product [*]
Online member POS transactions [*]
Online member internet enquiries and [*]
transactions.
</TABLE>
The generation of income from software licence sales is expected once
prospective clients have finalised their requirements and committed to the
product. This process is likely to take upwards of 6 months.
RISKS
A serious marketing risk was the barrier of, not invented here' being imposed by
the US marketplace. Marketing to the US through-Catuity Inc. and the US based
resellers, has now largely mitigated this problem.
Another potential risk to rapid market take-up centres on possible
customisations required to the products. These may come about as a requirement
to integrate the products with existing customer systems and processes.
Although standard interfaces have been incorporated into the products and sample
clients have been quizzed on their needs, the potential for customisations still
exists. Such enhancements could slow the commercialisation process for a
particular client, but probably not prevent sales.
There is always a risk that a competing product may overtake us in the
marketplace. This risk is best mitigated by being first to market with a good
product. Towards that end, the marketing strategy is to release individual
products, as they become available over a 12 month period, rather than waiting
to collect an entire suite and launching as a single entity.
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<PAGE> 21
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FAILURE
This project can be deemed a commercialisation failure if the combined income
from sales does not exceed development costs plus the marketing costs plus a
commercial return on investment.
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SCHEDULE 8 - REPAYMENT OF REPAYABLE CONTRIBUTION UNDER START PREMIUM (CLAUSE 13)
[ NOT-APPLICABLE ]
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Industry
Research and R&D START GRANT
Development
Board
GENERAL CONDITIONS
<TABLE>
<S> <C>
PROGRAM OBJECTIVES
PROJECT AND GRANT 2
OPERATIVE PROVISIONS: 2
1 Interpretation 2
2 Warranties 8
3 Payment of Grant 8
4 Conduct of Project 9
Permitted expenditure 9
Project performance 9
Variations 9
Reporting 10
Budget of expenditure 10
Bank account 11
Records to be kept 11
Inspection and audit 11
Other participants 12
5 Evaluation 12
6 Commercialisation 12
7 Other Financial Assistance 13
8 Acquittal of Grant 13
9 Termination 13
Limits on Liability 14
Termination by mutual deed 14
10 Notices 14
11 Assignment and Protection of Intellectual Property 15
12 Grantee's and Others Funding Contribution to the Project 15
13 Start Premium: Repayable Contribution 15
14 Acknowledgment and Public Statements 16
15 Waiver and Variation 16
16 Dispute Resolution 16
17 Governing law and jurisdiction 17
18 Term of Deed 17
19 Exercise of Discretions 17
20 GST 17
</TABLE>
<PAGE> 24
2
PROGRAM OBJECTIVES
The Commonwealth has established the R&D Start Program which aims to:
(a) increase the number of research and development projects having a
high commercial potential that are undertaken by companies;
(b) foster greater commercialisation of outcomes of those projects;
(c) increase the level of research and development activity that is
commercialised in Australia; and
(d) provide national benefits.
PROJECT AND GRANT
The Grantee proposes to undertake the Project. The Industry Research and
Development Board has awarded the Grant under the R&D Start Program for
the Project on the terms and conditions contained in this deed.
The Grant is made to the Grantee pursuant to the Industry Research and
Development Act 1986 (the Act), and the relevant Ministerial Directions
issued under sections 19 and 20 of the Act.
OPERATIVE PROVISIONS:
1 INTERPRETATION
1.1 Unless the contrary intention appears:
AGREED COMPLETION DATE means the agreed completion date set out in
item 1.3 of schedule 1.
APPLICATION means the application submitted by the Grantee (and, if
applicable, other persons) in respect of which the Grant was
awarded.
AUDITED ACQUITTAL REPORT means a Financial Acquittal Report which
has been audited in accordance with clause 4. 1 0.
BUDGET means the budget approved by the Commonwealth from time to
time under clause 4.15 and the budget set out in schedule 3.
CONTROL means control of a corporation through the possession
directly or indirectly of the power, whether or not having
statutory, legal or equitable rights, directly or indirectly to
control more than 50% of the membership of the board of directors of
the corporation or more than 50% of the voting shares (as defined in
the Corporations Law) of the corporation whether by means of trusts,
deeds, arrangements, understandings, practices, the ownership of any
interest in shares or stock of that corporation or otherwise.
CORE START means the program of financial assistance for research
and development projects of non-tax exempt companies with turnovers
of less than $50 million in each relevant year.
<PAGE> 25
3
DEAL WITH means:
(a) sell, transfer, declare a trust over or otherwise dispose or
procure or effect the disposal of, or in any way whatever deal
with, any legal or equitable interest in, or any right in respect
of, any subject matter; or
(b) effect a change in the beneficial interest or beneficial unit
holding under a trust the trustee of which has an estate or
interest in the subject matter.
ELIGIBLE EXPENDITURE has the meaning given in clause 4(l) of the R&D Start
Program Directions No. 1 of 1998 (DIRECTIONS), given under the Act, and
the relevant Industry Research and Development Board policies effective at
the date of this deed
ENCUMBRANCE means any Security Interest, notice under sections 218 or 255
of the Income Tax Assessment Act 1936 (or any corresponding section of the
Income Tax Assessment Act 1997) or under section 74 of the Sales Tax
Assessment Act 1992, profit a prendre, easements restrictive covenant,
equity, interest, garnishee order, writ of execution, right of set-off,
lease, licence to use or occupy, assignment of income or monetary claim,
and any deed to create any of them or allow them to exist.
END OF PROJECT REPORT means a report in the form and containing the
matters required by the Commonwealth.
EXIT SURVEY FORMS mean questionnaires sent to the Grantee at the end of
the Project to learn about its view of the quality of the services
rendered to it in respect of the Grant by officers of the Commonwealth
during the period of the Project.
FINANCIAL ACQUITTAL REPORT means a report in the form required by the
Commonwealth setting out:
(a) expenditure by the, Grantee on the Project;
(b) a tax invoice showing the GST payable on supplies to the
Commonwealth in connection with the project;
(c) details of input tax credits, if any, to which the Grantee is
entitled for creditable acquisitions made by the Grantee in
connection with supplies (or deemed supplies) to the Commonwealth in
connection with the Project;
(d) details of adjustment notes, if any, issued to the Grantee in
respect of creditable acquisitions made by the Grantee in connection
with supplies (or deemed supplies) to the Commonwealth in connection
with the Project;
(e) details of adjustment notes, if any, issued by the Grantee to the
Commonwealth in circumstances where the Grantee has previously been
issued with one or more adjustment notes in respect of creditable
acquisitions made by the Grantee in connection with supplies (or
deemed supplies) to the Commonwealth in connection with the Project;
and
<PAGE> 26
4
(f) any other maters required by the Commonwealth.
FINAL FINANCIAL ACQUITTAL REPORT means a Financial Acquittal Report
required at the end of the Project.
GRANT means the amount set out in item 2.2 of schedule 2, plus the GST, if
any, payable by the Grantee in respect of the supplies (or deemed
supplies) made by the Grantee to the Commonwealth in the course of
undertaking the project.
GRANT PERCENTAGE means the percentage of Eligible Expenditure to be paid
as a Grant, and:
(a) in the case of a Grant under Core Start, is an amount not exceeding
50% of Eligible Expenditure;
(b) in the case of a Grant under Start Plus, is an amount not exceeding
20% of the Eligible Expenditure;
(c) in the case of a Grant under Core Start and Start Premium is an
amount not exceeding 56.25% of the Eligible Expenditure;
(d) in the case of a Grant under Start Plus and Start Premium is an
amount not exceeding 56.25% of the Eligible Expenditure.
The Grant Percentage is set out in item 2.3 of schedule 2.
GST means any goods and services tax or similar value added tax imposed
pursuant to the A New Tax System (Goods and Services) Tax Act 1999
(Commonwealth) (as amended or regulations made under that Act on a supply
(or deemed supply) of any goods, property, service or any other thing.
INSOLVENCY EVENT means the happening of any of these events:
(a) an application is made to a court for an order or an order is
made that a body corporate be wound up; or
(b) an application is made to a court for an order appointing a
liquidator or provisional liquidator in respect of a body
corporate, or one of them is appointed, whether or not under
an order; or
(c) a receiver or receiver and manager is appointed in respect of
any part of the property of a body corporate; or
(d) except to reconstruct or amalgamate while solvent on terms not
prejudicial to its obligations and duties under this deed, a
body corporate enters into, or resolves to enter into, a
scheme of arrangement, deed of company arrangement or
composition with, or assignment for the benefit of, all or any
class of its creditors, or it proposes a reorganisation,
moratorium or other administration involving any of them; or
<PAGE> 27
5
(e) there occurs any event which the Commonwealth considers, with
the giving of notice, lapse of time or otherwise, would be or is
likely to become, a breach of this deed; or
(f) a body corporate resolves to wind itself up, or otherwise
dissolve itself, or gives notice of intention to do so, except to
reconstruct or amalgamate while solvent on terms not prejudicial
to its obligations and duties under this deed, or is otherwise
wound up or dissolved, or
(g) a body corporate is or states that it is insolvent; or
(h) as a result of the operation of section 459F(l) of the
Corporations Law, a body corporate is taken to have failed to
comply with a statutory demand; or
(i) a body corporate is, or makes a statement from which it may be
reasonably deduced that the body corporate is, the subject of an
event described in section 459C(2)(b) or section 585 of the
Corporations Law; or
(j) a body corporate takes any step to obtain protection or is
granted protection from its creditors, under any applicable
legislation or an administrator is appointed to a body corporate;
or
(k) a body corporate sells, or enters into negotiations to sell,
sufficient of its assets or resources so that, in the reasonable
opinion of the Commonwealth, it is unable to fulfill its
obligations under this deed; or
(1) a body corporate has a writ issued on any part of its assets
which would have, in the reasonable opinion of the Commonwealth,
a material adverse effect on its undertaking the Project and the
body corporate either does not contest the writ in good faith or
pay the creditor all amounts owing within 7 days; or
(m) anything analogous or having a substantially similar effect to
any of the events specified above happens under the law of any
applicable jurisdiction.
INTELLECTUAL PROPERTY means statutory and other proprietary rights in
respect of trade marks, patents, circuit layouts, copyrights, designs,
confidential information, Know-how, plant varieties and all other rights
with respect to intellectual property as defined in Article 2 of the July
1967 Convention Establishing the World Intellectual Property Organisation.
INTEREST RATE means the rate set out in item 2.5(a) of schedule 2.
KEY PROJECT PERSONNEL means a person or persons engaged for the Project
whose technical or scientific skills are crucial to the success of the
Project.
KNOW-HOW means expertise, knowledge, skills, techniques, methods,
procedures, ideas and concepts.
<PAGE> 28
6
PARTICULAR CONDITIONS means those conditions which are specific to the
Grant and the Project, and which are set out in the Schedules to this
deed.
POST-PROJECT REPORT FORMS mean forms to be completed by the Grantee to
evaluate whether the objectives of the R&D Start program are being met
through the Post-Project performance of grantees.
PRODUCT means any goods or services the production or supply of which
involves the exercise of Project Intellectual Property.
PROJECT PROGRESS REPORT means a report to be given under clause 4.8, which
includes information on financial acquittal, significant changes in
budgeted Eligible Expenditure, technical progress of the Project, and
progress on commercialisation.
PROJECT means the project described in schedule 1.
PROJECT INTELLECTUAL PROPERTY means all Intellectual Property created in
the course of the Project including any improvements, inventions or
discoveries (whether serendipitous or otherwise) arising out of the
conduct of the Project.
R&D START PROGRAM means the program of business research and development
assistance administered under that name by the Commonwealth, through the
Industry Research and Development Board.
RELATED BODY CORPORATE has the same meaning as in the Corporations Law.
RELEVANT YEAR for a Grantee means:
(a) if when the Application is made, the Grantee has been
incorporated for each of the three years preceding the Year of
income in which the Application was made -- each of those years;
and
(b) if when the Application is made, the Grantee has been
incorporated for fewer than three Years of income preceding the
Year of income in which the application was made -- each of those
years in which the Applicant was incorporated.
REPAYABLE CONTRIBUTION means that part of the Grant which is made under
Start Premium, which is:
(a) that percentage by which the Grant exceeds 50% of the Eligible
Expenditure on the Project, where provided in conjunction with
Core Start; or
(b) that percentage by which the Grant exceeds 20% of the Eligible
Expenditure on the Project, where provided in conjunction with
Start Plus.
The Repayable Contribution is set out in item 2.4 of schedule 2.
<PAGE> 29
7
SECURITY INTEREST means any bill of sale (as defined in any
statute), mortgage, charge, lien, pledge, hypothecation, title
retention arrangement, trust or power, as or in effect as
security for the payment of a monetary obligation or the
observance of any other obligation.
START PLUS means the program of financial assistance for
research and development projects of non-tax exempt companies
with turnover of $50 million or more in one, or more than one,
Relevant Year.
START PREMIUM means the program of financial assistance:
(a) for high merit research and development projects
in non tax-exempt companies; and
(b) that is repayable to the Commonwealth.
START PREMIUM INTEREST RATE means the rate set out in item
2.5(b) of schedule 2.
SUPPLY has the meaning given by the A New, Tax System (Goods
and Services) Tax Act 1999 (Cth).
TECHNICAL PROGRESS REPORT means a report required as part of
the Project Progress Report.
YEAR OF INCOME of a Grantee means the period of 12 months to
which the income tax returns of the company relate.
