-----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, WYAhYA2OaGXjv++bQao0pbcDzM/TC03ivkrCz2BeyP1ttmKsMnSuf4bdgxDGdXd7 GrawfPVlfMeHML/3zOof7Q== 0000950149-00-000808.txt : 20000410 0000950149-00-000808.hdr.sgml : 20000410 ACCESSION NUMBER: 0000950149-00-000808 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATUITY INC CENTRAL INDEX KEY: 0001109740 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 383518829 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-30045 FILM NUMBER: 595774 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 10-12G/A 1 AMENDMENT NO.1 TO FORM 10- PURSUANT TO RULE 12(G) 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 AMENDMENT NO. 1 TO FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 CATUITY INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 38-3518829 ---------------------------------------- ------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 2711 E. Jefferson Ave. Detroit, Michigan, USA 48207 ---------------------------------------- ------------------- (Address of Principal Executive Offices) (Zip Code) 313-567-4348 - -------------------------------------------------------------------------------- (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 --------------------------------------- ------------------------------ 2 TABLE OF CONTENTS
PAGE ---- ITEM 1 BUSINESS............................................................. 1 RISK FACTORS......................................................... 13 ITEM 2. FINANCIAL INFORMATION................................................ 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 28 ITEM 3. PROPERTIES........................................................... 34 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................................... 35 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS..................................... 37 ITEM 6. EXECUTIVE COMPENSATION............................................... 40 ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 49 ITEM 8. LEGAL PROCEEDINGS.................................................... 52 ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 53 ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.............................. 55 ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.............. 59 ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................ 60 ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 61 ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 62 ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.................................... 63
Our website is www.catuity.com. The information on our website is not incorporated by reference into this registration statement. Unless otherwise indicated, all information in this registration statement gives effect to the one-for-ten reverse stock split of our outstanding capital stock that occurred in November 1999. i 3 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This registration statement contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outline under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, levels of activity, performance or achievement. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this registration statement to conform such statements to actual results or to changes in our expectations. SPECIAL NOTE REGARDING FOREIGN CURRENCY AND EXCHANGE RATES All dollar figures contained in this registration statement are set forth in United States dollars (US$), except as otherwise indicated. All Australian dollars (A$) translated into US$ have been translated at the following rates per A$, except as otherwise indicated:
Exchange Rate per Australian Dollar ------------------------------------------ For Revenues For Dec. 31 Assets Year and Expenses(1) and Liabilities(2) ---- --------------- ------------------ 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
- ---------- (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 -1- 4 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 -2- 5 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. -3- 6 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. -4- 7 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. -5- 8 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. -6- 9 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. -7- 10 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 -8- 11 - 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 -9- 12 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; -10- 13 - 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. -11- 14 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. -12- 15 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; -13- 16 - 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 -14- 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 -15- 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 -16- 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; -17- 20 - 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. -18- 21 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. -19- 22 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. -20- 23 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, -21- 24 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. -22- 25 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. -23- 26 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: -24- 27 - 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. -25- 28 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- 29 SELECTED FINANCIAL DATA CATUITY INC. (INCLUDING CHIP APPLICATION TECHNOLOGIES LIMITED) YEARS ENDED DECEMBER 31
1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Income Statement Data: Operating Revenue $ 1,210,903 $ 702,289 $ 888,092 $ 441,322 $ 379,557 Operating Expenses 7,380,307 2,909,758 4,190,050 3,740,354 3,091,505 ------------ ------------ ------------ ------------ ------------ Operating (loss) income (6,169,404) (2,207,469) (3,301,958) (3,299,032) (2,711,948) Other (expense) income (40,680) (176,679) (214,882) (362,721) 16,577 ------------ ------------ ------------ ------------ ------------ Net (loss) income $ (6,210,084) $ (2,384,148) $ (3,516,840) $ (3,661,753) $ (2,695,371) ============ ============ ============ ============ ============ Net (loss) income per share Basic $ (1.05) $ (0.53) $ (1.15) $ (2.81) $ (12.03) Diluted $ (1.05) $ (0.53) $ (1.05) $ (2.01) $ (12.03) Weighted average number of outstanding shares Basic 5,913,613 4,473,257 3,065,840 1,300,906 223,992 Diluted 5,913,613 4,473,257 3,342,839 1,819,395 223,992
AS OF DECEMBER 31, ---------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Balance Sheet Data Total assets $ 6,254,324 $ 638,866 $ 1,336,385 $ 495,032 $ 598,318 Short-term debt including current portion of long-term debt 1,138,275 656,274 924,307 2,445,937 1,160,955 Long-term debt 874,818 1,593,549 1,691,618 2,028,169 0 Shareholders Equity/ (Capital deficit) 4,241,231 (1,610,957) (1,279,540) (3,979,074) (562,637)
-27- 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 -28- 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:
Years ended December 31 -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Revenues: Product License & Services $ 638,382 $ 291,533 $ 761,039 Research, Development & 572,521 410,756 127,053 Grants ---------- ---------- ---------- Total Net Operating Revenues 1,210,903 702,289 888,092 Costs and Expenses: Research, Development & 1,398,489 1,309,784 1,415,837 Testing Selling & Relationship 956,911 914,622 708,921 Development General and Administrative 1,255,096 693,979 998,061 Stock Compensation 2,475,175 (8,627) 218,646 Non Recurring Charges 1,294,636 -- 848,585 ---------- ---------- ---------- Total Costs and Expenses 7,380,307 2,909,758 4,190,050 ---------- ---------- ---------- Operating Loss (6,169,404) (2,207,469) (3,301,958) Other Income (Expense) 40,680 176,679 214,882 ---------- ---------- ---------- Net loss (6,210,084) (2,384,148) (3,516,840)
REVENUES Our product is currently being launched in the US market and 1999 was the first year US-based product license revenues were received. All prior year revenues were based on product license and services related to trials or other early stage developments in Australia and New Zealand. -29- 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 -30- 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 -31- 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 -32- 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. -33- 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. -34- 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.
