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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2004.
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File No: 000-30045
CATUITY INC.
(Exact Name of Registrant as specified in its charter)
Delaware 38-3518829
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2711 E. Jefferson Avenue
Detroit, MI 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(313) 567-4348
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes
of stock as of the latest practical date: Common stock outstanding - 779,137
shares as of October 31, 2004
CATUITY INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets- September 30, 2004 and December 31, 2003 3
Consolidated statements of operations - Three months ended September 30, 2004 and 2003;
Nine months ended September 30, 2004 and 2003 4
Consolidated statements of cash flows - Nine months ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements - September 30, 2004 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosure about Market Risk 12
Item 4. Controls And Procedures 12
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Unregistered Sales of Equity Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits 13
SIGNATURES AND CERTIFICATIONS 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATUITY INC.
CONSOLIDATED BALANCE SHEETS
----------------------------------------
SEPTEMBER 30, 2004 DECEMBER 31, 2003
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,293,653 $ 5,768,828
Accounts receivable, less allowance of $0 at
September 30, 2004 and $62,000 at December
31, 2003 11,999 402,109
Restricted cash 107,650 119,009
Work in process 0 70,692
Prepaid expenses and other 187,839 188,423
------------ ------------
Total current assets 3,601,141 6,549,061
Property and equipment, net 183,627 223,466
------------ ------------
Total assets $ 3,784,768 $ 6,772,527
============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable $ 93,676 $ 101,335
Deferred revenue 52,935 110,561
Accrued compensation 403,588 405,228
Other accrued expenses 123,587 116,742
Trust liability 85,236 95,586
------------ ------------
Total current liabilities 759,022 829,452
Shareholders' equity:
Common stock - $.001 par value; Authorized -
100 million shares: issued and outstanding
- 779,137 at September 30, 2004 and
777,323 at December 31, 2003 779 777
Preferred stock - $.001 par value Authorized -
10 million shares -- --
Additional paid-in capital 36,702,486 36,979,840
Shareholder loans (176,757) (468,166)
Foreign currency translation adjustment 27,517 88,299
Accumulated deficit (33,528,279) (30,657,675)
------------ ------------
Total shareholders' equity 3,025,746 5,943,075
------------ ------------
Total liabilities and shareholders' equity $ 3,784,768 $ 6,772,527
============ ============
See accompanying notes.
3
CATUITY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Software development revenue $ 0 $ 585,896 $ 231,387 $ 1,778,406
Service revenue 93,503 442,897 454,331 734,338
License revenue 10,800 88,700 32,400 1,745,925
----------- ----------- ----------- -----------
Total revenues 104,303 1,117,493 718,118 4,258,669
Cost of revenue and other operating expenses:
Cost of software development 0 349,609 90,544 1,059,845
Cost of service 67,621 319,487 291,190 545,474
Sales and marketing 232,065 303,737 710,503 951,512
Research and development 282,507 42,612 1,084,875 237,370
General and administrative 669,183 478,902 1,485,429 1,619,388
General and administrative - variable stock
compensation expense/(credit) 0 (918) 0 (40,620)
----------- ----------- ----------- -----------
Total costs and expenses 1,251,376 1,493,429 3,662,541 4,372,969
----------- ----------- ----------- -----------
Operating loss (1,147,073) (375,936) (2,944,423) (114,300)
Interest income 19,614 15,371 73,819 43,660
----------- ----------- ----------- -----------
Net loss $(1,127,459) $ (360,565) $(2,870,604) $ (70,640)
=========== =========== =========== ===========
Net loss per share (restated to reflect reverse
stock split) - basic and diluted $ (1.45) $ (0.58) $ (3.69) $ (0.12)
=========== =========== =========== ===========
Weighted average shares outstanding-basic & diluted 778,459 625,373 777,848 590,311
=========== =========== =========== ===========
See accompanying notes.