1.2 INCLUDING, INCLUDES and IN PARTICULAR do not limit the words which
precede them or to which they refer.
1.3 Unless the contrary intention appears:
(a) A PERSON includes a firm, a body corporate, an unincorporated
association or an authority;
(b) a deed, representation or warranty in favour of two or more
persons is for the benefit of them jointly and severally;
(c) a deed, representation or warranty on the part of two or more
persons binds them jointly and severally;
(d) the singular includes the plural and vice versa;
(e) a reference to a statute, ordinance, code or other law
includes regulations and other instruments made under it and
consolidations, amendments, re-enactments or replacements of
any of them; and
(f) a reference to a financial year means the period beginning on
1 July and ending on 30 June in the following calendar year.
1.4 Headings are inserted for convenience of reference only and are not
to be used in the interpretation of this deed.
1.5 A reference to a schedule is a reference to a schedule to the
Particular Conditions
<PAGE> 30
8
2 WARRANTIES
2.1 The Grantee warrants that:
(a) the Grantee is:
(i) incorporated under a law of the Commonwealth
or a State or Territory; and
(ii) not exempt from income tax;
(b) the Project consists of research and development
activities;
(c) it does not have any interests or obligations that
conflict with its interests or obligations under
this deed;
(d) all information it provides to the Commonwealth
from time to time (including in the Particular
Conditions and the Application) is true and
correct;
(e) the Grantee, has and will have, at all times, all
the necessary rights in respect of the
Intellectual Property and all technical
information, including but not limited to, all
designs, specifications, data, drawings, plans,
reports, models, prototypes and other things that
will be required to conduct the Project and to
commercialise the Project's outcome;
(f) the turnover of the Grantee and related companies
for each Relevant Year is as stated in item 1.5 of
schedule 1,
(g) is not aware of any circumstances, which
adversely affect or might adversely affect the
Grantee's ability to fulfil its obligations under
the deed.
and the Grantee warrants that the statements set out
above are true and correct at the date of this deed, and
each day during the term of this deed.
2,2 If the Grantee becomes aware of a breach of warranty,
the Grantee must immediately notify the Commonwealth of
that breach.
3 PAYMENT OF GRANT
3.1 Subject to parliamentary appropriation, the Grant is
payable in quarterly or six monthly instalments in
accordance with schedule 4.
3.2 The Commonwealth is not obliged to make a payment under
\ clause 3.1 if:
(a) any milestone set out in schedule 1 to be
completed before the date for payment has
not been achieved; or
(b) the total of all Grant payments made to date, and
the next scheduled Grant payment, would exceed the
Grant Percentage of:
(i) the Eligible Expenditure incurred to date;
and
(ii) the budgeted Eligible Expenditure for the
next 3 months,
<PAGE> 31
9
as determined by the Commonwealth; or
(c) the Grantee is otherwise in default under this
deed (including the failure to submit any report);
or
(d) the Commonwealth has issued a notice under clause
4.11 pending the submission of a satisfactory
report; or
(e) the Grantee has not provided a Budget which has
been approved by the Commonwealth under clause
4.15.
3.3 The Commonwealth's determination of the Eligible
Expenditure under clause 3.2(b) is final.
4 CONDUCT OF PROJECT
4.1 The Grantee agrees to undertake the Project:
(a) diligently;
(b) in accordance with schedule 1; and
(c) in accordance with any representations made in
the Application.
PERMITTED EXPENDITURE
4.2 The Grantee must use the Grant solely for the Project
and in accordance with the Budget.
PROJECT PERFORMANCE
4.3 The Grantee must notify the Commonwealth if a milestone
is not achieved by the date for completion set out in
schedule 1. The notice must set out:
(a) the reason for the delay;
(b) the Grantee's proposed action to address the
delay;
(c) the expected date for achievement of the
milestone;
(d) the expected effect the delay will have on
subsequent milestones;
(e) the expected effect the delay will have on the
Project and the Budget; and
(f) Key Project Personnel changes not reported under
4.3(a) of this clause.
4.4 Nothing in this clause 4 affects the Commonwealth's
rights under clause 3.2 or clause 9.
VARIATIONS
4.5 The Grantee may change or improve its work methods or
procedures to achieve efficiency, economy or improved
quality. However, the Grantee must not materially change
the Project as described in schedule 1 without the
Commonwealth's consent.
<PAGE> 32
10
4.6 The Grantee may, by notice to the Commonwealth, propose
a variation to the Project, the Budget, the date for
achievement of a milestone or completion of the Project
or any other variation to the milestones. Any
such variation must be either approved or rejected by
the Commonwealth within 60 days of receipt from the
Grantee.
4.7 The Grantee may reallocate expenditure between heads of
expenditure listed in the Budget without obtaining the
Commonwealth's consent if the total re-allocation from a
particular head of expenditure does not exceed 20% of
the total allocated to that particular head of
expenditure in the Budget. Where the proposed
re-allocation will exceed 20% the Grantee must seek
approval in writing from the Commonwealth. Any such
request must be either approved or rejected by the
Commonwealth within 60 days of receipt from the Grantee.
REPORTING
4.8 The Grantee must give the Commonwealth reports in
accordance with schedule 5 in the form required by the
Commonwealth from time to time.
4.9 Within 6 weeks of the Agreed Completion Date, or the
date of termination of this deed, whichever is the
earlier, the Grantee must give the Commonwealth an End
of Project Report and an audited Final Financial
Acquittal Report.
4.10 A report that is required by this clause 4 to be
audited must be audited by a member of the Institute of
Chartered Accountants in Australia, or the Society of
Certified Practising Accountants, who is not an
employee of the Grantee.
4.11 If in the Commonwealth's opinion either the form or the
content of a report is not adequate for the
Commonwealth's purposes, the Commonwealth may require
the Grantee to submit a revised report satisfactory to
the Commonwealth within 30 days of notice to the
Grantee.
4.12 Pursuant to clause 5, post-Project reporting is also
required of the Grantee.
BUDGET OF EXPENDITURE
4.13 The grantee must give the Commonwealth a draft budget:
(a) for the first financial year of the Project,
within 30 days of the date of this deed; and
(b) for every subsequent financial year of the
Project, on July 31 of that year.
4.14 The draft budget must:
(a) be in a form approved by the Commonwealth;
(b) set out expenditure incurred and proposed to be
incurred on the Project for the financial year to
which the draft budget relates; and
(c) divide expenditure into four quarters (July -
September, October - December, January - March,
April - June).
<PAGE> 33
11
4.15 The Commonwealth must approve or reject the draft
budget within 60 days of receipt from the Grantee.
4.16 The Grantee must give the Commonwealth an amended budget
within 30 days of receipt of notification from the
Commonwealth that the draft budget has been rejected.
The amended budget is subject to clause 4.15 and this
clause 4.16.
BANK ACCOUNT
4.17 The Grantee must establish a bank account for the sole
purpose of handling the Grant and interest on the Grant,
and disclose to the Commonwealth within 7 days of
request the location and details of that account.
4.18 The Grantee must pay all instalments of the Grant into
the account and not use the account for any purpose
other than the deposit and withdrawal of the Grant and
any interest.
RECORDS TO BE KEPT
4.19 The Grantee must keep to the Commonwealth's satisfaction
the records (including original receipts and invoices)
necessary to provide a complete, detailed record and
explanation of;
(a) expenditure by the Grantee on the Project;
(b) Project activities;
(c) the technical progress of the Project,
(d) any amounts of GST paid by the Grantee in respect
of any supply made to the Commonwealth under this
deed,
and any other records required by the Commonwealth.
4.20 Those records must be retained by the Grantee for the
term of the deed and at least 3 years following the
last payment of the Grant.
INSPECTION AND AUDIT
4.21 The Commonwealth or its auditor may at reasonable times
and on reasonable notice enter the Grantee's premises
and inspect the records kept by the Grantee, and
progress with the Project, to review the Grantee's
compliance with this deed.
4.22 The Grantee must give the Commonwealth and its auditor
all necessary facilities and assistance to enable them
to conduct an audit.
4.23 In conducting a review under clause 4.2 1, the
Commonwealth or its auditor may take copies of any
records (books, documents, invoices, receipts and any
other papers) that the Commonwealth or the auditor
considers relevant to the Project.
4.24 The Commonwealth must ensure that it and anyone
authorised by it under 4.21 uses confidential
information to which they are given access, only for
the purposes of this deed and does not disclose or use
it for any other purpose unless required by law.
<PAGE> 34
12
OTHER PARTICIPANTS
4.25 The Grantee must require any other participants engaged
for tile Project to keep like records to those required
to be maintained by the Grantee under clause 4.19 and
to give the Commonwealth similar access to their
premises and records pertaining to the Project.
5 EVALUATION
5.1 The Grantee must cooperate with any evaluation of the
R&D Start Program by the Commonwealth. The Grantee
must, if requested by the Commonwealth, provide
information and completed survey forms relating to:
(a) the Project; and
(b) the R&D Start Program,
during the Project and for five years after the Agreed
Completion Date.
5.2 The Grantee must comply with a request under clause 5.1
within 28 days of receiving the request.
6 COMMERCIALISATION
6.1 The Grantee must use its best endeavours to
commercialise the Project within a reasonable time of
completion of the Project.
6.2 The Grantee will be taken to have complied with its
obligations under clause 6.1 if it has complied with
schedule 7 and the conditions (if any) set out in
schedule 6 regarding the commercialisation obligations
of the Grantee.
6.3 If:
(a) at any time the Grantee decides that it will not
commercialise the Project; or
(b) the Grantee has not commercialized the Project
in accordance with schedule 7,
the Grantee must notify the Commonwealth and give the
Commonwealth details of the reasons for making that
decision or for not commercialising the Project, as the
case may be.
6.4 For the purposes of this deed, "commercialise the
Project" means to:
(a) manufacture, sell, or hire a product; or
(b) provide a service; or
(c) exploit a process; or
(d) license a third party as specified in schedule 7
to do any of paragraph (a), (b) or (c); or
<PAGE> 35
13
(e) otherwise exploit the Project,
through a direct or an indirect application of the
Project Intellectual Property to obtain a commercial
return. Unless specified in schedule 7, to Deal With the
Project Intellectual Property under this deed shall not
be accepted as a means to "commercialise the Project".
6.5 If the Commonwealth receives a notice under clause 6.3,
or if the Grantee has not commercialised the Project to
the Commonwealth's satisfaction within the time referred
to in schedule 7, the Commonwealth may by notice to the
Grantee require the Grantee to repay some or all of the
Grant paid to the Grantee, together with interest at the
Interest Rate. Interest is calculated on daily rests
from the date of payment by the Commonwealth of an
amount under clause 3.1 to the date of repayment by the
Grantee,
6.6 If the Commonwealth does not give the Grantee a notice
under clause 6.5 within 3 months of receiving the notice
under clause 6.3, it will be taken to have accepted that
the Grantee has complied with clause 6.1.
7 OTHER FINANCIAL ASSISTANCE
7.1 The Grantee must give the Commonwealth details of any
financial assistance for the Project it receives from
another Commonwealth, State or Territory government
source or agency after the date of this deed. The
Commonwealth may reduce the size of the Grant after
taking into account the other government financial
assistance.
8 ACQUITTAL OF GRANT
8.1 If at any time the amount paid to the Grantee under this
deed exceeds the Grant (as initially determined or
varied), or the Grant Percentage of the Eligible
Expenditure incurred to date, the Commonwealth may by
notice to the Grantee require the Grantee to repay the
amount of the excess to the Commonwealth,
8.2 If the Grantee expends the Grant other than in
accordance with this deed the Commonwealth may by
notice require the Grantee to repay the Grant or so much
of the Grant as the Commonwealth determines.
8.3 If the Commonwealth gives the Grantee a notice under
clause 8.1 or 8.2, the Grantee must pay the
Commonwealth the excess within 28 days of receipt of the
notice,
9 TERMINATION
9.1 Subject to clause 9.3 the Commonwealth may terminate
this deed by notice to the Grantee if:
(a) the Grantee is in breach of this deed, that breach
is capable of being remedied and the Grantee fails
to remedy that breach within 21 days of receipt of
a notice from the Commonwealth requiring it to do
so (or within any longer period specified in the
notice); or
(b) the Grantee is otherwise in breach of this deed;
or
<PAGE> 36
14
(c) tile Grantee is in breach of a warranty set out in
this deed; or
(d) an Insolvency Event occurs in respect of the
Grantee.
9.2 On termination of this deed:
(a) the Commonwealth's obligation to pay any amount
of the Grant that is unpaid as at the date of
termination ceases;
(b) the Grantee must give the Commonwealth:
(i) a Financial Acquittal Report as at the date
of termination; and
(ii) a report on the Project and its progress,
in a form satisfactory to the Commonwealth,
(c) the Commonwealth may by notice to the Grantee
require the Grantee to repay some or all of the
Grant paid to the Grantee, together with interest
at the Interest Rate; and
(d) interest payable under clause 9.2(c) is
calculated on daily rests from the date of
payment by the Commonwealth of an amount under
clause 3.1 to the date of repayment by the
Grantee.
LIMITS ON LIABILITY
9.3 The Commonwealth may not take action under clause 9 for
a breach of this deed due to a cause or causes beyond
the Grantee's reasonable control which does not continue
for more than 12 weeks in the aggregate.
TERMINATION BY MUTUAL DEED
9.4 This deed may be terminated at any time by the mutual
written deed of the parties.