Number of Percentage of Shares of Common Common Stock Stock Beneficially Beneficially Name and Address of Beneficial Owner Owned(1) Owned(2) - ------------------------------------ ------------ ------------ Lance D. O'Connor(3) 6-8 Kangaroo Point Road Kangaroo Point, NSW 2224 794,564 11.34% Australia Alexander S. Dawson(4) 52 St Marks Road Randwick, NSW 2031 201,484 2.99% Australia David L. Mac. Smith(5) 58 View Street Woollahra, NSW 2025 276,667 4.05% Australia Duncan P.F. Mount(6) 9 Ithica Road Elizabeth Bay, NSW 2011 200,000 2.97% Australia John M. Weihen(7) 17 Bayswater Road Lindfield, NSW 2070 34,200 * Australia
-35- 38
Number of Percentage of Shares of Common Common Stock Stock Beneficially Beneficially Name and Address of Beneficial Owner Owned(1) Owned(2) - ------------------------------------ ------------ ------------ Benjamin A. Garton(8) 65 Wilson Street Newtown, NSW 2042 21,384 * Australia Jonathan R.E. Adams(9) 10 Willows Lane Walingford, Pennsylvania 19806 1,500 * Carl H. Fisher(10) 1607 Damon Way Salt Lake City, Utah 84117 2,500 * Justin C.A. Wescombe(11) 14/339 Edgecliff Road Edgecliff NSW 2027 76,107 1.12% Australia All directors and executive officers as a group 813,842 11.71%
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants or other rights to purchase which are currently exercisable or are exercisable within 60 days after December 31, 1999 are deemed outstanding for purposes of computing the percentage ownership of any other person. Except as indicated by footnotes and subject to community property laws, where applicable, the persons named above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Percentage of Beneficial Ownership is calculated on the basis of the amount of outstanding securities plus those securities of the named person deemed to be outstanding under Rule 13-d3 (promulgated under the Securities and Exchange Act of 1934, as amended) by virtue of such securities being subject to rights to acquire beneficial ownership within 60 days after December 31, 1999. An asterisk indicates beneficial ownership of less than 1% of the common stock outstanding. (3) Includes 222,134 vested but unexercised options held by Mr. O'Connor. Also includes 55,000 vested but unexercised options held by Jenolan Pty Limited of which Mr. O'Connor is a shareholder and director. (4) Includes 16,484 vested but unexercised options held by Mr. Dawson. Also includes 25,000 shares held by Glomore Pty Limited, a family investment company of which Mr. Dawson is a shareholder and director. (5) Includes 100,000 vested but unexercised options. (6) Includes 178,087 shares held by Boom Australia Pty Limited which is the Trustee of the Mount Family Trust, the directors of which are Mr. Mount and his wife. (7) Includes 30,000 vested but unexercised options. (8) Includes 16,111 vested but unexercised options. (9) Includes 1,500 vested but unexercised options. (10) Includes 2,500 vested but unexercised options. (11) Includes 50,000 vested but unexercised options. -36- 39 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers, and their ages as of January 1, 2000, are as follows:
Name Age Position(s) - ---- --- ----------- David L. Mac. Smith 49 Director and Chairman Michael V. Howe 51 Director, President and Chief Executive Officer Alexander S. Dawson 56 Director(1) Duncan P.F. Mount 52 Director(1) John M. Weihen 53 Vice President -- Finance and Administration, Treasurer and Secretary Benjamin A. Garton 33 Vice President -- Product Development Jonathan R.E. Adams 37 Vice President -- Implementation and Technical Support Carl H. Fisher 45 Vice President -- Business Development Justin C.A. Wescombe 37 Vice President -- Sales and Marketing
(1) Member, Audit Committee David L. Mac. Smith is our founder and currently our Chairman of the Board. He has been the Chief Executive Officer and Managing Director of CAT, our wholly owned subsidiary, since November 1992. In December 1999, he became our President and CEO pending the appointment of a new President and CEO. In January 2000, he resigned as our President and CEO and became our Chairman. He was the founder and, from 1982 to 1991, CEO of Technology Investment Management Limited, a funds management company with specific focus on technology related businesses. He has a Bachelor of Law degree from the Australian National University. Michael V. Howe has served as our President and Chief Executive Officer since January 2000. From 1995 through 1999, he was the Director of Marketing Communications for United Airlines, responsible for the United Mileage Plus loyalty rewards program and the United partnership program. Prior to joining United Airlines, he served as the Chief Executive Officer of Young and Rubicam Advertising in Detroit, Michigan from 1990 to 1995. He has a Bachelor of Business Administration from John Carroll University and a Master of Business Administration from Michigan State University. Alexander S. Dawson is currently one of our non-employee Directors. He served as our Chairman of CAT, our wholly owned subsidiary, from November 1992 to December 1999. From 1987 to 1990, he was Chief Executive Officer of Arnotts Ltd., Australia's largest biscuit and snack food manufacturing company. From 1988 to 1990, he was a member of the Business -37- 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. -38- 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. -39- 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
Annual Compensation ------------------------------------------- Other Annual Name and Compensation Principal Position Year Salary($) Bonus($) ($)(1) - ------------------ ---- --------- -------- ------------- Michael V. Howe President and CEO 2000 240,000 60,000 David L. Mac. Smith Director and Chairman 1999 172,640 0 4,425 1998 163,275 0 25,041(2) 1997 185,750 0 4,214 John M. Weihen Vice President - Finance and Administration, Secretary 1999 129,100 0 4,425 1998 125,800 0 4,311 1997 148,600 0 4,214 Benjamin A. Garton Vice President - Product Development 1999 88,936 0 11,969(3) 1998 64,783 0 11,611(3) 1997 85,148 0 4,214 Jonathan R.E. Adams Vice President -- Implementation and Technical Services 1999 125,000 0 0 Carl H. Fisher Vice President -- Business Development 1999 150,000 0 0 Justin C.A. Wescombe Vice President - Sales and Marketing 1999 92,400 0 36,700(4) 1998 90,039 0 35,761(4) 1997 107,236 0 41,364(4)
-40- 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. -41- 44
Individual Grants Potential Realizable ----------------------------------------------------------- Value at Assumed Number of Percent of Annual Rates of Securities Total Options Stock Price Appreciation Underlying Granted to Exercise for Option Term(4) Options Employees in Price Per Expiration ------------------------ Name Granted(1) Fiscal Year(2) Share(3) Date 5% 10% - ---- ----------- ------------- --------- ------------ -------- -------- David L. Mac. Smith 50,000 14.20% $ 6.50 Jun 24, 2000 $ 16,250 $ 32,500 50,000 14.20 $ 7.48 Jun 24, 2001 $ 38,335 $ 78,540 50,000 14.20 $ 7.80 Jun 24, 2003 $ 84,047 $180,999 50,000 14.20 $10.40 Jun 24, 2004 $143,666 $317,465 ------- ------- 200,000 56.80% John M. Weihen 5,000 1.42% $ 6.18 Sep 30, 2001 $ 3,167 $ 6,489 5,000 1.42 $ 6.18 Jun 30, 2002 $ 3,167 $ 6,489 5,000 1.42 $ 1.95 Mar 31, 2001 $ 1,526 $ 3,227 ------- ------- 15,000 4.26% Benjamin A. Garton 15,000 4.26% $ 6.18 Jun 30, 2001 $ 9,502 $ 19,467 7,500 2.13 $ 6.18 Jun 30, 2002 $ 4,751 $ 9,733 7,500 2.13 $ 6.18 Jun 30, 2003 $ 4,751 $ 9,733 20,000 5.68 $ 6.18 Jun 30, 2004 $ 12,669 $ 25,956 ------- ------- 50,000 14.20% Jonathan R.E. Adams 1,500 0.43% $ 6.18 Jun 30, 2001 $ 706 $ 1,436 2,500 0.71 $ 6.18 Jun 30, 2001 $ 772 $ 1,544 3,500 0.99 $ 6.18 Jun 30, 2002 $ 1,648 $ 3,350 3,500 0.99 $ 6.18 Jun 30, 2002 $ 2,215 $ 4,539 ------- ------ 11,000 3.12% Carl H. Fisher 1,250 0.36% $ 6.18 Jun 30, 2001 $ 759 $ 1,553 1,250 0.36 $ 6.18 Jun 30, 2001 $ 657 $ 1,341 1,250 0.36 $ 6.18 Jun 30, 2001 $ 556 $ 1,128 1,250 0.36 $ 6.18 Jun 30, 2001 $ 455 $ 916 ------- ------ 5,000 1.44% Justin C. A. Wescombe -- -- -- -- -- --
- ---------- (1) Each such option will become fully vested as follows: -42- 45
