-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPyvnowQqCkMf0WMzLVf/rEmVxwfT1Qz06Vzy1kQjC9VlB7Fmi88ubnXjZzAQz9m kLphmTG/UXnFdSa2cRa1+w== 0000950124-05-006855.txt : 20051216 0000950124-05-006855.hdr.sgml : 20051216 20051216145020 ACCESSION NUMBER: 0000950124-05-006855 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20050901 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20051216 DATE AS OF CHANGE: 20051216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATUITY INC CENTRAL INDEX KEY: 0001109740 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 383518829 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-30045 FILM NUMBER: 051269453 BUSINESS ADDRESS: STREET 1: 2711 EAST JEFFERSON AVE CITY: DETROIT STATE: MI ZIP: 48207 BUSINESS PHONE: 3135674348 MAIL ADDRESS: STREET 1: 2711 EAST JEFFERSON AVE CITY: DETROIT STATE: MI ZIP: 48207 8-K/A 1 k00835e8vkza.txt AMENDMENT TO CURRENT REPORT, DATED SEPTEMBER 1, 2005 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): DECEMBER 16, 2005 (SEPTEMBER 1, 2005) --------------------- CATUITY INC. (Exact name of registrant as specified in its charter) DELAWARE 000-30045 38-3518829 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 2711 E. JEFFERSON AVE. DETROIT, MICHIGAN 48207 (313)-567-4348 (Address of principal (Registrant's telephone number, executive offices) including area code) NOT APPLICABLE (Former name or former address, if changed since last report) .........Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions. [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b), under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c), under the Exchange Act (17 CFR 240.13e-4(c)) On September 7, 2005, Catuity, Inc. ("Catuity") filed a Current Report on Form 8-K to report the completion of its acquisition of Loyalty Magic Pty. Ltd. On November 14, 2005 Catuity filed an amendment to the September 7, 2005 Current Report on Form 8-K to include required financial information. This Amendment is filed to provide additional financial information regarding the acquisition. ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired. The following financial statements are filed as a part of this Amendment as Exhibit 13.3. Audited Financial Statements of Loyalty Magic Pty. Ltd. for the twelve month period ended June 30, 2005. Balance Sheets Statements of Operations Notes to Consolidated Financial Statements Statement of Cash Flows (b) Pro Forma Financial Information. The following pro forma financial information is filed as a part of this Amendment: Pro Forma Unaudited Consolidated Balance Sheet as of June 30, 2005. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT JUNE 30, 2005 The following unaudited pro forma consolidated Balance Sheet has been derived from historical financial statements of Catuity, Inc, ("Catuity") and Loyalty Magic Pty. Ltd. ("Loyalty Magic"), adjusted to give pro forma effect to the acquisition of Loyalty Magic by Catuity (the "Transaction") at June 30, 2005. Catuity completed its acquisition of Loyalty Magic on September 1, 2005, has previously filed a Current Report on Form 8-K concerning such transaction on September 7, 2005, and filed an amended Current Report on Form 8-K/A on November 14, 2005. The unaudited pro forma consolidated Balance Sheet as of June 30, 2005 is presented for informational purposes only and does not purport to represent what our results would actually have been had the Transaction occurred at such time or to project our results of operations for any future period or date. The pro forma adjustments are based upon available information and various assumptions that we believe are reasonable. The pro forma adjustments and certain assumptions are described in the accompanying notes. The acquisition of Loyalty Magic has been accounted for using the purchase method of accounting. Allocations of the purchase prices have been determined based upon information presently available and are subject to change. The final allocations of the purchase price and the amounts included in the unaudited pro forma financial statement could differ significantly.