10 NOTICES
10.1 A notice, approval, consent or other communication in
connection with this deed must be:
(a) in writing; and
(b) left at the address of the addressee, or sent by
prepaid ordinary post (airmail if posted to or from
a place outside Australia) to the address of the
addressee or sent by facsimile to the facsimile
number of the addressee (or if the addressee
notifies another address or facsimile number then
to that address or facsimile number).
The address and facsimile number of each party is set
out in item 2.6 of schedule 2.
10.2 A notice, approval, consent or other communication takes
effect from the time it is received unless a later time
is specified in it.
10.3 A letter or facsimile is taken to be received:
<PAGE> 37
15
(a) in the case of a posted letter, on the third
(seventh, if posted to or from a place outside
Australia) day after posting, and
(b) in the case of facsimile, on production of a
transmission report by the machine from which the
facsimile was sent which indicates that the
facsimile was sent in its entirety to the
facsimile number of the recipient.
11 ASSIGNMENT AND PROTECTION OF INTELLECTUAL PROPERTY
11.1 The Grantee must not Deal With, assign, grant or create
any Encumbrance over:
(a) its rights under this deed; or
(b) its Interest in any Project Intellectual Property,
other than in accordance with any special conditions set
out in schedule 6, or the commercialisation strategy set
out in schedule 7, without the prior written consent of
the Commonwealth.
11.2 A change in Control of the Grantee is taken to be
Dealing With the Grantee's rights under this deed.
11.3 If a change in Control of the Grantee occurs and the
Commonwealth reasonably considers that the change in
Control adversely affects or may adversely affect the
objectives from time to time of the R&D Start Program,
the Board may require the Grantee to repay the Grant to
the Commonwealth together with interest at the Interest
Rate. Interest payable under this clause 11.3 is
calculated on daily rests from the date of payment by
the Commonwealth of an amount under clause 3.1 to the
date of repayment by the Grantee.
11.4 The Commonwealth may impose conditions in giving its
consent under clause 11.1. A breach of those conditions
is a breach of this deed.
11.5 Subject to this deed, the Grantee must take all
reasonable steps to protect the Project Intellectual
Property and must not do anything to diminish or destroy
its commercial value without the prior written consent
of the Commonwealth.
12 GRANTEE'S AND OTHERS' FUNDING CONTRIBUTION TO THE PROJECT
12.1 The Grantee and the Contributors must spend money on the
Project in accordance with item 4.1 of schedule 4.
12.2 The Grantee must notify the Commonwealth in the next
Progress Report if the Grantee or any of the
Contributors fails to comply with clause 12.1.
13 START PREMIUM: REPAYABLE CONTRIBUTION
13.1 The Grantee must repay the Repayable Contribution
together with interest at the Start Premium Interest
Rate to the Commonwealth in accordance with schedule 8.
<PAGE> 38
16
14 ACKNOWLEDGMENT AND PUBLIC STATEMENTS
14.1 The Grantee must acknowledge the financial assistance
received from the Commonwealth under the R&D Start
Program in any public statements about the Project or
any products, processes or inventions developed as a
result of it,
14.2 The Commonwealth may publicise the awarding of the
Grant.
14.3 The Commonwealth may include in press releases and
general announcements about the Grant and in its annual
report, the following information:
(a) the name of the Grantee,
(b) the amount of the Grant; and
(c) the title and a brief description of the Project.
14.4 The provisions of this clause continue for a period of 5
years after payment of the last instalment of the Grant.
15 WAIVER AND VARIATION
15.1 A provision of, or a right created under, this deed may
not be:
(a) waived except in writing signed by the party
granting the waiver; or
(b) varied except in writing signed by the parties.
16 DISPUTE RESOLUTION
16.1. A party who gives another party notice that a dispute
has arisen under this deed must include in that notice
the name of a representative with authority to negotiate
the dispute on the first party's behalf
16.2 A party who receives a notice under clause 16.1 must
promptly, and in any case within 14 days of receipt of
the notice, notify the first party of a representative
with authority to negotiate the dispute on the other
party's behalf.
16.3 The representatives must seek to resolve the dispute
as soon as possible.
16.4 If the dispute is not resolved within 30 days of the
notice referred to in clause 16.2 (or within such
further period as the parties agree), the
representatives must seek to agree on a process for
resolving the dispute through a means other than
litigation or arbitration (such as further
negotiations, mediation, conciliation, independent
expert resolution or mini-trial).
16.5 If the representatives are not able to agree on such a
process within a further 14 days (or within such
further period as the representatives agree), if the
process agreed upon fails to resolve the dispute, then
either party may take such action as it sees fit with
respect to the dispute without further reference to
this clause.
<PAGE> 39
17
16.6 This clause 16 does not prevent a party from taking
legal action if it considers not to do so would
prejudice its interests.
17 GOVERNING LAW AND JURISDICTION
17.1 This deed and the transactions contemplated by this deed
are governed by the law in force in the Australian
Capital Territory.
17.2 Each party irrevocably and unconditionally submits to
the non-exclusive jurisdiction of the courts of the
Australian Capital Territory and courts of appeal from
them for determining any dispute concerning this deed or
the transactions contemplated by this deed. Each party
waives any right it has to object to an action being
brought in those courts, including claiming that the
action has been brought in an inconvenient forum or that
those courts do not have jurisdiction.
18 TERM OF DEED
Obligations under this deed, unless otherwise stated,
terminate ten years after the day this deed is made.
19 EXERCISE OF DISCRETIONS
The Commonwealth must act fairly, reasonably and in good faith
in exercising its discretions, making decisions and generally
in all dealings with the Grantee under this Deed.
20 GOODS AND SERVICES TAX
20.1 Any amount referred to in this deed is exclusive of GST
unless it is expressly included.
20.2 Subject to subclause 20.3, if GST is imposed on a
supply (or deemed supply) of any goods, property,
service or any other thing made under or in connection
with this deed, then the consideration for that supply
(or deemed supply) is increased by an amount equal to
the amount which would otherwise have been payable
multiplied by the rate at which GST is imposed in
respect of that supply (or deemed supply), having
regard to input tax credits and adjustments, if any,
applicable to creditable acquisitions made by the
Grantee in relation to that supply (or deemed supply).
The increased amount will be payable in the same manner
and at the same times as the amount which would
otherwise have been payable.
20.3 Tile party making the supply (or deemed supply) must
provide to the recipient of that supply (or deemed
supply) from time to time over the course of the Project
GST tax invoices and, if applicable, adjustments notes
as required by the A New, Tax System (Goods and
Services) Tax Act 1999 (Cth).
20.4 If, due to the acquisition by the Grantee of an input
tax credit, or the issue to the Grantee of an
adjustment note, in respect of a creditable acquisition
made by the Grantee in relation to a supply (or deemed
supply) or for any other reason, the additional amount
of GST paid by the Commonwealth to the Grantee exceeds
the amount of GST payable in respect of the relevant
<PAGE> 40
18
supply (or deemed supply), the Grantee must repay the
excess amount to the Commonwealth and an off-setting
adjustment will be made at the time the next instalment
of the Grant is paid.
<PAGE> 41
Chip Application Technologies Ltd Costcheck Summary
<TABLE>
<CAPTION>
START GRANT - SUMMARY OF COST ESTIMATES
<S> <C> <C>
COMPANY: Chip Application Technologies Limited
PROJECT TITLE: Internet Capable Multi Application Smartcard System
PROJECT DURATION: 23.7, 1999 - 31.12.2000
- -------------------------------------------------------------------------------------------------------------
ASSESSED ESTIMATE OF EXPENDITURE
----------------------------------------------------------------
ITEM Claimed DISTRIBUTION BY FINANCIAL YEAR ENDING 30TH JUNE
Estimate of ----------------------------------------------------------------
Expenditure 1999-00 2000-01 NOTE TOTAL
---------- ---------- -------- ---- -----
Salary Expenditure [*] [*] [*] (1) [*]
Contract Expenditure [*] [*] [*] [*]
Net Plant Expenditure [*] [*] [*] (2) [*]
Net Prototype Expenditure [*] [*] [*] (3) [*]
Other Expenditure [*] [*] [*] (4) [*]
Total Project Expenditure [*] [*] [*] [*]
Grant authorised @ 50% [*] [*] [*] [*]
</TABLE>
Reasons for adjustments to claimed estimates of expenditure
Note (1)-(4) - Please see attached cost check details
Page 1
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 42
Chip Application Technologies Ltd Costcheck Detail
START GRANT - COST CHECK
Company: Chip Application Technologies Limited
Project: Internet Capable Multi Application Smartcard System
Project Duration: 23.7.1999 - 31.12.2000
Note (1) - R&D Salary Expenditure
<TABLE>
<CAPTION>
Time on proj. Time on proj.
rate 99-00 [%] 00-01 [%]
[$/hour] starts 7.99 ends 30.12.00 1999-00 2000-01 Total
-------- ----------- ------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
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[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*]
Salary on costs at [*] [*] [*] [*]
Admin Support Costs at [*] [*] [*] [*]
Total Salary Expenditure [*] [*] [*]
Rounded [*] [*] [*]
</TABLE>
(i) - Salary Expenditure is payable only on reconcilable salary
records. Individual employee time sheets, detailing task numbers,
milestone numbers, time spent and supervisor authorisations must be kept
by Chip Application Technologies. All source documents including pay
records, time sheets, master task lists, evidence of payments and group
certificates should be made available at the request of the Board's
Assessors on cost review visits.
Salary expenditure will be paid on actual time worked on the project
only, as all holiday, sick leaves are allowed through the on cost and
admin support costs
Increased in salary expenditure due to firming up of estimates
Page 1 of 3
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 43
Chip Applicaon Technologies Ltd Costcheck Detail
Note (2) - R&D Contract Expenditure
<TABLE>
<CAPTION>
1999-00 2000-01 Total
------ ------- ------
<S> <C> <C> <C>
[*] [*] [*] [*]
[*]
------ ----- ------
Total Contract Expenditure [*] [*] [*]
Rounded [*] [*] [*]
====== ===== ======
</TABLE>
Note (2) - R&D Plant Expenditure
<TABLE>
<CAPTION>
1999-00 2000-01 Total
------ ------- ------
<S> <C> <C> <C> <C> <C>
Date
Hardware purchased cost depn p.a.
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*]
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
[*]
[*] [*] [*] [*]
[*] [*] [*] [*]
Total Plant Expenditure [*] [*] [*]
------ ----- ------
Rounded [*] [*] [*]
====== ===== ======
</TABLE>
Reduction in expenditure due to firming up of estimates
Note (3) - Prototype Expenditure
<TABLE>
<CAPTION>
1999-00 2000-01 Total
------ ------- ------
<S> <C> <C> <C>
[*]
[*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*]
Total Prototype Expenditure [*] [*] [*]
----- ----- -----
Rounded [*] [*] [*]
===== ===== =====
</TABLE>
Reduction in expenditure due to firming up of estimates
Note (4) - Other Expenditure
<TABLE>
<CAPTION>
1999-00 2000-01 Total
------- ------- ------
<S> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*]
------ ------ ------
Total other Expenditure (ii) [*] [*] [*]
Rounded [*] [*] [*]
====== ====== ======
</TABLE>
(ii) - Chip Application Technologies Ltd is required to keep all source
documents including air ticket vouchers, itineraries, diaries, invoices,
receipts and correspondence regarding the purpose of travel. These
documents should be made available and accessible to the Board's
Assessors.
Reduction in expenditure due to reduction in audit certificate fees, travel
expenses and beta site testing as well as patent searches being disallowed.
page 2 of 3
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 44
Chip Application Technologies Ltd Costcheck Detail
SUMMARY OF EXPENDITURES:
<TABLE>
<CAPTION>
1999-00 2000-01 Total
--------- ------- --------
<S> <C> <C> <C>
Salary Expenditure [*] [*] [*]
Contact Expenditure [*] [*] [*]
Plant Expenditure [*] [*] [*]
Prototype Expenditure [*] [*] [*]
Other Expenditure [*] [*] [*]
--------- ------- ---------
[*] [*] [*]
========= ======= =========
[*] [*] [*]
</TABLE>
Page 3 of 3
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 10.13
VISA U.S.A. - VISA SMART LOYALTY
TECHNICAL WORK GROUP AGREEMENT
This Agreement is entered into this 26th day of August, 1999, by and between
Visa International Service Association, a Delaware corporation, Visa U.S.A., a
Delaware corporation (together, "Visa") and Chip Application Technologies,
Inc., an Australian corporation (the "Work Group Participant").
A. Visa desires to develop certain documentation relating to the integration of
Visa Payment and Loyalty (Documentation). The scope of this documentation may
be modified based on input from the Work Group Participant and may include some
or all of the following components that address the acceptance, interaction and
performance of payment and loyalty; guidelines, best practices, transaction
flows and interaction between loyalty and payment application. Specific Visa
initiatives that may be reviewed and/or addressed by the Work Group include:
Integrated Payment/Loyalty flows, Point of Sale (POS) Performance,
Multi-Application Personalization, Terminal Application Architecture, EMV/VIS
Modifications, Multi-Application Card Management, Payment/Loyalty
Card/Terminal Testing, and Consumer Interface Considerations. Other
initiatives, proposed by Visa or Work Group Participants, will also be
considered and prioritized by the Work Group.