Individual Grants ------------------------------------------------------------- Number of Securities Underlying Exercise Options Vesting Price Per Expiration Name Granted(1) Date Share $ Date - ---- ---------- ----------- --------- ------------ David L. Mac. Smith 50,000 Jul 1, 1999 6.50 Jun 24, 2000 50,000 Jul 1, 2000 7.48 Jun 24, 2001 50,000 Jul 1, 2001 7.80 Jun 24, 2003 50,000 Jul 1, 1999 10.40 Jun 24, 2004 John M. Weihen 5,000 Sep 30, 1999 6.18 Sep 30, 2001 5,000 Jun 30, 2000 6.18 Jun 30, 2002 5,000 Mar 10, 1999 1.95 Mar 31, 2001 Benjamin A. Garton 15,000 Jul 1, 1999 6.18 Jun 30, 2001 7,500 Jul 1, 2000 6.18 Jun 30, 2002 7,500 Jun 30, 2001 6.18 Jun 30, 2003 20,000 Jun 30, 2002 6.18 Jun 30, 2004 Jonathan R.E. Adams 1,500 Dec 31, 1999 6.18 Jun 30, 2001 2,500 Jun 30, 2000 6.18 Jun 30, 2001 3,500 Dec 31, 2000 6.18 Jun 30, 2002 3,500 Jun 30, 2001 6.18 Jun 30, 2002 Carl H. Fisher 1,250 Jul 31, 1999 6.18 Jun 30, 2001 1,250 Oct 31, 1999 6.18 Jun 30, 2001 1,250 Jan 31, 2000 6.18 Jun 30, 2001 1,250 Apr 30, 2000 6.18 Jun 30, 2001
(2) Based on a total of 352,254 option shares granted to our employees during fiscal year 1999. (3) The exercise price per share of each option was equal to or greater than the fair market value of the common stock on the date of grant as determined by the board of directors. The exercise price may be paid in cash, or in shares of our common stock valued at the market value of such stock on the exercise date. (4) The potential realizable value is calculated based on the term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our predictions of our future stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that the exercise price on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. -43- 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.
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options At December 31, 1999(1) at December 31, 1999(2) ----------------------- ------------------------- Name Vested Unvested Vested Unvested - ---- ------- -------- -------- -------- David L. Mac. Smith 100,000 100,000 $280,000 $361,000 John M. Weihen 30,000 5,000 $257,850 $ 25,350 Benjamin A. Garton 16,111 35,000 $121,152 $139,425 Jonathan R.E. Adams 1,500 9,500 $ 7,605 $ 48,165 Carl H. Fisher 2,500 2,500 $ 12,675 $ 12,675 Justin C. A. Wescombe 50,000 25,000(3) $401,500 $120,250
(1) The heading "Vested" refers to shares that were exercisable as of December 31, 1999; the heading "Unvested" refers to shares that were unexercisable as of December 31, 1999. (2) Based on a fair market value of our common stock as of December 31, 1999 of $11.25 per share. (3) Will not vest due to termination of employment as of April 30, 2000. POST FISCAL YEAR END-OPTION GRANTS Since the end of our last fiscal year, we retained a new President and Chief Executive Officer, Mr. Michael Howe. Associated with his employment, we are committed to issue options to Mr. Howe to purchase 315,000 shares of common stock. Of the shares underlying those options, 75,000 shares vested with the grant of the option and the balance vests quarterly over a five year period ending December 31, 2004. The expiration date of the options generally is December 31, 2008, or six months after cessation of employment, if earlier. The option exercise price will be the lowest of the volume-weighted average trading price of our shares on the Australian Stock Exchange for 30 days prior to listing on the Nasdaq National Market (converted to US$ at 0.65 per A$); the volume-weighted average trading price of our shares on the Nasdaq National Market for the 30 days immediately following listing on such Nasdaq Market; and the volume-weighted average trading price of Catuity shares on the Australian Stock Exchange for the month of January, 2000 (converted to US$ at 0.65 per A$). COMPENSATION OF DIRECTORS Each of our non-employee directors receives an annual director's fee of $16,138. Our Chairman and our President and CEO, who are executives and directors, receive only the executive compensation referred to above. -44- 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. -45- 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. -46- 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- 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. -48- 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, -49- 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 -50- 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- 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- 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.
High Low High Low Period (Australian $) (Australian $) (United States $) (United States $) - ------ -------------- -------------- ----------------- ----------------- Fiscal Year 1998: First Quarter 1998 $4.50 $3.00 $2.98 $1.99 Second Quarter 1998 $4.40 $2.60 $2.73 $1.62 Third Quarter 1998 $3.50 $2.10 $2.08 $1.25 Fourth Quarter 1998 $2.60 $2.05 $1.59 $1.26 Fiscal Year 1999: First Quarter 1999 $9.90 $2.40 $6.28 $1.52 Second Quarter 1999 $15.10 $7.60 $9.98 $5.03 Third Quarter 1999 $12.50 $8.00 $8.16 $5.22 Fourth Quarter 1999 $24.40 $11.70 $16.03 $7.69
-53- 56 Fiscal Year 2000 First Quarter (through March 10, 2000) $20.00 $14.55 $13.00 $9.46
All currency conversions are based on the prevailing A$ to US$ rate applicable on the last day of each respective quarter. As of December 31, 1999, there were approximately 4,380 stockholders of record of our common stock as reported to us by Computershare Registry Services Pty Limited, our transfer agent. To date, we have not paid any dividends on our common stock and do not expect to do so in the foreseeable future. We expect to retain all earnings to finance the growth and development of our business. -54- 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- 58 - - During the year, the following shares of common stock were issued as a result of the exercise of employee options:
Month Number of Shares Exercise Price ------- ---------------- -------------- January 41,500 $1.97 February 1,500 $1.97 March 6,559 $4.93 May 2,500 $1.97 August 1,500 $1.97 September 4,000 $1.97 October 7,000 $1.97 November 6,500 $1.97
- - In August, CAT issued 6,657 shares to Justin C.A. Wescombe in accordance with his employment agreement. These shares were issued as follows: 4,082 shares at $2.04 per share; 1,450 shares at $5.65 per share and 1,125 shares at $7.29 per share. FISCAL YEAR ENDED DECEMBER 31, 1998 In 1998, CAT issued to Cabcharge Australia Pty Limited shares as consideration due under an agreement for the purchase of the business and assets of Transcard Australia Pty Ltd. The consideration was payable in 4 tranches of shares at a value of $153,150 determined by the average sale price of shares in the preceding quarter. The first tranche was paid in 1997 (see below). In January, CAT issued 49,420 shares at $3.12 per share, in April CAT issued 68,177 shares at $2.67 per share and in July CAT issued 69,897 shares at $2.21 per share to Cabcharge Australia Pty Limited, all under the terms of the purchase agreement. In February, CAT issued 3,364 shares at a per share price of $2.28 to Justin C.A. Wescombe and 11,858 shares at a per share price of $1.84 to M. Spooner, in accordance with their employment service contracts. In May, CAT issued 3,363 shares at a per share price of $2.28 to Justin C.A. Wescombe and 14,294 shares at a per share price of $1.84 to M. Spooner, in accordance with their employment service contracts. In August, CAT issued 4,140 shares at a per share price of $1.85 to Justin C.A. Wescombe and 14,502 shares at a per share price of $2.11 to M. Spooner, in accordance with their employment service contracts. In November, CAT issued 5,388 shares at a per share price of $1.42 to Justin C.A. Wescombe and 19,459 shares at a per share price of $1.57 to M. Spooner, in accordance with their employment service contracts. In May, 1,500 shares were issued at $1.84 per share to employees following the exercise of options. -56- 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- 60 convert balance sheet figures for the respective fiscal years. The respective exchange rates are US$0.65 for 2000, US$0.6571 for 1999, US$0.6126 for 1998 and US$0.6503 for 1997 per $A. All share numbers reflect the impact of the one for ten reverse stock split completed in November 1999. All share prices have been rounded to the nearest cent. Where underwriters' fees were paid, the fees have been deducted from the issued capital in the financial statements, but the gross receipts before such fees are indicated above. At December 31, 1999, we had 6,729,269 shares of common stock outstanding. -58- 