LOYALTY CATUITY AND LOYALTY MAGIC MAGIC CATUITY COMBINED PRO FORMA BALANCE SHEET IN USD IN USD PRO-FORMA IN USD JUNE 30, 2005 6/30/05 6/30/05 ADJ. NOTES 6/30/05 - ------------------------------------------------------------------------------------------------------------------ CURRENT ASSETS Cash and cash equivalents 33,106 1,003,717 3,492,006 1 4,528,829 Accounts Receivable less allowance 651,631 14,251 665,882 Restricted Cash 0 110,615 110,615 Investments 3 0 3 Prepaid expenses and other 5,800 64,954 70,754 TOTAL CURRENT ASSETS 690,540 1,193,537 3,492,006 5,376,083 NON-CURRENT ASSETS Property and equipment, net 111,503 121,131 232,634 Capital Leasing, net 56,812 0 56,812 Other assets 1,351 274,864 276,215 Web Development 53,353 0 (53,353) 2 0 New Platform 159,389 0 (159,389) 3 0 Goodwill 0 0 2,705,338 4 2,705,338 Other Intangibles, Net 1,752,890 5 1,752,890 TOTAL NON-CURRENT ASSETS 382,409 395,995 4,245,486 5,023,890 TOTAL ASSETS 1,072,949 1,589,532 7,737,492 10,399,973 CURRENT LIABILITIES Accounts Payable 128,502 212,254 340,756 Accrued compensation 113,005 103,921 216,926 Other accrued expenses 116,267 126,638 242,905 Trust liability 0 86,782 86,782 TOTAL CURRENT LIABILITIES 357,774 529,595 0 887,369 NON-CURRENT LIABILITIES Capital Leasing Liability 51,677 0 51,677 TOTAL NON-CURRENT LIABILITIES 51,677 0 0 51,677 TOTAL LIABILITIES 409,451 529,595 0 939,046 EQUITY & RESERVES Common Stock 2,056,965 778 (2,055,660) 6 2,083 Additional Paid in Capital 0 36,707,811 8,956,428 7 45,664,239 Shareholder Loans 0 (185,155) (185,155) Foreign Currency Translation 0 68,709 68,709 Retained Earnings (1,393,467) (35,532,206) 836,724 (36,088,949) Current Years Earnings 0 0 OWNERS EQUITY 663,498 1,059,937 7,737,492 9,460,927 - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES & OWNERS EQUITY 1,072,949 1,589,532 7,737,492 10,399,973 - ------------------------------------------------------------------------------------------------------------------
Notes: 1. The adjustment to cash to reflect the additional cash remaining due to the capital raises after the purchase of Loyalty Magic. 2. The elimination of the Loyalty Magic intangible item Web development. 3. The elimination of the Loyalty Magic intangible item New platform 4. The amount of goodwill resulting from the Loyalty Magic acquisition. 5. The net amount of identifiable intangibles resulting from the Loyalty Magic acquisition. 6. The elimination of the Loyalty Magic common stock and the addition of the Catuity common stock issued in the acquisition and associated capital raise. 7. The additional paid in capital resulting from the Loyalty Magic acquisition and associated capital raise. (d) Exhibits 13.3 Audited Financial Statements of Loyalty Magic Pty. Ltd. for the twelve month period ending June 30, 2005. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CATUITY INC. (Registrant) By /s/ John H. Lowry --------------------------------- John H. Lowry Senior Vice President, Chief Financial Officer & Secretary Date: December 16, 2005 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------------- ------------------------------------------------------------ 13.3 Audited Financial Statements of Loyalty Magic Pty. Ltd. for the twelve month period ending June 30, 2005
EX-13.3 2 k00835exv13w3.txt AUDITED FINANCIAL STATEMENTS OF LOYALTY MAGIC PTY. LTD Exhibit 13.3 LOYALTY MAGIC PTY LIMITED SPECIAL PURPOSE FINANCIAL REPORT FOR THE YEAR ENDED 30TH JUNE 2005 LOYALTY MAGIC PTY LIMITED A.C.N. 075 350 239 CONTENTS Declaration by Directors Balance Sheet Profit and Loss Notes to and Forming Part of the Financial Statements Statement of Cash Flows Independent Auditor's Report LOYALTY MAGIC PTY LIMITED BALANCE SHEET AS AT 30TH JUNE 2005
NOTE 2005 2004 $ $ - ------------------------------------------------------------------ CURRENT ASSETS Cash ........................ 2 43,446 659,991 Receivables ................. 3 855,159 450,248 Investments ................. 4 4 4 Other ....................... 5 7,611 30,795 ---------- ---------- TOTAL CURRENT ASSETS ........ 906,220 1,141,038 ---------- ---------- NON-CURRENT ASSETS Property, plant and equipment 6 220,886 157,816 Intangibles ................. 7 280,963 54,391 ---------- ---------- TOTAL NON-CURRENT ASSETS .... 501,849 212,207 ---------- ---------- TOTAL ASSETS ................ 1,408,069 1,353,245 ========== ========== CURRENT LIABILITIES Accounts Payable ............ 8 168,638 149,461 Borrowings .................. 9 34,672 34,242 Provisions .................. 10 137,684 243,301 Other ....................... 11 117,909 133,470 ---------- ---------- TOTAL CURRENT LIABILITIES ... 458,903 560,474 ---------- ---------- NON-CURRENT LIABILITIES Borrowings .................. 9 67,817 -- Provisions .................. 10 10,617 -- ---------- ---------- TOTAL NON-CURRENT LIABILITIES 78,434 -- ---------- ---------- TOTAL LIABILITIES ........... 537,337 560,474 ========== ========== NET ASSETS (LIABILITIES) .... 870,732 792,771 ========== ========== EQUITY Issued capital .............. 12 2,699,429 2,699,029 Accumulated losses .......... (1,828,697) (1,906,258) ---------- ---------- TOTAL EQUITY ................ 870,732 792,771 ========== ==========