B. Visa desires to benefit from the industry's experience and efforts regarding
chip cards and loyalty. Visa desires that the Work Group Participant benefit
from Visa's experience and efforts regarding chip cards and payment. Visa
desires to create a group of selected participants (the "Work Group") to share
advice, comments, insights, suggestions and work assignments regarding the
development and evolution of the Documentation and the resolution of agreed
upon related technology and industry issues, all in accordance with applicable
laws, rules and regulations, including those relating to antitrust and export,
Work Group Participant and all others agreeing to participate in the Work Group,
including Visa, are referred to collectively as "Participants."
C. Visa and the Work Group Participants will benefit from their participation
in the Work Group by having a forum in which to provide input and comment on
the Documentation, help to shape its content, address issues that currently
retard the acceptance of smart cards and obtain recognition for their
involvement in helping to resolve key market issues.
D. All Participants will sign an agreement similar in form and content to this
Agreement, granting the same rights and licenses as described herein, and thus
enabling them to participate in the Work Group.
In consideration of the foregoing, Visa and the Work Group Participant agree as
follows:
1. VISA AND WORK GROUP PARTICIPANT RESOURCE COMMITMENTS
Work Group Participant, at their choice, shall provide a minimum of 11
representative and a maximum of 2 representatives to the Work Group to
participate as described in the SOW (as defined below).
Visa will supply a minimum of 1 representative and utilize additional Visa
resources as Visa deems necessary.
Assigned Work Group Participant representatives will each be available to work
on Work Group assignments and attend meetings at least two, 8 hour, work days a
month and no more than five, 8 hour, work days a month. (This time would not
include time spent by other individuals in the Work Group Participant's
organization who might be consulted by the representative during the execution
of Work Group tasks). Meetings will be held approximately once a month and will
be scheduled on not less than thirty (30) days written notice. Meetings will be
held at a location reasonably convenient to all Participants.
<PAGE> 2
2. WORK GROUP MEETINGS
During the Term of this Agreement, Visa intends to hold Work Group meetings. In
some cases, all Participants will be invited to join a Work Group meeting, and
in other cases, Visa may establish a subset of Participants to comment on
specific aspects of the Documentation or the resolution of agreed upon related
technology and industry issues. Meetings will be called by Visa from time to
time to provide Visa with industry feedback regarding the Documentation and
related payment and loyalty technologies and issues. Meetings may be held
in person, via telephone, or via video conference.
Visa U.S.A. will host a Work Group kick-off meeting. At this meeting Work Group
protocol, roles and expectations will be communicated, initiatives proposed and
presented by Visa, additional initiatives/suggestions proposed by Work Group
Participants, and priorities established.
3. CONTROL OVER SPECS
Visa shall retain sole discretion as to the content of the Documentation,
including whether to incorporate any comments, technology or suggestions by the
Participants into the Documentation.
4. CONFIDENTIALITY
Confidential information disclosed by Visa or Work Group Participants, both
verbal and written, during Work Group meetings will be disclosed and treated in
accordance with the terms and conditions of the Confidentiality Agreement
executed between Visa and Work Group Participant as of September 28, 1998 (CDA).
Prior to publication, all pre-published Work Group materials and the state of
such Work Group materials must be protected in accordance with the terms of the
CDA. However, upon publication of materials, by or on behalf of the Work Group,
Work Group Participant may openly disclose information contained in the
published materials.
The CDA shall survive the termination of this Agreement.
5. INTELLECTUAL PROPERTY LICENSE
The specific responsibilities of Work Group Participant and Visa will be those
specified in the statement of work attached hereto ("SOW"). Work Group
Participant will not perform any activities unless specifically described in the
SOW.
"Materials" shall mean literary works or other works of authorship, which are
created by Visa or any other Participant under the SOW, such as programs,
program listings, programming tools, documentation, reports, and drawings.
"Inventions" shall mean any idea, concept, know-how, or technique that Visa or
any other Participant first conceives or reduces to practice during the term of
this Agreement and while in performance of its responsibilities under the SOW
and for which a patent application is filed.
Any Materials created by Work Group Participant or Visa alone, or in
combination with other Participants ("Creating Participants"), shall be owned
by the Creating Participants ("Licensed Materials") without accounting to each
other or the other Participants. The Creating Participants hereby grant Visa an
irrevocable, perpetual, non-exclusive, worldwide, paid-up copyright license to
reproduce, display,
<PAGE> 3
perform, prepare and have prepared derivative works based upon and distribute
and sublicense the Licensed Materials and derivative works thereof. Visa hereby
grants Work Group Participant an irrevocable, perpetual, non-exclusive,
worldwide, paid-up copyright license to reproduce, display, perform, prepare
and have prepared derivative works based upon and distribute and sublicense all
Materials and derivative works thereof. In addition, Work Group Participant or
Visa may also include its own pre-existing or third party material in Licensed
Materials, provided that it has sufficient rights and licenses to enable it to
grant the copyright license set forth above.
Any Inventions created by Work Group Participant or visa alone, or in
combination with other Participants ("Inventing Participants"), shall be owned
by the Inventing Participants ("Licensed Inventions") without accounting to
each other or the other Participants. The Inventing Participants hereby grant
to Visa an irrevocable, perpetual, non-exclusive, worldwide, paid-up patent
license, to make, have made, use, lease, sell, offer for sale or otherwise
transfer any apparatus and article of manufacture and to practice any method,
covered by any Licensed Inventions. Visa hereby grants Work Group Participant
an irrevocable, perpetual, non-exclusive, worldwide, paid-up patent license, to
make, have made, use, lease, sell, offer for sale or otherwise transfer any
apparatus and article of manufacture and to practice any method, covered by any
inventions.
Except as explicitly set forth in this Agreement, Work Group Participant does
not grant Visa nor any other Participants any rights or licenses to any
patents, copyrights, trademarks, trade secrets or other intellectual property
rights of Work Group Participant.
6. WARRANTIES AND LIABILITIES
Except as may be expressly set forth to the contrary herein, neither Visa nor
Work Group Participant make any representations or warranties whatsoever
regarding the information exchanged under this Agreement, all of which is
provided on an "AS-IS", "WHERE-IS" basis, "WITH ALL FAULTS" known and unknown.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BOTH PARTIES HEREBY DISCLAIM
ALL WARRANTIES REGARDING THE FOREGOING, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, THE
IMPLIED WARRANTY OF MERCHANTABILITY AND ANY WARRANTY OF NON-INFRINGEMENT.
NEITHER PARTY SHALL BE LIABLE FOR ANY THIRD PARTY CLAIMS, OR FOR ANY SPECIAL,
CONSEQUENTIAL, INCIDENTAL, OR PUNITIVE DAMAGES, REGARDLESS OF THE THEORY UPON
WHICH SUCH DAMAGES ARE SOUGHT, EVEN IF ADVISED IN ADVANCE OF THE POSSIBILITY OF
SUCH DAMAGES. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR DIRECT
DAMAGES IN EXCESS OF $25,000.
7. MISCELLANEOUS
A. TERM
The term of this Agreement shall commence as of the date it is executed by both
parties hereto and shall remain in effect until July 31, 2000.
B. TERMINATION
Work Group Participant may terminate this Agreement at any time, with or
without cause, upon 14 days notice to Visa. Upon any such termination, Work
Group Participant shall deliver to Visa a complete copy of any outstanding Work
Group assignments performed by that Participant under the SOW, as they exist as
of the ate of such termination. The provisions contained in Section 4 of this
Agreement shall survive the termination of this Agreement for any reason.
C. GOVERNING LAW
<PAGE> 4
This Agreement shall be construed and interpreted under the internal laws of
the State of California, without giving effect to its principles of conflict of
law.
D. DISPUTES
Any dispute between the parties may be brought before a court of competent
jurisdiction. Each party waives its right to a jury trial in any such action.
No suit may be brought more than two (2) years after the cause of action arose.
E. COSTS
All costs associated with the activities of the Work Group will be borne by the
incurring party.
F. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement and understanding between Visa
and the Work Group Participant regarding the subject matter contained herein.
NO modification or waiver of this Agreement shall be binding unless it is in
writing and signed by both parties. If any provision of this Agreement is
invalid, illegal or unenforceable, the parties shall omit it from the Agreement
to the extent required. The remaining terms shall remain in full force and
effect.
G. INDEPENDENT PARTIES
The parties of this Agreement each represent their own independent interests;
no partnership, employment or other fiduciary relationship is created,
contemplated or permitted by this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first written above.
<PAGE> 5
CHIP APPLICATION TECHNOLOGIES, INC. VISA U.S.A.
("WORK GROUP PARTICIPANT") ("VISA")
/s/ Justin Wescombe /s/ Patrick [ILLEGIBLE]
By ____________________________________ By ________________________________
Justin Wescombe Patrick [ILLEGIBLE]
Name __________________________________ Name ______________________________
SVP Sales & Marketing Vice President
Title _________________________________ Title _____________________________
26 . VIII . 99 9/13/99
Date __________________________________ Date ______________________________
VISA INTERNATIONAL SERVICE
ASSOCIATION ("VISA")
/s/ Bernard Morvant
By ________________________________
Bernard Morvant
Name ______________________________
Vice President
Title _____________________________
9/15/99
Date ______________________________
<PAGE> 1
EXHIBIT 10.14
PARTNER PROGRAM LOYALTY SERVICES AGREEMENT
THIS AGREEMENT ("Agreement") is made as of __________ 199_ by and between VISA
INTERNATIONAL SERVICE ASSOCIATION ("Visa"), with its principal place of business
at 900 Metro Center Boulevard, Foster City, California 94404 (mailing address
P.O. Box 8999, San Francisco, CA 94128-8999), and Chip Application Technologies
Limited (C.A.T), at Level 5 Cabcharge House 152-162 Riley Street East, Sydney
NSW 2010, Australia.
WHEREAS, Visa is developing a program to facilitate the implementation of
chip-based Visa products (the "Program") for Visa's Participating Members from
time to time during the Term of this Agreement;
WHEREAS, as part of the Program, Visa desires to identify organizations, such as
C.A.T. that can develop custom applications to support loyalty programs on
Visa's chip-based cards, as such applications may be requested by Visa's
Participating Members from time to time during the Term of this Agreement;
WHEREAS, C.A.T desires to be one of several suppliers that offer Visa approved
loyalty program application development services to Visa Members under the
Program;
WHEREAS, by entering into this Agreement, C.A.T receives valuable consideration
by increasing its exposure and sales potential among Visa Members, and Visa
receives valuable consideration by increasing its Members' ability to implement
Visa's chip-based products.
NOW, THEREFORE, in consideration of the above premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties hereto hereby agree as follows:
1. DEFINITIONS: The terms and definitions set forth below shall be used for
purposes of this Agreement:
a) "CONFIDENTIAL INFORMATION" shall have the meaning set forth in Section
6.
b) "CALENDAR OF EVENTS" means a calendar of events produced by Visa each
month describing upcoming Program events, including events in which
C.A.T. may be requested or required to participate as described in this
Agreement.
c) "PARTICIPATING MEMBER" means any member of Visa participating in the
Program.
d) "PROGRAM" shall have the meaning set forth in the first recital of this
Agreement.
e) "SERVICES" shall mean software development and other services performed
by C.A.T. for a Participating Member under the Program to develop such
chip loyalty program applications may be desired by such Participating
Members.
f) "TERM" shall have the meaning set forth in Section 5.
g) "VISA APPROVAL" means written confirmation by Visa that a product or
service meet the standards required by Visa to participate in the
Program, as such standards may be amended from time to time by Visa,
including, without limitation: (i) the functional and security standards
imposed by Visa from time to time, and (ii) the specifications
associated with such products or services.
1
<PAGE> 2
2. C.A.T. PARTICIPATION.
(a) Participation. During the Term of this Agreement, C.A.T. shall make
Services available to Participating Members upon such terms and
conditions as may be agreed upon between C.A.T. and such Participating
Members.
(b) Marketing. C.A.T. shall participate with Visa in marketing the Program,
including, but not limited to, the following:
i) SALES TEAMS.
C.A.T. shall participate in so-called "sales teams" as agreed to
by the parties, by which a representative of each component of
the Program (including, for example, representatives from a
terminal vendor, a chip card vendor, and a system integrator)
meet with a Visa member to educate the member about and promote
the Program.
ii) C.A.T. SALES SUPPORT.
C.A.T. may present the Visa Program in at least two (2) global
and/or regional C.A.T. financial services sales conferences per
year and give Visa the option (without obligation) to have Visa
representatives participate in such conferences. At the request
of C.A.T., Visa may make a representative available for these
sales conferences.
iii) VISA VENDOR MEETINGS.
Upon agreement of the parties, C.A.T. may send appropriate
representatives to vendor meetings, arranged by Visa in the
normal course of Visa's business, during the Term of this
Agreement, which meetings shall be held at Visa's headquarters
in or near Foster City, California.
iv) C.A.T. TRAIN THE TRAINER.
When necessary, C.A.T. will conduct training sessions for C.A.T.
staff involved in services engagements with Participating
Members related to the Program.
(v) C.A.T. ARTICLES AND SPEECHES.
Visa shall have the right to approve the text of all
vendor-sponsored articles and speeches to the extent they
address Visa chip products or the Program. Visa shall provide
C.A.T. with pre-written text which C.A.T. may use as appropriate
without further approval from Visa.
(vi) VISA COLLATERAL MATERIALS.
C.A.T. shall refer the Program and Visa and use the Visa
trademark in collateral materials C.A.T. distributes pertaining
specifically to Visa chip products and Visa services; provided,
however, that Visa shall first review and approve all such
trademark usage by C.A.T.
(vii) PUBLIC RELATIONS OUTREACH SESSIONS.