61 ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED Our authorized capital consists of 110,000,000 shares, of which 100,000,000 shares are denominated common stock, par value $0.001 per share and of which 10,000,000 shares are denominated preferred stock, par value $0.001 per share. A total of 6,741,072 shares of common stock were issued and outstanding as of March 10, 2000. Also outstanding as of that date were options held by third parties to purchase an aggregate of 821,623 shares of common stock. No preferred stock has been issued. Holders of common stock are entitled to one vote for each share standing in his or her name. The holders of common stock may receive cash dividends as declared by the Board of Directors out of funds legally available therefor. Each share of common stock is entitled to share pro rata in distributions upon liquidation. Holders of common stock are entitled to participate in the election of all directors. The holders of common stock do not have cumulative voting rights in the election of directors. The outstanding shares of common stock are fully paid and non-assessable. Holders of common stock do not have subscription, redemption, conversion, liquidation or preemptive rights. The rights of the holders of common stock will also be subject to the rights and preferences of the holders of the company's preferred stock, as designated by our Board of Directors. -59- 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- 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- 64 ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -62- 65 ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS 1. Our financial statements are filed as part of this Registration Statement on Form 10. See Index to Financial Statement Information at page F-1. 2. The following financial schedules are included for the three years ended December 31, 1999: Schedule II -- Valuation and Qualifying Accounts, at page F-22. Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes. (b) EXHIBITS 2.1++ Implementation Agreement between Chip Application Technologies Limited and NovaTec Inc. 3.1++ Certificate of Registration of Card Technologies Australia Limited 3.2++ Certificate of Registration on Change of Name from Card Technologies Australia Limited to Chip Application Technologies Limited 3.3++ Certificate of Incorporation of NovaTec Inc. 3.4++ Certificate of Amendment to the Certificate of Incorporation of NovaTec Inc. 3.5++ Bylaws of NovaTec Inc. 10.1++ Put and Call Option Deed of A.S. Dawson in Respect of Shares of Chip Application Technologies Limited 10.2++ Share Option Deed of A.S. Dawson in Respect of Shares of NovaTec Inc. 10.3++ Employment Agreement of Michael V. Howe 10.4++ Executive Services Agreement of David L. Machattie Smith 10.5++ Deed of Employment of Benjamin Garton 10.6++ Employment Contract of Justin Wescombe and Employment Contract Amendment 10.7++ Deed of Employment of John Weihen 10.8++ Services Agreement of Jonathan Adams 10.9++ Services Agreement of Carl H. Fisher 10.10++ Lease for premises located at 68-72 Wentworth Avenue Surry Hills, New South Wales, Australia 10.11++ Lease for premises located at 2711 East Jefferson Avenue, Detroit, Michigan 10.12* Research and Development Start Grant for Chip Application Technologies Limited 10.13 Smart Loyalty Technical Work Group Agreement between Visa U.S.A. and Chip Application Technologies Limited 10.14 Partner Program Loyalty Services Agreement between Visa International Service Association and Chip Application Technologies Limited 10.15* Software Remarketing Agreement between IBM and Chip Application Technologies Limited 10.16* Marketing Support Plan between IBM and Chip Application Technologies Limited 10.17++ Operation Reseller Agreement between Catuity Inc. and Data Pro Accounting Software, Inc. 10.18++ Sun Microsystems Computer Company and Chip Application Technologies Limited Joint Marketing Agreement 10.19++ Cooperative Agreement between Chip Application Technologies Limited and Global Transaction Company 10.20++ Technology Partnership Agreement between Chip Application Technologies Limited and Gemplus Technologies Asia Pte Ltd. 10.21++ Memorandum of Understanding between De La Rue Cartes et Systemes and Chip Application Technologies Limited 10.22++ Loan Repayment and Option Agreement among Chip Application Technologies Limited, Health Group Australia Pty Limited and Industrial Superannuation Administration Services Limited 10.23++ Form of Indemnification Agreement 10.24++ Form of Stock Option Plan and Form of Stock Option Agreement under Plan 27.1++ Financial Data Schedule * Confidential treatment requested. + To be filed by amendment. ++ Previously filed. -63- 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- 67 CATUITY INC INDEX TO FINANCIAL STATEMENTS(9)
Page ---- Independent Auditors Report................................................................... F-2 Consolidated Balance Sheets as at December 31, 1998 and 1999.................................. F-3 Consolidated Statement of Operations for the years ended December 31, 1997, 1998 and 1999..... F-4 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999...................................................................................... F-5 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1998 and 1999..... F-6 Notes to Consolidated Financial Statements.................................................... F-7
F-1 68 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS The Board of Directors and Stockholders Catuity Inc. We have audited the accompanying consolidated balance sheets of Catuity Inc., as at December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Catuity Inc., at December 31, 1998 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material aspects to the information set forth therein. ERNST & YOUNG Sydney, Australia February 18, 2000 F-2 69 CATUITY INC. FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 1999 F-3 70 CATUITY INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN U.S. DOLLARS)
DECEMBER 31 ----------------------------- 1998 1999 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 148,789 $ 5,269,757 Accounts receivable, less allowance of nil in 1998 and $157,704 in 1999 10,791 429,159 Inventories, net 151,187 65,781 Prepaid expenses 33,495 67,016 Restricted cash 72,164 178,054 Other 38,234 2,519 ------------ ------------ Total current assets 454,660 6,012,286 Non-Current Assets: Property, plant and equipment, net 170,890 242,038 Other 13,316 -- ------------ ------------ Total non-current assets 184,206 242,038 ============ ============ Total assets $ 638,866 $ 6,254,324 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 310,066 $ 560,906 Accounts payable to shareholders 17,650 -- Accrued expenses 116,846 301,630 Deferred income 58,359 -- Accrued compensation 81,189 118,054 Trust liability 72,164 157,685 ------------ ------------ Total current liabilities 656,274 1,138,275 Non-Current Liabilities: Borrowings from shareholders 1,593,549 854,230 Accrued compensation -- 20,588 ------------ ------------ Total non-current liabilities 1,593,549 874,818 Commitments and Contingencies (Note 6) -- -- Stockholders' equity: Ordinary shares - par value nil in 1998 and $0.001 in 1999 Authorized shares - 100 million in 1998 and 1999 Issued and outstanding shares - 4,920,340 in 1998 and 6,729,269 in 1999 11,969,007 21,519,333 Additional paid-in capital 210,019 2,685,195 Shareholder loans (806,146) (757,733) Foreign currency translation reserve 412,716 401,073 Accumulated deficit (13,396,553) (19,606,637) ------------ ------------ Total stockholders' equity (1,610,957) 4,241,231 ------------ ------------ $ 638,866 $ 6,254,324 ============ ============
See accompanying notes F-4 71 CATUITY INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN U.S. DOLLARS)
YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Revenues: Product license revenue $ 581,769 $ 135,235 $ 540,759 Product service revenue 179,270 156,298 97,623 Grant revenue 127,053 410,756 572,521 ------------ ------------ ------------ Total revenues 888,092 702,289 1,210,903 Costs and expenses: Research and development and testing 1,415,837 1,309,784 1,398,489 Selling and relationship development 708,921 914,622 956,911 General and administrative 998,061 693,979 1,255,096 Stock compensation 218,646 (8,627) 2,475,175 Non-recurring charges 848,585 -- 1,294,636 ------------ ------------ ------------ Total costs and expenses 4,190,050 2,909,758 7,380,307 ------------ ------------ ------------ Operating loss (3,301,958) (2,207,469) (6,169,404) ------------ ------------ ------------ Other income (expense): Interest income 57,601 20,186 115,631 Interest expense - related party (272,483) (196,865) (156,311) ------------ ------------ ------------ Total other income (expense) (214,882) (176,679) (40,680) ------------ ------------ ------------ Loss before taxes (3,516,840) (2,384,148) (6,210,084) Provision for Income taxes -- -- -- ------------ ------------ ------------ Net Loss $ (3,516,840) $ (2,384,148) $ (6,210,084) ============ ============ ============ Net loss per share - basic $ (1.15) $ (0.53) $ (1.05) ============ ============ ============ Net loss per share - diluted $ (1.05) $ (0.53) $ (1.05) ============ ============ ============ Weighted average shares outstanding - basic 3,065,840 4,473,257 5,913,613 ============ ============ ============ Weighted average shares outstanding - diluted 3,342,839 4,473,257 5,913,613 ============ ============ ============
See accompanying notes F-5 72 CATUITY INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN U.S. DOLLARS)
ISSUED CAPITAL ADDITIONAL ---------------------- PAID IN SHAREHOLDER SHARES AMOUNT CAPITAL LOANS --------- ----------- ----------- ------------- Balances at December 31, 1996 1,370,648 $3,166,463 $ 964,108 $(502,373) Issuance of common stock 1,877,660 4,209,862 428,640 Shares issued through loans to employees 136,282 303,773 Shareholder loans (303,773) Exercise of options 33,999 79,509 29,065 Issuance of shares in consideration for acquisition of Transcard assets 35,714 79,602 106,143 Share issuance costs (379,033) Conversion of note to common stock 450,675 1,004,555 Stock based compensation 218,646 Comprehensive income Net loss Foreign currency translation reserve Comprehensive income --------- ----------- ----------- --------- Balances at December 31, 1997 3,904,978 $8,843,764 $ 1,367,569 $(806,146) Issuance of common stock 826,368 1,463,999 108,503 Restructure of par value of shares 1,279,258 (1,279,258) Exercise of options 1,500 2,831 Share issuance costs (70,763) Issuance of shares in consideration for acquisition of Transcard assets 187,494 379,155 92,595 Stock based compensation (8,627) Comprehensive income Net loss Foreign currency translation reserve Comprehensive income --------- ----------- ----------- --------- Balances at December 31, 1998 4,920,340 $11,969,007 $ 210,019 $(806,146) Issuance of common stock 796,782 5,294,713 Exercise of options 1,012,147 4,731,445 Share issuance charges (475,832) Stock based compensation 2,475,176 Shareholder loans 48,413 Comprehensive income Net loss Foreign currency translation reserve Comprehensive income --------- ----------- ----------- --------- Balances at December 31, 1999 6,729,269 $21,519,333 $ 2,685,195 $(757,733) ========= =========== =========== =========
FOREIGN TOTAL COMPREHENSIVE ACCUMULATED CURRENCY SHAREHOLDERS INCOME DEFICIT TRANSLATION EQUITY ------------ ------------ ----------- ------------ Balances at December 31, 1996 $(7,495,565) $(111,707) $(3,979,074) Issuance of common stock 4,638,502 Shares issued through loans to employees 303,773 Shareholder loans (303,773) Exercise of options 108,574 Issuance of shares in consideration for acquisition of Transcard assets 185,745 Share issuance costs (379,033) Conversion of note to common stock 1,004,555 Stock based compensation 218,646 Comprehensive income Net loss (3,516,840) (3,516,840) (3,516,840) Foreign currency translation reserve 439,386 439,386 439,386 ----------- Comprehensive income $(3,077,454) =========== ------------ -------- ----------- Balances at December 31, 1997 $(11,012,405) $327,679 $(1,279,539) Issuance of common stock 1,572,502 Restructure of par value of shares -- Exercise of options 2,831 Share issuance costs (70,763) Issuance of shares in consideration for acquisition of Transcard assets 471,750 Stock based compensation (8,627) Comprehensive income Net loss (2,384,148) (2,384,148) (2,384,148) Foreign currency translation reserve 85,037 85,037 85,037 ----------- Comprehensive income $(2,299,111) =========== ------------ -------- ----------- Balances at December 31, 1998 $(13,396,553) $412,716 $(1,610,957) Issuance of common stock 5,294,713 Exercise of options 4,731,445 Share issuance charges (475,832) Stock based compensation 2,475,176 Shareholder loans 48,413 Comprehensive income Net loss (6,210,084) (6,210,084) (6,210,084) Foreign currency translation reserve (11,643) (11,643) (11,643) ----------- Comprehensive income $(6,221,727) =========== ------------ -------- ----------- Balances at December 31, 1999 $(19,606,637) $401,073 $ 4,241,231 ============ ======== ===========
See accompanying notes F-6 73 CATUITY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN U.S. DOLLARS)
YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (3,516,840) $ (2,384,148) $ (6,210,084) Adjustments used to reconcile net loss to net cash used in operating activities: Stock based compensation 218,646 (8,627) 2,504,224 Depreciation and amortization 55,724 78,425 101,809 Amortization of prepaid license fees -- 72,319 -- Provision for doubtful accounts -- -- 157,704 Provision for obsolete inventory -- 30,669 104,929 Changes in assets and liabilities: Accounts receivable (214,500) 193,015 (576,072) Inventories (119,756) 104,940 (19,523) Accounts payable (35,687) 164,585 250,840 Accrued expenses and other liabilities 7,563 12,881 166,229 Other assets, net -- (13,554) (4,860) ------------ ------------ ------------ Net cash used in operating activities (3,604,850) (1,749,495) (3,524,804) ------------ ------------ ------------ Cash flows from investing activities: Purchase of property, plant and equipment (156,540) (175,951) (135,622) Net advances to shareholders 88,429 (120) -- Deposits lodged (14,864) -- -- ------------ ------------ ------------ Net cash used in investing activities (82,975) (176,071) (135,622) ------------ ------------ ------------ Cash flows from financing activities: Borrowings from related parties 47,305 -- -- Payments on borrowings from related parties (18,185) -- (839,981) Issuance of common stock, net of expenses 4,291,287 1,504,570 9,521,278 ------------ ------------ ------------ Net cash provided by financing activities 4,320,407 1,504,570 8,681,297 ------------ ------------ ------------ Foreign exchange effect on cash (88,193) (23,411) 100,097 ------------ ------------ ------------ Net increase/(decrease) in cash and cash equivalents 544,389 (444,407) 5,120,968 Cash and cash equivalents, beginning of year 48,807 593,196 148,789 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 593,196 $ 148,789 $ 5,269,757 ============ ============ ============ Supplemental disclosure of cash flow information Interest paid during the year $ 252,631 $ 178,241 $ 156,311 ============ ============ ============ Common stock issued for purchase of Transcard assets $ 185,750 $ 471,750 -- ============ ============ ============ Conversion of notes to common stock $ 1,018,306 $ -- -- ============ ============ ============