LOYALTY MAGIC PTY LIMITED PROFIT & LOSS FOR THE YEAR ENDED 30TH JUNE 2005
NOTE 2005 2004 $ $ - -------------------------------------------------------------------------------- NET PROFIT(LOSS) BEFORE INCOME TAX ..... (163,999) 236,693 Income Tax Expense ..................... 241,560 57,728 ---------- ---------- NET PROFIT(LOSS) AFTER INCOME TAX ...... 77,561 294,421 Retained Profits (Accumulated Losses) at the beginning of the Financial Year .... (1,906,258) (2,200,679) ---------- ---------- TOTAL AVAILABLE FOR APPROPRIATION ...... (1,828,697) (1,906,258) ---------- ---------- RETAINED PROFITS (ACCUMULATED LOSSES) AT END OF FINANCIAL YEAR ............... (1,828,697) (1,906,258) ========== ==========
LOYALTY MAGIC PTY LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30TH JUNE 2005
2005 2004 $ $ - -------------------------------------------------------------------------------- SALES ASP Sales 2,131,431 1,899,456 Subscription Services 113,031 11,475 License Income 252,137 617,259 Support Services 259,173 180,319 International Sales 90,000 73,600 ---------- ---------- 2,845,772 2,782,109 LESS: DIRECT COSTS Purchases 117,292 149,061 Contract Data Entry 217,387 243,106 Terminal Costs 25,500 40,616 ---------- ---------- 360,179 432,783 ---------- ---------- GROSS PROFIT FROM TRADING 2,485,593 2,349,326 EXPENDITURE 2,667,750 2,131,849 ---------- ---------- (182,157) 217,477 OTHER INCOME Interest Received 9,908 14,266 Government Subsidies 8,250 4,950 ---------- ---------- 18,158 19,216 ---------- ---------- NET (PROFIT)LOSS 163,999 (236,693) ========== ==========
LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005 1 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES This financial report is a special purpose financial report prepared for the use by the members and directors of the company. Although the directors have determined that the company is not a reporting entity, the report has been prepared in accordance with Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The report is also prepared on an accruals basis and is based on historic cost and does not take into account changing money values or, except where specifically stated, current valuations of non-current assets. The following material accounting policies, which are consistent with the previous period unless otherwise stated, have been adopted in the preparation of this report:- (a) INCOME TAX The company adopts the liability method of tax effect accounting whereby the income tax expense is based on the operating profit adjusted for any permanent differences. Future income tax benefits are not brought to account unless realisation of the asset is assured beyond any reasonable doubt. Future income tax benefits in relation to tax losses are not brought to account unless there is virtual certainty of realisation of the benefit. (b) PROPERTY, PLANT AND EQUIPMENT Each class of property, plant and equipment is accounted for at cost less accumulated depreciation, and is depreciated on a diminishing value basis over the expected useful lives to the company. (c) INTANGIBLES Web Site development costs are capitalised until completion of the relevant platform, then amortised on a straight line basis over the period during which the site is expected to benefit the company. (d) EMPLOYEE ENTITLEMENTS Provision is made for employee entitlements arising from services rendered by employees to balance date. (e) GOODS AND SERVICES TAX Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the cost of the expense. The net amount of GST recoverable, or payable to, the ATO is included as a current asset or liability in the balance sheet. LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005 1 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) (f) REVENUE RECOGNITION Main Areas of Income (i) Application Service Provision Income Fixed Charge Management fees - Invoiced monthly and brought to account monthly Variable Fees - Invoiced monthly based on volume of transactions processed (ii) Licensed Income Customisation of Software - Taken up as unearned income and brought to account as revenue, on completion of agreed milestones. Support Fees - Invoiced in advance, taken up as unearned income and transferred to revenue depending on the contract terms. Upgrade rights - Invoiced annually in advance, taken up as unearned income and transferred to revenue monthly on a straight line basis. (g) LEASES Leases of fixed assets, where substantially all the risks and benefits incidental to the ownership of the asset, but not legal ownership, are transferred to the company are classified as finance leases. Finance leases are capitalised recording an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual value. Leased assets are depreciated on a straight line basis over their estimated useful lives where it is likely that the economic entity will obtain ownership of the asset or over the term of the lease. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. CONFORMITY WITH UNITED STATES OF AMERICA (US) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) In order to comply with the provisions of US GAAP, capitalised Web Development and new platform development costs of $279,170 (refer to note 7), should be written off as expenses in the year ended 30th June 2005. This adjustment would reduce the company's net profit for the year by $279,170 and reduce net assets at 30th June, 2005 by $279,170. LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005
2005 2004 $ $ - ------------------------------------------------------------------------------- 2 CASH Petty Cash 200 200 Cash at Bank 43,246 659,791 -------- -------- 43,446 659,991 ======== ======== 3 RECEIVABLES CURRENT Trade Debtors 633,599 407,520 Less: Provision for Doubtful Debts (80,000) (30,000) -------- -------- 553,599 377,520 -------- -------- Sundry Debtors 286,560 57,728 Rental Bond 15,000 15,000 -------- -------- 855,159 450,248 ======== ======== 4 INVESTMENTS CURRENT Shares in Associated Companies 4 4 ======== ======== 5 OTHER ASSETS CURRENT Prepayments 7,611 30,795 ======== ========
LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005
2005 2004 $ $ - ------------------------------------------------------------------------------- 6 PROPERTY, PLANT & EQUIPMENT Office Furniture & Equipment at Cost 366,722 416,163 Less: Accumulated Depreciation (220,393) (258,347) -------- -------- 146,329 157,816 -------- -------- Leased Assets at Cost 92,556 -- Less: Accumulated Amortisation (17,999) -- -------- -------- 74,557 -- -------- -------- TOTAL PROPERTY, PLANT & EQUIPMENT 220,886 157,816 ======== ======== 7 INTANGIBLES Development of New Platform - at cost 209,173 -- Patents & Trademarks 1,773 -- Web Development - at cost 84,020 54,391 Less: Accumulated Amortisation (14,003) -- -------- -------- 70,017 54,391 -------- -------- 280,963 54,391 ======== ======== 8 ACCOUNTS PAYABLE CURRENT Sundry Creditors 44,903 27,198 Trade Creditors 123,735 122,263 -------- -------- 168,638 149,461 ======== ======== 9 BORROWINGS CURRENT GST Payable 34,672 34,242 ======== ======== NON-CURRENT Lease Liability 67,817 -- ======== ========
LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005
2005 2004 $ $ - -------------------------------------------------------------------------------- 10 PROVISIONS CURRENT Provision for Annual Leave 104,635 81,654 Provision for Bonuses 33,049 161,647 NON CURRENT Provision for Long Service Leave 10,617 -- --------- --------- Aggregate employee entitlement liability 148,301 243,301 ========= ========= 11 OTHER LIABILITIES CURRENT Income in Advance 117,909 133,470 ========= ========= 12 ISSUED CAPITAL PAID UP CAPITAL: Issued Capital 2,699,429 2,699,029 ========= ========= 13 EXPENDITURE Salaries 1,460,293 1,156,712 General and Administrative 1,207,457 975,137 --------- --------- Total Expenditure 2,667,750 2,131,849 ========= =========
14 INCOME TAX EXPENSE No income tax is payable on the net profit for the year as the company has accumulated losses available as an income tax deduction from prior years. Future income tax benefits not brought to account, the benefits of which will only be realised if the relevant conditions for deductibility occur: - timing differences 34,576 24,496 - tax losses 66,643 243,053 ------- ------- Total 101,219 267,549 ======= =======
Further, the company is entitled to receive a grant of $241,560 (2004 - $57,728) from the Australian Taxation Office in respect of research and development expenditure for the year ended 30 June 2005. LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005
NOTE 2005 2004 $ $ - ---------------------------------------------------------------------------------------------- 15 STATEMENT OF CASH FLOWS RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Operating profit/(loss) after income tax 77,561 294,421 Depreciation expense 51,875 41,044 CHANGE IN OPERATING ASSETS AND LIABILITIES (Increase)/Decrease in trade and other receivables (221,079) 109,438 (Increase)/Decrease in prepayments 23,184 (21,985) Increase/(Decrease) in trade and other creditors 19,607 42,224 Increase/(Decrease) in borrowings -- (44,948) Increase/(Decrease) in provisions (95,000) (75,871) Increase/(Decrease) in unearned income (15,561) 2,887 Increase/(Decrease) in provision for income tax (183,832) 326,402 -------- ------- Net cash flow from operating activities (343,245) 673,612 ======== =======