Visa plans to conduct regular "getting to know you" sessions
with the public relations staff of C.A.T. and other Visa
vendor.' The objectives of these sessions will be: (i) establish
good working relationships, (ii) gain common agreement on key
messages to meet the objectives of Visa and its vendors and
(iii) understand procedures of all parties to be able to
expedite press
2
<PAGE> 3
releases, announcements and similar items. C.A.T. may, at its
discretion participate in such sessions as and when arranged by
Visa.
(viii) JOINT TESTIMONIAL ADS AND TRADE ADS.
C.A.T. may advertise in general and trade press promoting C.A.T.
products and services and the Program. Visa shall use its
commercially reasonable efforts to refer to C.A.T., together
with other vendors participating in the Program, as Visa deems
appropriate, during keynote speeches and press releases that
discuss the Program; provided, however, that such references
shall be limited to listing C.A.T. as a supplier of Program
Products and services and, to the extent granted, listing C.A.T.
as Visa Approved.
(ix) HIGH PROFILE DEMONSTRATIONS.
C.A.T. may, as may be reasonable necessary, staff, fund, and/or
provide materials for demonstrations of C.A.T. products and
services during at least two (2) Visa member meetings per Visa
region per year.
(x) TRADE SHOWS.
C.A.T. will use commercially reasonable efforts to refer to Visa
and highlight the Program in all trade shows in which C.A.T.
participates.
(xi) CALENDAR.
Visa shall use its commercially reasonable efforts to list in
Visa's Calendar of Events the events described in this Section
2(c) which are scheduled to occur in the six (6) months
following such Calendar of Events.
(a) CENTRAL APPROVAL AUTHORITY.
C.A.T. and Visa shall co-operate to allow Visa to review and assess
C.A.T. ability to provide Services in each Visa region in which C.A.T.
desires to provide Services under the Program. Visa shall assess C.A.T.
as a loyalty service provider under the Program in each of Visa's six
(6) geographic regions as may be requested by C.A.T. and in the event
Visa determines in its discretion that C.A.T. is capable of providing
Services which are consistent with the standards promoted or desired by
the Program in a region, Visa shall grant Visa Approval, if at all, in
writing as a loyalty service provider in such region under the Program
(Visa Approval"). Visa Approval in any region shall not be construed as
approval of any specific business practice or services offered by C.A.T.
Vendor understands and acknowledges that Visa conducts a global business
through several Visa regions and that Visa's determination that C.A.T.
is qualified to provide Services under the Program in one Visa region
does not mean that C.A.T. is approved in other Visa regions. Prior to
receiving Visa Approval in any particular Visa region, C.A.T. may
promote itself as a Visa Smart Program participant, provided, however,
that C.A.T. shall not promote itself as Visa Approved until such
approval is in fact granted. Visa will grant Visa Approval to C.A.T. if
at all, pursuant to the policies, procedures and fees Visa adopts from
time to time and routinely applies to other vendors generally. In the
event Visa determines, in its discretion, not grant Visa Approval to any
loyalty service provider under the Program, and in fact does not assess
or grant approval to any vendor, Visa shall have no obligation to assess
C.A.T. services for Visa Approval and C.A.T. shall be free to provide
such services under Program without Visa approval.
In all written communications and materials referring to Visa Approval
from C.A.T. or its agents, subcontractors or distributors to third
parties, C.A.T. shall include (or cause to be included), in a manner
reasonably calculated to be noticed those reading the communication or
material, the following legend:
3
<PAGE> 4
"Visa Approval is provided by Visa to ensure certain security and
operational characteristics important to Visa's systems as a whole, but
Visa Approval does not include any endorsement or warranty regarding the
functionality, quality or performance of any particular product of
service. Visa does not warrant any products or services. provided by
Vendor or Vendor's distributors. Visa Approval does not include or imply
any product warranties from Visa, including, without limitation, any
implied warranties of merchantability, fitness for purpose or
non-infringement, all of which are expressly disclaimed by Visa. All
rights and remedies regarding products and services which have received
Visa Approval shall be provided by the party providing such products or
services, and not by Visa."
3. OTHER C.A.T. OBLIGATIONS.
(a) C.A.T. NOT EXCLUSIVE.
C.A.T. acknowledges that Visa may and will include in the Program
products and services from other manufacturers and that nothing
contained in this Agreement should be interpreted to give C.A.T. an
exclusive right to supply Services to Participating Members.
(b) IMPLEMENTATION SUPPORT SERVICES.
C.A.T. may, at Visa's request, provide appropriate representatives to
participate in meetings with Visa and Participating Members to define
and develop migration planning and implementation services for
Participating Members.
(c) CO-MARKETING CONTRIBUTION.
In the event Visa establishes a formal co-marketing program with the
various vendors that participate in the Program, Visa shall inform
C.A.T. of such co-marketing program and give C.A.T. an opportunity to
participate upon terms to be mutually agreed between Visa and C.A.T.
(d) SEMI-ANNUAL REVIEW.
Visa shall conduct a semi-annual review of the Program to evaluate
progress, review obligations among Program participants and make
decisions on adjusting plans. C.A.T. shall send appropriate
representatives to Visa's headquarters in or near Foster City,
California, to participate in such semi-annual review process. Dates for
the project reviews will be agreed to by the parties, such agreement not
to be unreasonably delayed or withheld.
(e) STATEMENT OF YEAR 2000 READINESS.
C.A.T. represents and warrants that not later than January 1, 1999, each
of the [Products] will: (i) manage and manipulate all data involving
dates, including single-century formulas and multi-century formulas, and
will not either cause an abnormally ending scenario within an
application, or result in the generation of incorrect values involving
such dates; (ii) include in all date-related user interface
functionality and data fields a correct indication of century; (iii)
include a correct indication of century in all date-related functions;
and (iv) comply with the following:
- no such programs or applications will provide invalid or incorrect
messages or results when presented with or processing date-dependent
data;
- all such programs and applications will accurately recognise,
manage, accommodate and manipulate date-dependent data, including
single and multi-century formulas and leap years.
4
<PAGE> 5
In addition to any other remedies that may be available, a failure of
any program or application to comply with the foregoing that negatively
impacts the performance of the programs and applications and is not
rectified by CAT under the normal maintenance arrangements, shall
entitle Visa or the party for which the programs and applications were
developed, to either (i) a refund of the license fees paid for the
effected programs and applications or (ii) require CAT to promptly
furnish to Visa or the party for which such programs and applications
were developed, at no charge, all materials and services as may be
required for the purpose of bringing such programs and applications into
compliance.
f) NON-C.A.T. PRODUCTS.
Non-C.A.T. products are provided by C.A.T. on a "AS IS" basis. Where
authorized, C.A.T. will pass through to Participating Members
representations and warranties from third party manufacturers to
end-user customers regarding these non-C.A.T. products, including,
without limitation, any representations regarding the year 2000
readiness of the non-C.A.T. hardware and software products.
4. VISA'S OBLIGATIONS.
(a) FORECAST.
VISA MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER REGARDING THE
PROJECTED LEVEL OF C.A.T. SALES OR PROFIT IN CONNECTION WITH THE
PROGRAM.
(b) NO MINIMUMS.
Neither Visa, any Participating Members, nor any third party shall have
a minimum order requirement in connection with this Agreement or the
Program.
(c) PROMOTION AND MARKETING KIT.
Visa shall attempt to make its members aware of C.A.T. Services, when
appropriate to the members' programs, both verbally and in press
materials. Visa will not require its members to use C.A.T. products or
services. Visa will list C.A.T. as a supplier of Services under the
Program in collateral materials regarding the Program produced for
members and the media. Visa shall provide C.A.T. with a marketing and
communications kit to facilitate C.A.T. development of collateral
marketing materials that include-mention of Visa. The kit will include
logo artwork and guidelines for usage, copying and distribution for Visa
language and terms, and prepared text that may be inserted into the
C.A.T. marketing materials.
(d) VISA TRAINING EFFORTS.
Visa shall provide such training to C.A.T. staff regarding the Program
and Visa's products and services as Visa determines necessary and
equivalent to that provided to other providers of Services who receive
Visa Approval.
(e) NON-EXCLUSIVE.
Visa acknowledges that C.A.T. may and will offer products and services
to others who directly and indirectly compete with Visa and that nothing
contained in this agreement should be interpreted otherwise.
5. TERMINATION.
(a) TERM.
This Agreement is effective from the date first written above when
signed by both parties, and will remain in effect until April 30, 2001;
provided, however, that the term may be extended for an unlimited number
of additional one (1) year terms if prior to the termination of the
initial three (3) year term, or any one (1) year extension thereof, both
parties agree in writing to extend the term for an additional one (1)
year period (the "Term"). In the event C.A.T. is bound by a written
contract with one or
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more Participating Members to perform Integration Services, and to the
extent such contract or contracts are in effect at the time of the
expiration of the Term, then C.A.T. and Visa shall continue to perform
their obligations under this Agreement after the expiration of the Term,
for up to 12 months after such expiration, to the extent reasonably
necessary to allow C.A.T. to fulfil its contractual obligations to such
Participating Member(s).
(b) EARLY TERMINATION.
If termination is for a material breach of the terms of this Agreement,
the breaching party shall have thirty (30) days from receipt of written
notice to cure such breach. Termination shall be effective without
further notice at the end of such period if the breach has not been
cured. If C.A.T. materially or routinely breaches any agreement or
agreements pertaining to the Program in a manner which would reasonable
jeopardize the continuing goodwill of the Program, Visa, or any
Participating Member, then C.A.T. shall be deemed to have materially
breached this Agreement. This Agreement shall terminate immediately in
the event of the voluntary or involuntary bankruptcy or insolvency, an
assignment for the benefit of creditors, the appointment of a receiver
or similar proceeding regarding C.A.T.
6. CONFIDENTIALITY.
The parties agree the exchange of Confidential Information between the
parties related to this Agreement shall be governed by the terms and
conditions of that certain C.A.T. Agreement.
7. TRADEMARKS.
Except as expressly set forth in this Agreement, neither party grants to
the other any right to use its trademarks, service marks, logos or trade
names without its prior written consent. The owning party shall have the
right to review and approve all material related to the subject matter
of this Agreement containing such marks prior to its release, which
approval may be withheld for any or no reason.
8. PATENT AND COPYRIGHT INDEMNIFICATION.
C.A.T. shall defend Visa against third party claims against Visa that
C.A.T. products or C.A.T. services provided to a Participating Member as
part of the Program (i) infringe that party's patents, copyrights or
trademarks in any country where C.A.T. or its subsidiaries directly
conduct business or (ii) unlawfully misappropriates that party's trade
secrets, at C.A.T. expense, and C.A.T. shall pay all costs, damages, and
attorneys' fees that a court finally awards or are included in any
settlement of such claim; provided, however, that Visa and the relevant
Participating Member must promptly notify C.A.T. when such a claim is
made and allow C.A.T. to control, and co-operate with C.A.T. in, the
defense and any related settlement negotiations. C.A.T. shall not be
entitled to make any commitments, representations or admissions on
behalf of Visa without Visa's prior written approval, which approval
shall not be unreasonable withheld.
This is C.A.T. entire obligation to Visa regarding any claim of
infringement. C.A.T. has no obligation regarding any claim to the extent
such claim is based on any of the following:
1) anything Visa or a Participating Member provides which is
incorporated into an C.A.T. product;
2) Visa's or an Participating Member's modification of an C.A.T.
product, or an C.A.T. product's use in other than according to
its written documentation and, if applicable, its specified
operating environment;
3) the combination, operation, or use of an C.A.T. product with
other products not provided by C.A.T. as a system, or the
combination, operation, or use of an C.A.T. product with any
product, data, or apparatus that C.A.T. did not
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provide, represent or acknowledge in writing that the C.A.T.
product was capable of interoperating with; or
4) infringement by a non-C.A.T. product alone, as opposed to its
combination with products C.A.T. provides to a Participating
Member as a system.
The provisions of this section shall survive the termination of this
Agreement, regardless of the reason for such termination.
9. INDEMNIFICATION.
C.A.T. shall defend Visa against third party claims against Visa to the
extent such claims by third parties are based on statements made by
C.A.T. or its subsidiaries relating to Visa Approval or the meaning of
Visa Approval as defined in this Agreement, which statements are not
previously authorized by Visa in writing, and C.A.T. shall pay all
costs, damages, and attorneys' fees that a court finally awards or are
included in a settlement by C.A.T. of such claims; provided, however,
that Visa must promptly notify C.A.T. when such claim is made and allow
C.A.T. to control, and co-operate with C.A.T. in, the defense and any
related settlement negotiations. C.A.T. shall not be entitled to make
any commitments, representations or admissions on behalf of Visa without
Visa's prior written approval, which approval shall not be unreasonably
withheld. The provisions of this Section shall survive the termination
of this Agreement, regardless of the reason for such termination.
10. LIMITATION OF LIABILITY.
Regardless of the basis on which either party is entitled to claim
damages from the other related to this Agreement (including fundamental
breach, negligence, misrepresentation, or other contract or tort claim),
each party hereto is liable to the other only for: 1) obligations
referred to in the Section 8 above; and 2) the amount of any other
actual direct damages or loss, up to the greater of the charges for the
C.A.T. product or service that is the subject of the claim or the
aggregate amount U.S. $1,000,000.