See accompanying notes. F-7 74 NOTE 1. DESCRIPTION OF BUSINESS Catuity Inc. (the "Company" or "Catuity") is a Delaware Corporation incorporated in 1999. The Company listed on the Australian Stock Exchange ("ASX") on November 23, 1999. In November 1999, under court approved Schemes of Arrangement, Catuity acquired all the shares on issue in Chip Application Technologies Limited ("CAT"), a company which had been listed on the ASX since July 1997 (Refer Note 7). Catuity is the parent company of the group and will continue the business activities of CAT. The Company designs, develops, operates and markets multi-program systems that provide loyalty and incentive marketing solutions for retail shops and the Internet. These solutions aim to increase customer retention, increase the customer base and reduce costs for merchants in the rapidly converging physical and virtual worlds. Catuity provides full program services and network system software that directly connects the seller and the buyer across all purchasing channels, irrespective of payment method. The Company's operations had been predominantly located in Australia but will now be expanded into North America. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements are presented in US dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which differ in certain respects from accounting principles applied by the Company in its local currency financial statements, which are prepared in accordance with accounting principles generally accepted in Australia ("Australian GAAP"). PRINCIPLES OF CONSOLIDATION The accompanying financial statements include the consolidation of accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statement and the reported amount of revenues and expenses during the reporting periods. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS For the purposes of the consolidated statements of cash flows, the Company considers all cash and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories comprising of validators, keypads and cards used in pilots are stated at the lower of cost (first in first out method) or market value (net realizable value) (Refer Note 5). F-8 75 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the shorter of the estimated useful lives of the respective assets (which ranges from three to seven years) or the applicable lease term. Maintenance and repairs are expensed as incurred and improvements are capitalized. Depreciation expense was $100,703, $75,368 and $52,634 for the years ended December 31, 1999, 1998, and 1997 respectively. Amortization expense was $1,106, $3,057, and $3,090 for the years ended December 31, 1999, 1998, and 1997 respectively. FOREIGN CURRENCY TRANSLATION The accounts of the Company are translated in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". The Company's management has elected to present these consolidated financial statements in U.S. dollars. The financial statements of the Company and its subsidiaries are translated from their functional currency into the reporting currency, the U.S. dollar, utilizing the current rate method. Accordingly the assets and liabilities are translated at the exchange rates in effect at the end of the reporting period. The rates used to translate assets and liabilities were:
DECEMBER 31 DECEMBER 31 1999 1998 ----------- ----------- $0.6571 $0.6126
Revenues and expenses are translated at the average exchange rate during the year. The rates used to translate revenues and expenses were:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31 DECEMBER 31 DECEMBER 31 1999 1998 1997 ----------- ----------- ----------- $0.6455 $0.6290 $0.7430
All cumulative translation gains and losses from the translation into the Company's reporting currency are included as a separate component of stockholders' equity in the consolidated balance sheets. Currency transaction gains and losses are recognized in current operations and have not been significant to the Company's operation results in any period. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires the use of the liability method in accounting for income taxes. Under SFAS No. F-9 76 109, deferred tax assets and liabilities are measured based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. REVENUE RECOGNITION Product Sales Revenue is recognized upon the execution of the sale or license agreement provided the company has no additional performance criteria. If significant customization is part of the transaction, such revenues are recognized over the period of delivery. Product sales payments received which are related to future performance are deferred and recorded as revenues as they are earned over specified future performance periods. Revenues from transaction processing services are recorded at the time the service is utilized by the customer. Research and development grants are recorded as revenue when the underlying performance objective has been attained or services have been provided or costs incurred as per the grant agreement. NET LOSS PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128") and Staff Accounting Bulletin No. 98 ("SAB 98") during the year ended December 31, 1997. SFAS 128 replaced the calculation of primary and fully diluted net loss per share with basic and diluted loss per share. Under SFAS No. 128, basic net income per share excludes dilutive common stock equivalents and is calculated by dividing net loss by the weighted average number of shares outstanding. Diluted net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. Common equivalent shares from stock options are excluded from the calculation of diluted net loss per share as their effect is anti dilutive. SAB 98 applied to pre IPO issuances of shares and potential common equivalent shares that are considered to be nominal issuances. SAB 98 requires nominal issuances of shares and common equivalent shares to be included in diluted net loss per share for all years presented even if the impact is antidilutive. STOCK-BASED COMPENSATION The Company accounts for stock-based awards to employees under the intrinsic value method in accordance with Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") which F-10 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 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 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:
DECEMBER 31 ------------------------ 1998 1999 --------- --------- Finished goods $ 215,478 $ 235,001 Provision for obsolete inventory (64,291) (169,220) --------- --------- $ 151,187 $ 65,781 ========= =========
NOTE 5 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of:
DECEMBER 31 ------------------------ 1998 1999 --------- --------- Computer equipment $ 235,759 $ 346,666 Buildings and improvements 7,261 63,485 Office furniture and equipment 50,413 60,566 --------- --------- $ 293,433 $ 470,717 Less accumulated depreciation and amortization (122,543) (228,679) --------- --------- $ 170,890 $ 242,038 ========= =========
F-13 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: 2000 $103,497 2001 85,347 2002 89,412 2003 93,883 -------- $372,139 ========
Total rent expense on all operating and office leases was $121,701, $126,605 and $142,422 for 1999, 1998 and 1997 respectively. Under the terms of a Grant Agreement with the Commonwealth of Australia, the Company must meet certain obligations with regard to the development and commercialization of a Multi Card Acceptance Device. In the event that these obligations are not met the Company may be required to repay all or part of the grant monies received. The Directors do not believe that any liability will materialize. Management believe they have complied with and will continue to comply with the terms of the Grant Agreements. The maximum potential liability at December 31, 1999 was $222,042. NOTE 7. STOCKHOLDERS' EQUITY LIMITED RECOURSE LOANS The Company has provided limited recourse loans to a director (1999: $593,043 and 1998: $598,826) and related companies (1999: $68,168 and 1998: $63,551) for the purpose of purchasing shares in the Company. The loans have been offset against issued capital. The loans will only be repaid from the proceeds of dividends paid by the Company and from the proceeds from the sale of the shares. The Company's recourse for repayment of the loan is limited to after-tax dividends and sale proceeds from the shares. As a result, the recoverability of the loan is dependent upon the value of the shares. The loans do not have a specified repayment date. The loans provided are interest-free. Consequently, the loans have been treated as variable option and variable accounting has been adopted. Based on the movement in the share price of common stock from the date of the loan to December 31, 1999, the Company has recorded an expense of $2,459,523 and $31,713 for the years ended December 31, 1999 and 1997. The Company has recorded a credit of $26,847 for the year ended December 31, 1998. ESCROW SHARES As a prerequisite to the Company's initial public offering in July 1997 the Australian Stock Exchange requested the Company restrict the trading of 293,848 shares of common stock and 1,174,822 options held by existing shareholders for a period of two years from the date of the initial public offering. In addition as a result of negotiations with our underwriter 374,739 shares of common stock were voluntarily held in escrow until July 2000. F-14 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:
YEAR ENDED DECEMBER 31 ------------------------------------------- 1997 1998 1999 ----------- ----------- ----------- Net Loss as Reported $(3,516,840) $(2,384,148) $(6,210,084) =========== =========== =========== Pro Forma $(3,529,991) $(2,436,292) $(6,865,434) =========== =========== =========== Pro Forma basic earnings per share $ (1.15) $ (0.54) $ (1.16) =========== =========== =========== Pro Forma diluted earnings per share $ (1.06) $ (0.54) $ (1.16) =========== =========== ===========
Because the SFAS No. 123 method of valuation has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation costs may not be representative of amounts to be expected in future years. F-15 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:
DECEMBER 31 ----------------------------- 1997 1998 1999 ------ ------ ------ Risk Free Interest Rate 5.80% 4.65% 5.96% Expected Dividend Yield -- -- -- Expected Lives (years) 2.45 3.38 3.04 Expected Volatility 0.683 0.749 0.796
Activity in the Plans is as follows:
NUMBER OF WEIGHTED AVERAGE SHARE OPTIONS EXERCISE PER SHARE ------------- ------------------ Outstanding at December 31, 1996 836,280 $ 5.61 Granted 597,318 5.37 Cancelled/lapsed (3,101) 2.92 Exercised (33,999) 3.08 ---------- ------ Outstanding at December 31, 1997 1,396,498 5.57 Granted 125,500 3.59 Cancelled/lapsed (33,000) 1.89 Exercised (1,500) 1.89 ---------- ------ Outstanding at December 31, 1998 1,487,498 5.49 Granted 352,254 7.00 Cancelled/lapsed (5,982) 4.76 Exercised (1,012,147) 5.64 ---------- ------ Outstanding at December 31, 1999 821,623 $ 5.96 ========== ======
The weighted average fair value of options granted during the year ended December 31, 1999, 1998 and 1997 are $3.19, $1.07, and $0.33 respectively. The following is additional information relating to options outstanding as of December 31, 1999: F-16 83
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER EXERCISE RANGE SHARES PRICE LIFE (YEARS) OF SHARES PRICE - ------------- --------- --------- ------------ --------- -------- $ 1.95-$ 2.20 64,000 $ 2.05 1.38 56,500 $ 2.06 $ 3.15-$ 4.35 39,668 $ 3.94 2.09 39,668 $ 3.94 $ 4.90-$ 6.50 517,955 $ 5.35 1.28 415,703 $ 5.12 $ 6.55-$ 8.00 150,000 $ 7.34 1.83 50,000 $ 6.57 $10.00-$11.00 50,000 $10.51 4.50 50,000 $10.51
PREFERRED STOCK The Company's Certificate of Incorporation authorizes 10 million shares of preferred stock, with a par value of $0.001 per share, none of which is issued or outstanding. The Board of Directors has the authority to issue the preferred stock in one or more series and to fix rights, preferences, privileges and restrictions, including dividends, and the number of shares constituting any series or the designation of such series, without any further vote or action by the stockholders. F-17 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 85 "Additional Paid In Capital" and relating to share premiums was transferred to "Issued Capital" on July 1, 1998. NOTE 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in dollars, except share and per share data):
YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Net loss $ (3,516,840) $ (2,384,148) $ (6,210,084) ============ ============ ============ Weighted average shares 3,065,840 4,473,257 5,913,613 Effect of dilutive securities: Employee stock options 276,998 -- -- ------------ ------------ ------------ Dilutive potential common shares 3,342,838 4,473,257 5,913,613 ------------ ------------ ------------ Net loss per share $ (1.15) $ (0.53) $ (1.05) ============ ============ ============ Net loss per share - assuming dilution $ (1.05) $ (0.53) $ (1.05) ============ ============ ============
NOTE 9. SEGMENT INFORMATION The Company operates in the computer technology industry. Its major operations are based in Australia. In June 1999, the Company established operations in the United States of America (USA). In 1999, 1998 and 1997 all of the Company's revenues relate to the Australian operations. In 1999 revenues included $314,757 (26%) of export sales to the USA. In 1998 revenues included export sales of $56,610 (8% of total sales) to New Zealand. No export sales were made in 1997. In 1999, $462,044 of the operating loss of $6,169,404 is attributable to the operations in the USA. The costs relating to the operations in the USA represent direct costs of executives and consultants and their related costs and does not include costs incurred by non resident personnel in the USA. In 1998, $343,726 of the operating loss of $2,207,758 was attributable to operations in Asia. The Australian operations accounted for 100 percent of the operating loss in 1997. All major assets of the Company were held in Australia in 1999, 1998 and 1997. F-19 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:
YEAR ENDED DECEMBER 31 ----------------------------------------- 1997 1998 1999 ----------- --------- ----------- Net loss at statutory tax rate $(1,266,062) $(858,293) $(2,235,630) Stock compensation 78,713 (3,106) 891,063 Abnormal item 174,156 -- 466,069 R&D grant 25% deduction (97,002) (56,805) (84,678) Grant revenue -- (147,872) (206,108) Over provision of losses -- 313,813 -- Effect of change in corporate tax rate on loss and FITB not recognized -- -- 336,699 Non-deductible branch costs -- 101,907 -- Other 1,507 44 409 ----------- --------- ----------- Valuation allowance $ 1,108,688 $ 650,312 $ 832,176 ----------- --------- ----------- Provision for income tax -- -- -- ---------- --------- -----------
The statutory tax rate was 36% for the years 1997, 1998 and 1999. The statutory tax rate will change to 34% effective July 1, 2000. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
YEAR ENDED DECEMBER 31 --------------------------- 1998 1999 ----------- ----------- Deferred tax assets: Net operating loss carry-forwards $ 4,452,486 $ 5,235,117 Provisions 93,933 143,478 ----------- ----------- Total deferred tax assets 4,546,419 5,378,595 ----------- ----------- Valuation allowance (4,546,419) (5,378,595) ----------- ----------- Total net deferred tax assets $ -- $ -- =========== ===========
F-20 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 88 as a current liability. The trust account had an ending balance of $72,164 in 1998 and $157,685 in 1999. In addition, the Company had restricted cash of $20,369 and $0 as of December 31, 1999 and 1998, respectively, related to an amount held as security for an operating lease. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF DESCRIPTION (IN THOUSANDS) PERIOD EXPENSES DEDUCTIONS(1) PERIOD - -------------------------- ------------ ---------- ------------- ---------- Year ended December 31, 1999 Allowance for doubtful debts $0 $158 $0 $158 Year ended December 31, 1998 Allowance for doubtful debts $0 $ 0 $0 $ 0 Year ended December 31, 1997 $0 $ 0 $0 $ 0
- --------- (1) Write-offs of uncollectible amounts, net of recoveries. F-22 89 NOTE 13. SUBSEQUENT EVENTS There have been no significant events since December 31, 1999. F-23 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. EX-10.12 2 RESEARCH AND DEVELOPMENT START GRANT 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 Version 2 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. Version 2 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 Version 2 4 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 Version 2 5 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 Version 2 6 6 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 Version 2 7 7 1.6 MAJOR ACTIVITIES
Activity Finish Eligible Major Activity Start Date Date Expenditure $ -------------- ---------- ------ ------------- 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 [*]
Version 2 An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 8 8 1.7 MAJOR MILESTONES
Milestone Eligible Achievement Cumulative Major Milestone Date Expenditure $ --------------- ----------- ------------- 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
Version 2 An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 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. Version 2 10 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, Version 2 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. Version 2 12 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 Version 2 13 SCHEDULE 3 - PROJECT BUDGET 3. 1 SUMMARY OF PROJECT ELIGIBLE EXPENDITURE