During the financial year the company acquired property, plant and equipment with a cost of $92,556, by means of finance leases, these acquisitions are not reflected in the Statement of Cash Flows. 16 CAPITAL AND LEASING COMMITMENTS Finance Lease Commitments Payable - not later than 1 year 33,588 -- - later than 1 year but not later than 5 yrs 35,241 -- - later than 5 years -- -- -------- ------- Minimum lease payments 68,829 Less future finance charges (1,011) -------- ------- Total Lease Liability 9 67,818 -- -------- ------- Operating Leases Commitments Payable - no later than 1 year 66,938 63,548 - later than 1 year but not later than 5 years 76,428 143,365 - later than 5 years -- -- -------- ------- Total Lease Liability 143,365 206,914 -------- -------
LOYALTY MAGIC PTY LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2005
NOTE 2005 2004 $ $ - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 2,617,382 2,899,384 Payments to suppliers and employees (3,024,948) (2,621,208) Interest Received 9,907 14,266 Interest Paid (3,314) (2,960) Income Tax Refund 57,728 384,130 ---------- --------- NET CASH INFLOW FROM OPERATING ACTIVITIES 15 (343,245) 673,612 CASH FLOWS FROM INVESTING ACTIVITIES Payments for property, plant and equipment (21,700) (61,833) Proceeds from sale of property, plant and equipment -- -- Payments for Web Development (226,572) (54,391) ---------- --------- NET CASH OUTFLOW FROM INVESTING ACTIVITIES (248,272) (116,224) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of Ordinary Shares 400 538 Repayment of lease liabilities (25,428) -- ---------- --------- Net cash inflow/(outflow) from financing activities (25,028) 538 Net increase/(decrease) in cash held (616,545) 557,926 Cash at the beginning of the financial year 2 659,991 102,065 ---------- --------- CASH AT THE END OF THE FINANCIAL YEAR 2 43,446 43,446 ---------- ---------
INDEPENDENT AUDIT REPORT TO THE MEMBERS OF LOYALTY MAGIC PTY LTD SCOPE The financial report and the Directors responsibility The special purpose financial report comprises the attached Balance Sheet, Profit and Loss Statement, Statement of Cash Flows, accompanying notes to the financial statements, and Directors' Declaration of Loyalty Magic Pty Ltd, for the year ended 30 June 2005. The Directors are responsible for the preparation and true and fair presentation of the special purpose financial report and have determined that the accounting policies used and described in Note 1 to the financial statements are appropriate to meet the requirements of the Corporations Act 2001 and are appropriate to meet the needs of the Members. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the special purpose financial report. Audit approach We conducted an independent audit in order to express an opinion to the Members of Loyalty Magic Pty Ltd. No opinion is expressed as to whether the accounting policies used, and described in Note 1, are appropriate to the needs of the members. Our audit was conducted in accordance with Australian Auditing and Assurance Standards in order to provide reasonable assurance as to whether the special purpose financial report is free of material misstatement. The financial report has been prepared for distribution to the Members. We disclaim any assumption of responsibility for any reliance on this audit report or on the special purpose financial report to which it relates to any person other than the Members, or for any purpose other than that for which it was prepared. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal controls, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the special purpose financial report presents fairly, in accordance with Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's financial position, and of its performance as represented by the results of its operations. We formed our audit opinion on the basis of these procedures, which included: - - examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the special purpose financial report, and - - assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the Directors. While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Our audit did not involve an analysis of the prudence of business decisions made by management or the Directors. INDEPENDENCE In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. AUDIT OPINION In our opinion, the special purpose financial report of Loyalty Magic Pty Ltd is in accordance with: (a) the Corporations Act 2001 including: (i) giving a true and fair view of the company's financial position as at 30 June 2005 and its performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia to the extent described in Note 1 and the Corporations Regulations 2001; and (b) other mandatory professional reporting requirements in Australia to the extent described in Note 1. McInnes, Graham & Gibbs Chartered Accountants Jeffrey E Graham Partner December 2005 -----END PRIVACY-ENHANCED MESSAGE-----