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER UNDER OR IN
CONNECTION WITH THIS AGREEMENT FOR ANY CONSEQUENTIAL, INDIRECT OR
SPECIAL DAMAGES, HOWEVER CAUSED, WHETHER UNDER THEORY OF CONTRACT, TORT
(INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE, EVEN IF THE
OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT
TO THE EXTENT INCLUDED WITHIN THE AMOUNTS FOR WHICH C.A.T. IS PROVIDING
INDEMNIFICATION UNDER SECTIONS 8 OR 9 OF THIS AGREEMENT.
11. GENERAL.
(a) Disclaimer Of Warranties.
OTHER THAN THE EXPRESS WARRANTIES PROVIDED IN THIS AGREEMENT, C.A.T.
DISCLAIMS ALL OTHER WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
(b) Excusable Delays.
Neither party shall be held responsible for delays caused by acts beyond
its control, such as acts of God or public enemies, government acts,
utility or communications delays or failures, labor disputes, or war.
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(c) Assignment.
Neither party may assign this Agreement, or its rights or duties
hereunder, without the prior written consent of the other party.
(d) Relationship.
Neither party or its personnel are not agents, employees, lessees,
partners, or joint ventures of the other party. Neither party may bind
or obligate the other party without the other party's prior written
consent.
(e) Notice.
All notices required under this Agreement to be in writing shall be
deemed given when delivered personally, by overnight delivery upon
written verification of receipt, by facsimile transmission upon
electronic acknowledgement of receipt, or by certified or registered
mail, return receipt requested, upon verification of receipt. Notice
shall be sent to the addresses set forth above or such other address or
facsimile number as either party may specify in writing. Notices to Visa
shall be sent to the attention of Mr. David Barnes and notices to C.A.T.
shall be sent to the attention of C.A.T. legal Department, In addition,
to facilitate the on-going efforts of Visa and C.A.T., each party shall
designate a primary contact person within two weeks after the execution
of this Agreement, which contact person shall serve as such party's
primary liaison for all purposes of this Agreement other than written
notices sent as required by this Section.
(f) Governing Law.
This Agreement shall be construed and interpreted under the internal
laws of the State of California, without giving effect to its principles
of conflict of law.
(g) Severability.
If a court of competent jurisdiction finds any provision of this
Agreement invalid, illegal or unenforceable, the remainder of the
Agreement shall remain in full force and effect.
(h) Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original, but both of which together shall constitute one and
the same instrument.
(i) Entire Agreements: Modification: Waivers.
This Agreement and its attachments constitutes the entire agreement and
understanding between Visa and C.A.T. regarding the subject matter
hereof. No breach, performance or other actions with respect to this
Agreement shall be deemed a breach, performance or other action with
respect to any other agreement that may exist between C.A.T. and Visa.
No modification or waiver of this Agreement or any Exhibit or rider
shall be binding unless it is in writing and signed by both parties.
(j) Attorneys' Fees.
In the event of a dispute regarding the enforcement or interpretation of
this Agreement should result in litigation between the parties, the
prevailing party shall be entitled to collect its reasonable attorneys'
fees and costs from the other party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first written above.
("C.A.T.") VISA INTERNATIONAL SERVICE
ASSOCIATION ("VISA")
8
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EXHIBIT 10.15
IBM
SOFTWARE VENDOR MARKETING PARTNERSHIPS
- --------------------------------------------------------------------------------
SOFTWARE REMARKETING AGREEMENT
This is a Software Remarketing Agreement ("SRA") between Chip Application
Technologies Limited ("you" or "C.A.T.") and International Business Machines
Corporation ("IBM"). The complete Agreement between the parties consists of this
SRA and the following Attachments and Exhibits:
(a) Attachment A - C.A.T. Product Schedule
(b) Attachment B - IBM Rate Schedule
(c) Attachment C - Certificate of Originality
(d) Exhibit - Agreement for the Exchange of Confidential Information (AECI)
(e) Exhibit - Your End User License Agreement
Both parties accept the terms of this Agreement #T98066 and identified
Attachments and Exhibits by signing below. If there is a conflict among the
terms of this SRA and any of its Attachments, the terms of the SRA prevail
unless the Attachment expressly indicates that particular terms within the
Attachment prevail.
This Agreement replaces all prior oral or written communications between the
parties relating to the subject matter hereof. Once signed, any reproduction of
this Agreement made by reliable means (for example, photocopy or facsimile) is
considered an original, unless prohibited by local law. This Agreement may only
be modified by a written amendment signed by both parties.
AGREED TO: AGREED TO:
International Business Machines Chip Application Technologies
Corporation Limited
By: /s/ JULIE F. JOYCE By: /s/ DAVID C. MACSMITH
--------------------------- ------------------------------
Julie F. Joyce David C. MacSmith
------------------------------
Print Name
Director Worldwide C.E.O. & Managing Director
Strategy & Business Development. ------------------------------
3-29-99 25 March 1999
- ------------------------------- ------------------------------
Date Date
1. DEFINITIONS
Capitalized terms in this Agreement have the following meanings:
CODE is computer programming code including both Object Code and Source Code:
a) OBJECT CODE is computer programming code in substantially binary form, and
includes header files of the type necessary for use or interoperation with other
computer programs. It is directly executable by a computer after processing or
linking, but without compilation or assembly. b) SOURCE CODE is computer
programming code that may be displayed in a form readable and understandable by
a programmer of ordinary skill. It includes related source code level system
documentation, comments and procedural code and all "Error" corrections and
"Enhancements". Source Code does not include Object Code.
ENHANCEMENTS are changes or additions to the Products:
a) BASIC ENHANCEMENTS are all Enhancements, other than Major Enhancements,
including those that support new releases of operating systems and devices, and
correct Errors.
b) MAJOR ENHANCEMENTS provide substantial additional value and are normally
offered to customers for an additional charge.
ERROR is a) any mistake, problem or defect that causes a Product to malfunction
or to fail to meet its specifications; or b) any incorrect or incomplete
statement or diagram in the related documentation that causes a Product to be
materially inaccurate or inadequate.
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IBM REVENUE is the revenue (excluding local taxes) due IBM for Products and/or
Services from the effective date of this Agreement.
MAINTENANCE SUPPORT is the Service provided when a customer identifies an
Error.
There are three Maintenance Support Service Levels:
LEVEL 1 is the Service provided in response to the customer's initial contact
identifying an Error, and includes the following steps:
1. Identify the end-user
2. Log the problem, time stamp it and briefly describe it with the
end-user contact
3. Scan a database for previous reports of this problem
4. Inform the account representative for the end-user of the incident
5. Report the planned action to the end-user
LEVEL 2 is the Service provided to reproduce and attempt to isolate the Error,
or to find that the Service Provider cannot reproduce the Error. Usual steps
include:
1. Do detailed problem analysis
2. Contact CAT product support for telephone consultation
3. Inform end-user of correct procedure
4. Determine if temporary by-pass is appropriate
5. Report action taken to CAT
6. Keep account representative informed
LEVEL 3 is the Service provided remotely to isolate the Error at the component
level of the Products. The Service Provider distributes the Error correction or
circumvention, or gives notice if no correction or circumvention is found.
SERVICE LEVELS (response time/effort) are normally based on the Severity level
of the problem.
Severity 1 - System multiple terminal outages. The business is severely
impacted.
Response: Work to resolve as soon as possible with a response time
within one business day of notification and to be
conducted continuously until resolution achieved.
Severity 2 - Experiencing difficulty in executing tasks and it is taking a
protracted time to do the job.
Response: Work to begin within 2-3 business days of notification and to
be conducted continuously until resolution achieved.
Severity 3 - A problem exists, but a temporary solution is available. A fix is
required.
Response: Work to be included in development cycle (within 6 months).
Severity 4 - An irritant.
Response: Work to be included in development cycle (within 6 months).
MARKETING MATERIALS are Product brochures, manuals, technical specification
sheets, demonstration presentations, Product education and training materials,
Product descriptions used in electronic online services, and other marketing
sales literature provided by you to IBM for IBM's use in performance of
marketing activities. IBM's use of Marketing Materials may include transmission
of them through electronic marketing services.
NEW PRODUCTS include a) all Major Enhancements to your Products; and b) any of
your other software products that render our existing Products down level or
obsolete.
PRODUCTS are your computer programs in Object Code form, including
documentation, related materials, maintenance modifications, Basic Enhancements
and any security devices or "locks" that are listed in this Agreement.
SERVICES are activities associated with the Products, such as Maintenance
Support. Services include all three levels of Maintenance Support unless stated
otherwise.
SUBSIDIARY is an entity that is owned or controlled directly or indirectly (by
more than 50% of its voting stock, or if not voting stock, decision-making
power) by you or IBM.
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IBM customer under your End User License. If a Product does not comply with its
warranties, you agree to correct the problem without charge and in a timely
manner.
LEVEL 1 AND LEVEL 2 MAINTENANCE SUPPORT:
Since IBM shall provide Level 1 and Level 2 Maintenance Support to its customers
of the Product, you agree to provide assistance to IBM's end user support
personnel during normal business hours to help them answer customer questions
related to the use and installation of the Products, and accept calls from IBM's
end user support personnel pertaining to Level 3 Maintenance Support matters.
LEVEL 3 MAINTENANCE SUPPORT:
You agree to provide Level 3 Maintenance Support to IBM's customers of the
Product.
4.4 UPGRADES: You represent that the demonstration Products available to IBM
under this Agreement are always the most current release or version that is
available to your customers. If you make New Products available to your
customers, IBM may offer such New Products to its customers under the terms of
this Agreement. You will give IBM at least six months notice prior to
withdrawing any Product (including any version) from marketing or support. You
will not be required to provide any support whatsoever to any Product version
that is two or more Product versions old.
4.5 MARKETING MATERIALS: You agree to provide to IBM at no additional charge, a
reasonable number of copies of the Marketing Materials related to the Products.
You authorize IBM to alter the Marketing Materials to indicate that IBM has the
authority to market, price, license, and provide services for the Products. You
also agree to provide to IBM a reasonable number of copies of your Products for
demonstration purposes.
4.6 MARKET SUPPORT: You agree to provide the following market support
activities to IBM as reasonably requested and at no additional charge during the
term of this Agreement. All of your personnel providing market support will have
sufficient Product knowledge and skills to adequately perform the support
Services requested.
o MARKETING EVENTS: You agree to participate in trade shows, executive
conferences, and other marketing events, on dates and at locations mutually
agreed to by the parties.
o TELEPHONE/E-MAIL SUPPORT: You agree to provide telephone/e-mail consulting
services during normal business hours to address technical questions
related to demonstration, marketing, operation, use and installation of the
Products.
o PRE-SALES SUPPORT: You agree to provide pre-sales technical support
services and demonstration assistance for the Products to IBM customers on
dates and at locations mutually agreed to by the parties.
o IMPLEMENTATION SUPPORT: You agree to provide five (5) person-days of
implementation support for the Products to new IBM customers on dates and
at locations mutually agreed to by the parties.
IBM agrees to reimburse you for all reasonable and actual travel and living
expenses you incur while providing market support activities as requested and
authorized by IBM. IBM's reimbursement shall be made in accordance with IBM
guidelines. You agree to obtain IBM's written approval prior to incurring any
expenses related to market support activities.
4.7 TRAINING: You agree to provide the following training at no charge to IBM.
All training shall be conducted on dates and at locations mutually agreed to by
the parties:
o During each 12-month period during the term of this Agreement, you shall
conduct one (1), 5-day marketing/technical training class related to the
demonstration, marketing, installation and use of the Products.
IBM agrees to reimburse you for all reasonable and actual travel and living
expenses you incur while providing training as requested and authorized by IBM.
If you are unable after such efforts to correct the Errors, you agree to replace
the Products not meeting your warranty. IBM will either return the defective
Products to you, or destroy them, at your direction.
4.8 ERROR CORRECTION: You will use commercially reasonable efforts to correct
reproducible Errors in the Products and associated documentation. If you are
unable after such efforts to correct the Errors, you agree to replace the
Products not meeting your warranty. IBM will either return the defective
Products to you, or destroy them, at your direction.
4.9 BILLABLE SERVICES: "Billable Services" are other services above and beyond
those specified in this Agreement. If the parties agree that you will provide
Billable Services to IBM, you will furnish such services in a workmanlike
manner in accordance with the terms and conditions of a separate IBM Agreement
to be negotiated in good faith by
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floor in Attachment B) per license had been used to calculate quarterly
payments, instead of the applicable percent of IBM revenue specified herein. If
the aggregated amount of royalties paid to you for such calendar year was less
than the floor amount, IBM will pay you the difference, as an annual minimum
royalty adjustment, with the next scheduled payment.
6.2 SPECIAL/ADJUSTED IBM RATES
In the event IBM finds it necessary to offer a customer a special discount, IBM
may request a lower IBM Rate for such transaction. If you agree to such Lower
IBM rate, the parties will sign an amendment specifying the lower amount.
IBM Rates are based on IBM doing all things necessary to sell the Product with
limited assistance from C.A.T., as provided for in Clause 4.6. In the event
either party changes their marketing roles, we agree to in good faith review
the IBM Rate.