ESTIMATED EXPENDITURE $ -------------------------- TOTAL HEAD OF EXPENDITURE 99-00 00-01 $ ------------------- --------- ------- ---------- R&D Salary Expenditure [*] [*] [*] Contract Expenditure [*] [*] [*] Plant Expenditure [*] [*] [*] Prototype Expenditure [*] [*] [*] Other Expenditure [*] [*] [*] PROJECT ELIGIBLE EXPENDITURE [*] [*] [*]
3. 2 GLOBAL BUDGET
ESTIMATED EXPENDITURE $ -------------------------- TOTAL 99-00 00-01 $ --------- ------- ---------- Project Eligible Expenditure [*] [*] [*] Project Ineligible Expenditure [*] [*] [*] TOTAL PROJECT COST [*] [*] [*]
An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 14 14 SCHEDULE 4 - FUNDING OF PROJECT AND PAYMENT DATES 4. 1 PROJECT FUNDING
CONTRIBUTION SOURCE 99-00 00-01 TOTAL ------------ --------- ------- --------- R&D Start Grant [*] [*] [*] Grantee [*] [*] [*] TOTAL PROJECT EXPENDITURE [*] [*] [*]
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 Version 2 An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 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. Version 2 An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 16 16 SCHEDULE 5 - REPORTING REQUIREMENTS (CLAUSES 4.8 AND 4.9) 5.1 QUARTERLY REPORTING SCHEDULE
DUE REPORTS FOR PERIOD - --- ------- ---------- [*] 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
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. Version 2 An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 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. Version 2 18 18 SCHEDULE 6 - SPECIAL CONDITIONS The is no condition specified by the Board at the time of approval Version 2 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. Version 2 20 20 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.
PRODUCT SCHEDULED RELEASE FROM DEVELOPMENT ------- ---------------------------------- 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.
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. Version 2 An * indicates that information has been redacted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 21 21 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. Version 2 22 22 SCHEDULE 8 - REPAYMENT OF REPAYABLE CONTRIBUTION UNDER START PREMIUM (CLAUSE 13) [ NOT-APPLICABLE ] Version 2 23 Industry Research and R&D START GRANT Development Board GENERAL CONDITIONS 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
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. 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 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 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. 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. 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 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, 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. 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). 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. 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 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 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: 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. 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. 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 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. 41 Chip Application Technologies Ltd Costcheck Summary
START GRANT - SUMMARY OF COST ESTIMATES 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% [*] [*] [*] [*]
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. 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
Time on proj. Time on proj. rate 99-00 [%] 00-01 [%] [$/hour] starts 7.99 ends 30.12.00 1999-00 2000-01 Total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alary on costs at [*] [*] [*] [*] Admin Support Costs at [*] [*] [*] [*] Total Salary Expenditure [*] [*] [*] Rounded [*] [*] [*]
(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. 43 Chip Applicaon Technologies Ltd Costcheck Detail Note (2) - R&D Contract Expenditure
1999-00 2000-01 Total ------ ------- ------ [*] [*] [*] [*] [*] ------ ----- ------ Total Contract Expenditure [*] [*] [*] Rounded [*] [*] [*] ====== ===== ======
Note (2) - R&D Plant Expenditure
1999-00 2000-01 Total ------ ------- ------ Date Hardware purchased cost depn p.a. [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] Total Plant Expenditure [*] [*] [*] ------ ----- ------ Rounded [*] [*] [*] ====== ===== ======
Reduction in expenditure due to firming up of estimates Note (3) - Prototype Expenditure
1999-00 2000-01 Total ------ ------- ------ [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] Total Prototype Expenditure [*] [*] [*] ----- ----- ----- Rounded [*] [*] [*] ===== ===== =====
Reduction in expenditure due to firming up of estimates Note (4) - Other Expenditure
1999-00 2000-01 Total ------- ------- ------ [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] ------ ------ ------ Total other Expenditure (ii) [*] [*] [*] Rounded [*] [*] [*] ====== ====== ======
(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. 44 Chip Application Technologies Ltd Costcheck Detail SUMMARY OF EXPENDITURES:
1999-00 2000-01 Total --------- ------- -------- Salary Expenditure [*] [*] [*] Contact Expenditure [*] [*] [*] Plant Expenditure [*] [*] [*] Prototype Expenditure [*] [*] [*] Other Expenditure [*] [*] [*] --------- ------- --------- [*] [*] [*] ========= ======= ========= [*] [*] [*]
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. EX-10.13 3 SMART LOYALTY TECHNICAL WORK GROUP AGREEMENT 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. 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, 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 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. 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 ______________________________ EX-10.14 4 PARTNER PROGRAM LOYALTY SERVICES AGREEMENT 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 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 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 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 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 5 6 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 6 7 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. 7 8 (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 EX-10.15 5 SOFTWARE REMARKETING AGREEMENT - IBM AND CHIP 1 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. Page 1 2 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. Page 2 3 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 Page 4 4 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. Page 6 5 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 kfadelle@ca.ibm.com justinw@chipapp.com 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. Page 8 6 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. Page 9 7 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:
Price Element IBM Rate (% TSP) Comments OTC [*] Includes upgrades Annual Card Fees [*] Annual Maintenance [*]
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. 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 9 APPENDIX 1
- -------------------------------------------------------------------------------------- PROGRAM MODULE PLATFORM VERSION - -------------------------------------------------------------------------------------- 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
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 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. 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
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 11 EXHIBIT - END USER LICENSE AGREEMENT _______________________________________________________________________________ A sample copy of your End User License Agreement is attached. Page 14 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 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 $320,950 ======== ======== ======== ======== ======== ========
13 C.A.T. SYSTEM SW PRICING US$ - Effective Date: 98/10/17 PRICES 2/4 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 ======== ======== ========== ========== ===========
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: 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. EX-10.16 6 MARKETING SUPPORT PLANBETWEEN IBM AND CHIP 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 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. -----END PRIVACY-ENHANCED MESSAGE-----