6.3 IBM has no obligation to pay C.A.T. for Products used for the following
purposes:
o marketing, demonstrations, customer evaluations using demonstration systems
up to a limit of 8 weeks per customer);
o Product training and eduction;
o product maintenance and support;
o backup and archival purposes;
o Basic Enhancements and Error corrections; or
o warranty replacement copies of the Products
6.4 Payments are made against revenue recorded by IBM in a royalty payment
month. In the Territory, a royalty payment month ends on the last business day
of the calendar month. IBM shall make payments to you 30 days following the
close of the royalty payment month in which IBM records that a customer has
acquired your Product and/or Service, and recognizes revenue for the Product
and/or Service. All payments to you shall be net of refunds, adjustments, and
if applicable, any withholding taxes. Payment will be accompanied by a summary
of the basis for determining its amount. IBM will maintain records to support
the payment amount. Payment will be made by either electronic funds transfer,
or failing that, by express courier. Payment is deemed to be made on the date
of electronic funds transfer, or on the date of courier dispatch, as
applicable. All payments will be made in U.S. dollars.
Payments based on foreign revenue will be converted to U.S. dollars at the rate
of exchange published by Reuters Financial Service in New York on approximately
the same day each month. Where possible, conversion will be done at 5:30 p.m.
on the relevant day the payment is received by IBM.
7. MOST FAVORED CUSTOMER
You agree not to charge IBM higher rates for the Products and/or Services than
those you charge to others who have a similar relationship and arrangements on
similar terms with you. If, during the term of this Agreement you enter into an
agreement with a third party for a relationship similar to the one set forth
herein with terms that are more advantageous to such third party than those
specified in this Agreement, then you shall promptly notify IBM in writing. IBM
shall have the right within 30 days after receiving your notification to
substitute such different terms for those specified in this Agreement, effective
as of the date of availability of such terms to the third party. You shall
return to IBM any payments IBM made subsequent to such date which are in excess
of the payments required under the substituted terms.
8. WARRANTY
You represent and warrant on an ongoing basis that: (1) you have sufficient
rights to the Products (including associated marks and names) to grant IBM the
rights specified in this Agreement, and to grant customers the rights specified
in your End User License agreement; (2) the Products substantially and in all
material respects conform to their published specifications and any written
representations made by you to IBM or customers; (3) the Products (including
but not limited to Marketing Materials) do not infringe any patent, copyright,
trademark or trade secret or any other intellectual property rights of any
third party, and do not contain any virus or other harmful code; and (4) the
Products, when used in accordance with their associated documentation, are
substantially and in all material respects capable of correctly processing,
providing and/or receiving date data within and between the twentieth and
twenty-first centuries, provided that all products (for example, hardware,
software and firmware) used with the Products properly exchange accurate date
data with the Products.
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without the other party's prior written consent, except to the extent necessary
to establish each party's rights hereunder, or, as required by applicable law
or regulations including any stock exchange listing rules. Subject to the
foregoing, neither party will issue press releases or other publicity regarding
this Agreement or the relationship under it without the other party's prior
written approval.
13. TAXES
Each party is responsible for complying with the collection, payment, and
reporting of all taxes imposed by any governmental authority applicable to its
activities in connection with the sale, lease, delivery or license of the
Products to customers under this Agreement. Neither party is responsible for
taxes that may be imposed on the other party. Situations may arise where
governmental authorities require IBM to withhold from amounts payable to you.
In such cases, IBM may withhold the amount of taxes due from payments to be
made to you under this Agreement and remit the taxes withheld to the
governmental authority. IBM will provide you with documentation supporting the
withholding amount whenever any amount to which such deduction applies is
remitted.
14. NOTICE
Any notice required or permitted under this Agreement will be sent to the
representative named below, and shall be effective upon receipt as demonstrated
by reliable written confirmation (for example, certified mail receipt, courier
receipt or facsimile receipt confirmation sheet.) Each party will notify the
other if their coordinator changes.
For IBM: For you:
Chip Application Technologies Limited
IBM Canada Limited Level 5 Cabcharge House
C5/E37 152-162 Riley Street
3600 Steeles Avenue East East Sydney, New South Wales
Markham, Ontario, Canada L3R 9Z7 2010 Australia
Attention: K. A. (Ken) Fadelle Attention: Justin Wescombe
(905)316-3786 FAX: (905)316-2535 +61-2-9-332-4955 FAX +61-2-9-332-1285
[email protected] [email protected]
15. GENERAL
15.1 Neither party guarantees the success of any marketing effort it engages in
for the Products. Either party may independently develop, acquire, and market
materials, equipment, or programs that may be competitive with (despite any
similarity to) the other party's products or services. Unless otherwise
specified, each party is responsible for its own costs, including all business,
travel and living expenses incurred by the performance of this Agreement.
15.2 Neither party has relied on any promises, inducements or representations
by the other, except those expressly stated in this Agreement. This Agreement
is not to be construed as a commitment or obligation, express or implied, on
the part of IBM that IBM will sell any Products under this Agreement.
15.3 Either party may only assign this Agreement to a Subsidiary or in
connection with the sale of all or a substantial portion of its business
related to the Product in the Territory. Any other attempted assignment is
void.
15.4 Neither party will bring a legal action against the other more than two
years after the cause of action arose. Each party waives a jury trial in any
dispute. Failure by either party to demand strict performance or to exercise a
right does not prevent either party from doing so later.
15.5 The parties are independent contractors. Personnel you supply are deemed
your employees and are not for any purpose considered employees or agents of
IBM. Each party assumes full responsibility for the actions of its personnel
while performing its obligations under this Agreement and is solely responsible
for their direction and compensation. This Agreement does not create any
obligations for IBM in any way limiting or restricting the assignment of its
employees. Subject to each party's statutory patent and copyright rights, either
party is free to use any information, processing ideas, concepts or techniques
disclosed in the Products for any purpose whatsoever.
15.6 The laws of New York govern this Agreement. The United Nations' Convention
on the International Sale of Goods does not apply.
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ATTACHMENT A -- C.A.T. PRODUCT SCHEDULE
A copy of your most current Product Schedule (including Product Prices, Annual
Support and Maintenance Fees, and Annual Card Fees) is attached.
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ATTACHMENT B - IBM RATE SCHEDULE
IBM RATE FOR LICENSE FEES
As described in Section 6.1, IBM will pay you an amount ("IBM Rate"), a
percentage (%) of the Selling Price ("TSP") that we receive from customers for
licensing the Products.
The Table below describes the "IBM Rate" associated with the Territory:
<TABLE>
<CAPTION>
Price Element IBM Rate (% TSP) Comments
<S> <C> <C>
OTC [*] Includes upgrades
Annual Card Fees [*]
Annual Maintenance [*]
</TABLE>
TSP (*) means the actual sales price of the Product, including but not limited
to lump sum payments, annual payments, and any other consideration related to
the Product, but excluding integration services.
MINIMUM IBM RATE FOR OTC LICENSE FEES AND UPGRADES
IBM will pay you a minimum of [*] of your Suggested Retail Price ("SRP"), as
described in the C.A.T. Product Schedule (Attachment A), for each sale, unless
a special rate is agreed to as described in Section 6.2.
MINIMUM IBM RATE FOR ANNUAL CARD FEES
IBM will pay you a minimum of [*] of your Suggested Retail Price ("SRP") as
described in the C.A.T. Product Schedule (Attachment A), for each sale, unless
a special rate is agreed to as described in Section 6.2.
MINIMUM IBM RATE FOR MAINTENANCE AND SUPPORT FEES
IBM will pay you a minimum of [*] of your Suggested Retail Price ("SRP"), as
described in the C.A.T. Product (Attachment A), for each sale, unless a special
rate is agreed to as described in Section 6.2.
ANNUAL CARD FEES
The IBM Rate for Annual Card Fees for a particular Product sale will be
applicable for the duration of the Product Sale contract for all contracts
signed during the period for which the applicable IBM Rate applies,
irrespective of when the Annual Card Fee is earned, paid or received and
irrespective of any later change in the IBM Rate.
IBM RATE REVIEW
It is acknowledged that the IBM Rate has been established as the basis under
which IBM will pay CAT for IBM's sales of the Product. The parties agree to
review the IBM Rate at the end of the initial 24 month period of this agreement
and if the agreement is to continue, then the parties agree in good faith to
renegotiate the IBM Rates for OTC Products and Annual Card Fees to IBM Rates
mutually agreeable by both parties.
Page 10
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
<PAGE> 8
ATTACHMENT C - CERTIFICATE OF ORIGINALITY
You may use this questionnaire to cover on complete Product, event if that
Product includes multiple modules.
Please do not leave any questions blank. Write "not applicable" or "N/A" if a
question is not relevant to the furnished software material. Depending on your
responses, IBM may require additional information.
1) Please identify the software material including version, release, and
modification numbers for programs and any documentation.
SEE APPENDIX 1
2) Was any portion of the software material written by anyone other than you or
your employees within the scope of their employment?
YES
If YES, provide, as an attachment, the following information:
A) Indicate if the whole software material or only a portion thereof was
written by such party, and identify such portion: SEE APPENDIX 2
(i) Specify for each involved party the name, address and citizenship; SEE
APPENDIX 2
(ii) If the party is a company, how did it acquire title to the software
material (e.g., software material was written by company's employees within the
scope of their employment); SEE APPENDIX 2
(iii) If the party is an individual, did he/she create the software material
while employed by or under contractual relationship with another party? SEE
APPENDIX 2
If YES, provide name and address of the other party and explain the nature of
the contractual relationship:
SEE APPENDIX 2
B) How did you acquire title to the software material written by the other
party?
SEE APPENDIX 2
3) Are any copyright, confidentiality, or proprietary notice(s) present on the
software material(s)?
YES
If YES, please describe such notice(s):
SEE APPENDIX 3
4) Was any portion of the software material (e.g., Code, associated
documentation, etc.) derived from preexisting works (either yours or a third
party's), including any code from freeware, shareware, electronic bulletin
boards, or the Internet?
No
If YES, please identify the material, author, owner and copyright notice, if
any, for each of the preexistingt materials:
5) Does any of the software material (e.g., Code associated documentation)
include recognizable voice, pictures, icons or other licenses?
YES
If YES, how did you acquire the rights to use such recognizable voices,
pictures, icons and other licenses?
ALL CREATED AND ORIGINATED BY CAT
6) Provide as an attachment, an explanation of any other circumstance which
might affect IBM's ability to reproduce, distribute and market this software
material, including whether your software material was prepared from any
preexisting materials which have any: (a) confidentiality or trade secret
restrictions to others; (b) known or possible royalty obligations to others;
(c) used other preexisting materials developed for another party or customer
(including government) where you may not have retained full rights to such
other preexisting materials.
C.A.T. KNOWS OF NO OTHER CIRCUMSTANCE THAT MAY AFFECT IBM'S ABILITY TO
DISTRIBUTE AND MARKET THIS SOFTWARE MATERIAL. IBM HAS NO RIGHTS TO REPRODUCE
THIS SOFTWARE MATERIAL UNDER THIS AGREEMENT
7) You recognize that, for copyright registration or enforcement of legal
rights relating to the furnished software material, IBM may need you to produce
additional information related to the software material. You hereby agree to
cooperate with IBM and provide such information to IBM at IBM's request. As an
authorized representative of your company, you hereby certify the above to be
true and accurate.
BY: /s/ DAVID C. MACSMITH
----------------------------------
(Authorized Signature)
Name: David C. MacSmith
--------------------------------
(Type or Print)
Title: CEO & Managing Director
-------------------------------
Page 11
<PAGE> 9
APPENDIX 1
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PROGRAM MODULE PLATFORM VERSION
- --------------------------------------------------------------------------------------
<S> <C> <C>
Host Management Information System - Client Win32 6.01
Host Management Information System - Communications module Win32 6.00
Host Management Information System - Database service module Win32 6.00
Host Management Information System - System logging module Win32 6.00
Host Management Information System - ERACOM simulator Win32 6.00
Host Management Information System - Security Access Module Win32 6.00
Host Management Information System - Key Roll module Win32 6.00
Host Management Information System - Daily settlement module Win32 6.00
Host Management Information System - Business stats extract Win32 6.00
Host Management Information System - Posting module Win32 6.00
Host Management Information System - Bank extract Win32 6.00
Host Management Information System - Daily processing script Win32 6.00
Host Management Information System - Log rollover script Win32 6.00
- --------------------------------------------------------------------------------------
Card Creation - Host Win32 1.01
Card Creation - Remote Win32 1.01
Master card creation module Win32 1.02
Key inject Win32 1.01
Card dumper Win32 1.01
Card reverter Win32 1.01
Scope Win32 1.01
Tail Win32 1.01
Virtual Annex Win32 1.01
Scotialoyalty/CAT/Visa Cash Elite 730T terminal software Elite 730T 1.20
</TABLE>
DOCUMENTATION
H0805 CAT System HMIS User Guide
H0807 CAT System HMIS Standard Reports
H0808 CAT HMIS A Guide to the Transaction Process
H0809 CAT System HMIS Database Guide
H0810 CAT Smartcard System Security Procedure Reference Guide
H0820 CAT HMIS Technical Reference Guide
H0821 730T Terminal User Guide
H0822 730T Terminal Quick User Guide
H0823 Procedure for Installing Software for
the NPT Terminal
Un-numbered Product Overview
Page 12
<PAGE> 10
Appendix 2
Yes, some runtime libraries and components used have been supplied by third
parties. This software is all generally available and is used under unlimited
runtime license arrangements.
<TABLE>
<S> <C>
Borland Delphi 3.0 C/S Components and runtime environment Inprise corporation
Borland Database Engine 4.0 Inprise corporation
G&D Starcos CCR2 libraries G&D
GNU Perl 5 for Win32 Public license
</TABLE>
Appendix 3
All GUI application "Help, About" screens contain copyright and ownership
details. All CUI applications log copyright information on the system log and
startup.
Page 13
<PAGE> 11
EXHIBIT - END USER LICENSE AGREEMENT
_______________________________________________________________________________
A sample copy of your End User License Agreement is attached.
Page 14
<PAGE> 12
ATTACHMENT A: C.A.T. PRODUCT SCHEDULE T98066-00
C.A.T. SYSTEM SW PRICING PRICES 1/4
U.S.$ - Effective Date :98/10/17
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF CARDS
- -Minimum 10,000 10,001 25,001 50,001 100,001 200,001
- -Maximum 10,000 25,000 50,000 100,000 200,000 300,000
SW LICENSE FEES (HOST)
System Core $49,000 $105,000 $140,000 $175,000 $210,000 $245,000
APPLICATION MODULES
Loyalty and Incentives $35,000 $70,000 $84,000 $98,000 $112,000 $126,000
Membership & Access
control $7,000 $10,500 $14,000 $17,500 $21,000 $24,500
Ticketing $14,000 $24,500 $42,000 $49,000 $56,000 $63,000
======== ======== ======== ======== ======== ========
TOTAL HOST SW LICENSE FEES $105,000 $210,000 $280,000 $339,500 $399,000 $458,500
======== ======== ======== ======== ======== ========
ANNUAL MAINTENANCE (15%) $15,750 $31,500 $42,000 $50,925 $59,850 $68,775
ANNUAL CARD FEES - FIRST PAYMENT SYSTEM
Base (Minimum) 10,000 10,000 19,000 29,000 41,500 61,500
Fee per card issue or
renewed 0.600 0.400 0.250 0.200 0.175
Maximum 10,000 19,000 29,000 41,500 61,500 79,000
ANNUAL CARD FEES - EACH ADDITIONAL PAYMENT SYSTEM PER CARD
Minimum 0 2,500 4,750 7,250 10,375 15,375
Fee per card issued or
renewed 0.250 0.150 0.100 0.063 0.050 0.044
Maximum 2,500 4,750 7,250 10,375 15,375 19,750
SW LICENSE FEES (SUBHOST)
System Core (including EP) $34,300 $73,500 $98,000 $122,500 $147,000 $171,500
APPLICATION MODULES
Loyalty and Incentives $24,500 $49,000 $58,800 $68,600 $78,400 $88,200
Membership & Access
control $4,900 $7,350 $9,800 $12,250 $14,700 $17,150
Ticketing $9,800 $17,150 $29,400 $34,300 $39,200 $44,100
======== ======== ======== ======== ======== ========
SUBHOST SW LICENSE FEES $73,500 $147,000 $196,000 $237,650 $279,300 $320,950
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 13
C.A.T. SYSTEM SW PRICING
US$ - Effective Date: 98/10/17 PRICES 2/4
<TABLE>
<S> <C> <C> <C> <C> <C>
NUMBER OF CARDS
- - Minimum 300,001 400,001 500,001 1,000,001 5,000,001
- - Maximum 400,000 500,000 1,000,000 5,000,000 10,000,000
SW LICENSE FEES (HOST)
System Core $280,000 $315,000 $ 385,000 $ 490,000 $ 560,000
APPLICATION MODULES
Loyalty and Incentives $140,000 $154,000 $ 192,500 $ 262,500 $ 350,000
Membership & Access control $ 28,000 $ 31,500 $ 35,000 $ 52,500 $ 70,000
Ticketing $ 70,000 $ 77,000 $ 87,500 $ 105,000 $ 140,000
======== ======== ========== ========== ===========
TOTAL HOST SW LICENSE FEES $518,000 $577,500 $ 700,000 $ 910,000 $ 1,120,000
======== ======== ========== ========== ===========
ANNUAL MAINTENANCE (15%) $ 77,700 $ 86,625 $ 105,000 $ 136,500 $ 168,000
ANNUAL CARD FEES - FIRST PAYMENT SYSTEM
Base (Minimum) 79,000 94,000 106,500 156,500 396,500
Fee per card issued or renewed 0.150 0.125 0.100 0.060 0.050
Maximum 94,000 106,500 156,500 396,500 646,500
ANNUAL CARD FEES - EACH ADDITIONAL PAYMENT SYSTEM PER CARD
Minimum 19,750 23,500 26,625 39,125 99,125
Fee per card issued or renewed 0.038 0.031 0.025 0.015 0.013
Maximum 23,500 26,625 39,125 99,125 161,625
SW LICENSE FEES (SUBHOST)
System Core (including EP) $196,000 $220,500 $ 269,500 $ 343,000 $ 392,000
ADDITIONAL MODULES
Loyalty and Incentives $ 98,000 $107,800 $ 134,750 $ 183,750 $ 245,000
Membership & Access control $ 19,600 $ 22,050 $ 24,500 $ 36,750 $ 49,000
Ticketing $ 49,000 $ 53,900 $ 61,250 $ 73,500 $ 98,000
======== ======== ========== ========== ===========
SUBHOST SW LICENSE FEES $362,600 $404,250 $ 490,000 $ 637,000 $ 784,000
======== ======== ========== ========== ===========
</TABLE>
<PAGE> 14
C.A.T. SYSTEM SW PRICING NOTES: PRICES 3/4
(1) C.A.T. System pricing is based on the following components:
System Core Software License Fees;
Applications Module Software License Fees;
Annual Maintenance Fees; and Annual Card Fees
(2) Prices will increase based on:
- Number of Cards, starting with minimum of 10,000 cards.
- Number of Payment Systems (per card)
- Number of SubHosts
(3) A System Core Software License is mandatory for each host site, and
includes one backup copy.
This License does NOT permit any sub-license or the establishment of
sub-hosts.
Prices are tiered, based on the maximum number of cards being used. If
card volumes exceed the maximum for a tier, upgrades are priced as the
difference between higher and lower volume tiers. For example, it will
cost $49,000 to upgrade to 50,000 cards (from 25,000),
for a core plus loyalty application module
the difference between the new cost ($273,000) and the old ($224,000).
Since Software License Fees are One-Time Charges, no rebates are given for
"downgrades."
(4) Application Modules are dependent on and must include the System Core
Software. Application Modules are priced using the same tiered approach.
As card numbers increase the Application module price increases.
(5) Total Software License Fees are calculated by aggregating the System Core
and Application Module(s) fees, including upgrades. Upgrades only include
enhancements if the Annual Card Fee is paid.
(6) The Software License Fee includes
- one terminal type and one card type
- one payment system integrated to the CAT system
- additional payment systems on the same card are covered in item 16 below
(7) The Annual Maintenance Fee is the percentage specified of the Total
Software License Fee by the licensee (currently 15%).
These fees are payable annually, in advance. A warranty period may apply.
(8) ANNUAL CARD (SERVICES) FEES
- covers C.A.T. software for one card type, one terminal model and one
payment system integrated to the CAT System
- is independent of number of terminals
- will only apply to payment types, card types, and terminal models that
are currently supported by C.A.T.
(9) Annual Card Fees are calculated based on the following factors:
<PAGE> 15
- base volume of cards (assuming a single payment system PRICES 4/4
per card); and
- incremental charges based on the number of payment systems
per card
(10) Annual Card Fees - Base Pricing - Card Volumes
- minimum $10,000 (based on 10,000 cards at $1.00 per card)
per year
- tiered pricing with "per card" rates decreasing as volumes
increase
- fees to be paid "sequentially"
For example: Annual Card Fees will be $21,000 for 30,000 cards
Minimum $10,000 for the first 10,000 cards
plus $9,000 for the next 15,000 cards @$.60 per card
plus $2,000 for the next 5,000 cards @$.40 per card
(11) Annual Card Fees - Incremental Pricing
- for each additional payment system per card
- 25% of Base Pricing-Card Volumes (above)
For example: If 20,000 of the above cards use two different payment
systems
Pay additional $2,500 for the first 10,000 cards ($10,000 x 25%)
plus $1,500 for the next 10,000 cards @$.60 per card x 25%
(12) Annual Card Fees - Payment Schedule
- 50% of estimated Annual Card Fees payable in advance
- remaining 50% of estimate, adjusted for actual volumes payable at
year-end
(13) Software License fees for Sub-Hosts (Distributed System License Option)
- Separate System Host(s) - indirect maintenance and support via Primary
Host
- System Core Software License Fees will be 70% of Primary Host Fees
- Application Software License Fees will be 70% of Primary Host Fees
(14) Implementation Fees
- charges for implementing the C.A.T. System, including project management
- fee and timing quotation must be obtained from C.A.T. (or IBM as their
Remarketer)
(15) Training Fees
- charges for Training customer support staff and end-users
- fees and timing quotations must be obtained from C.A.T. (or IBM as their
Remarketer)
(16) Additional Payment systems integrated to the CAT System within the license.
Note item (6) above. - each license for one payment type. A fee and timing
quotation must be obtained from C.A.T. for each additional payment type
that is required under the license before any confirmed pricing, delivery
or implementation dates are given.
(17) Additional Card and Terminal types under the license
Note item (6) above. - each license is for one card and one terminal type.
A fee and timing quotation must be obtained from C.A.T. for each additional
card type and terminal type (models) that are required under the license
before any confirmed pricing, delivery or implementation dates are given.
(18) Other One-Time Charges for Consulting, Customization, Development,
Certification,...
Any specific development, customization, or general consulting requires
separate quotation.
<PAGE> 1
EXHIBIT 10.16
[IBM LOGO]
Pervasive
Computing Division
Route 100, P. O. Box 100
Somers, New York 10589
March 12, 1999
David MacSmith
CEO & Managing Director
Card Application Technologies
Level 5 Cabcharge House
152-162 Riley Street
East Sidney, New South Wales 2010
Dear David:
IBM recognizes the need to accelerate the loyalty business market creation. In
support of this goal, IBM has created the attached Marketing Support Plan (MSP)
under our Software Remarketing Agreement, to help promote the initial market
acceptance of the CAT Loyalty solution product.
The attached MSP cannot be modified except by a writing signed by an authorized
representative of IBM that specifically amends this letter.
We look forward to working with your team.
Sincerely
/s/ MARK F. BREGMAN
- --------------------------------
Mark F. Bregman
General Manager
IBM Pervasive Computing Division
<PAGE> 2
MARKETING SUPPORT PLAN
THIS IS THE MARKETING SUPPORT PLAN (MSP) REFERRED TO UNDER SECTION 5.1 OF THE
SOFTWARE REMARKETING AGREEMENT BETWEEN IBM AND CAT # T98066 (AGREEMENT).
1. MARKETING ACTIVITIES
IBM will, at a minimum, undertake the following marketing activities:
- - Feature CAT at CTST 99, by giving CAT representation in pre exhibition
invitations distributed by IBM, positioning of a CAT pedestral in the IBM
booth, and providing a dedicated meeting room during the conference for CAT
to use
- - Work to enhance CAT presence in IBM marketing collateral by placing CAT on
the IBM Global Smart Card Solutions Web home page for loyalty, ticketing and
multi-application solutions and creating appropriate links, provided CAT
agrees to the associated terms
[X] Education and training of IBM banking and retail ISU sales teams, as
appropriate
[X] Reference selling, upon successful completion of the first project in
North America, as appropriate
[X] CAT and Product participation and demonstration on IBM stands at
exhibitions where the Product is applicable in IBM's judgment
[X] A series (4 at least) of roadshows in select cities chosen by IBM with
presentation to potential customers identified by IBM and CAT
Upon implementation of the first project in the Territory, IBM will
- - Feature the CAT solution as an IBM eBusiness success story in a marketing
brochure or other sales collateral
- - Create briefing documents, marketing brochures, and/or sales collateral
featuring CAT as an IBM eBusiness solution and post such material on an
e-business reference site on the Web chosen by IBM
- - IBM will fund a two week trip to Raleigh, North Carolina (in accordance with
IBM's normal expense reimbursement guidelines) for one CAT technical staff
member to complete an "internship" with IBM store system developers, the
objective of which would be to have CAT develop their own integration to our
IBM 4690 POS General Sales Application, subject to CAT's acceptance of the
associated terms for performing such work at an IBM site.
2. MARKETING EXPENSE FUNDING
IBM will re-imburse CAT for documented, out-of-pocket expenses incurred in
directly supporting IBM in North America up to a maximum of [*], in increments
of up to [*] per quarter for the first 4 quarters of the Agreement. You agree to
obtain IBM's written approval prior to incurring any such expenses. IBM may
advance CAT the sum of [*] per quarter to cover these expenses. Although expense
forecasts will be reviewed each quarter and therefore this funding cannot be
guaranteed, IBM currently expects to maintain this level of funding for the
first four quarters of the Agreement. Funding for future years, if any, will be
determined by IBM during the annual plan review.
This Market Expense Funding relates to re-imbursing CAT for selected, documented
direct marketing costs that specifically relate to the support of IBM. Any sums
that are advanced by IBM to CAT and are not used by CAT for eligible direct
marketing costs authorized by IBM must be refunded to IBM. For example, the
direct cost of running advertising with IBM's name included (if authorized by
IBM), CAT organized promotions where IBM appears, CAT's costs of the roadshows
four times a year, could be re-imbursed from these funds if authorized by IBM in
advance and properly documented by CAT. If the Agreement is terminated prior to
its expiration, no further Market Expense Funding will be re-imbursed to CAT,
and any funds advanced by IBM and not used for authorized expenses as of the
date of termination must be promptly refunded to IBM by CAT.
Each party shall bear its own costs in connection with this MSP and the
Agreement, except as otherwise specifically authorized in writing.
An * indicates that information has been redacted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