4
CATUITY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(2,870,604) $ (70,640)
Adjustments used to reconcile net loss to net cash used
in operating activities:
General and Administrative variable stock compensation -- (40,620)
(non-cash)
Depreciation and amortization 56,245 186,748
Changes in assets and liabilities:
Accounts receivable 390,110 (602,419)
Other assets, net 82,635 (18,211)
Deferred revenue (57,626) (1,479,624)
Accounts payable (7,659) (40,770)
Accrued expenses and other liabilities (5,145) 271,060
----------- -----------
Net cash used in operating activities (2,412,044) (1,794,476)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (16,406) (211,163)
----------- -----------
Net cash used in investing activities (16,406) (211,163)
----------- -----------
Cash flows from financing activities:
Repayment of shareholder loan -- 28,499
Issuance of common stock, net of expenses 14,057 4,120,477
----------- -----------
Net cash provided by financing activities 14,057 4,148,976
----------- -----------
Foreign exchange effect on cash and cash equivalents (60,782) 161,861
----------- -----------
Net increase/(decrease) in cash and cash equivalents (2,475,175) 2,305,198
Cash and cash equivalents, beginning of period 5,768,828 3,611,447
----------- -----------
Cash and cash equivalents, end of period $ 3,293,653 $ 5,916,645
=========== ===========
See accompanying notes.
5
CATUITY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Catuity Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for annual
financial statements and notes. The balance sheet at December 31, 2003 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 2004 are not necessarily
indicative of the results that may be expected for any subsequent quarter or for
the entire year ended December 31, 2004. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2003.
The accompanying interim, consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2003.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. COMPREHENSIVE INCOME/ (LOSS)
Comprehensive income/(loss) is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2004 2003 2004 2003
----------- --------- ----------- --------
Net loss $(1,127,459) $(360,565) $(2,870,604) $(70,640)
Foreign currency translation 36,096 77,021 (60,782) 161,861
----------- --------- ----------- --------
Total comprehensive income/(loss) $(1,091,363) $(283,544) $(2,931,386) $ 91,221
=========== ========= =========== ========
3. STOCK BASED COMPENSATION
The Company accounts for stock-based awards issued to employees under the
intrinsic value method in accordance with Accounting Principles 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").
6
Had compensation costs for stock-based awards issued to employees been
determined consistent with SFAS No.123, the Company's net loss and net
loss per share would have been reported as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2004 2003 2004 2003
----------- --------- ----------- --------
Net loss as reported ($1,127,459) ($ 360,565) ($ 2,870,604) ($ 70,640)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards (8,029) (30,728) (26,535) (159,638)
----------- ---------- ------------ -----------
Pro forma net loss ($1,135,488) $ (391,293) $(2,897,139) $ (230,278)
=========== ========== ============ ===========
Net loss per share: basic and
diluted- as reported ($ 1.45) ($ 0.58) ($ 3.69) ($ 0.12)
=========== =========== ============ ===========
Pro forma basic and diluted
(loss) per share ($ 1.46) ($ 0.62) ($ 3.72) ($ 0.39)
=========== =========== ============ ===========
The above per share data reflects the effect of the reverse stock split.
4. REVERSE STOCK SPLIT
On November 1, 2004, the Company held, a special shareholders meeting in Sydney
Australia for the purpose of seeking support of a majority of all shares
outstanding for a reverse stock split, also known as a share consolidation. The
reverse stock split became necessary to bring the Company into compliance with
Nasdaq's on-going listing rule requiring that shares on Nasdaq trade above
$1.00. The proposal passed, authorizing the Board to effect a split. Immediately
after the special shareholders meeting, the Board of Directors met by telephone
and unanimously authorized a 1 for 15 reverse split to be effective on November
12, 2004 the earliest date that trading could begin in the post-reverse shares.
The balance sheet, earnings per share, and other appropriate data in this Form
10-Q have been restated to reflect the reverse split.
5. SHAREHOLDER LOANS ' EQUITY
In 1995 and 1996, the Company issued non-recourse loans to a former Australian
director for the purpose of purchasing approximately 276,000 shares of the
Company's stock. The Company's recourse for repayment of the loans is limited to
after-tax dividends and proceeds from the disposal of the shares. In 1999,
$75,000 AUD of the loan was repaid ($48,000 USD at the exchange rate in effect
on the date of the transaction) related to the sale of 25,000 shares. In the
fourth quarter of 2003, $60,750 AUD was repaid ($42,000 USD at the exchange
rate in effect on the date of the transaction) related to the sale
of 20,250 shares. The amount of the loan outstanding is re-valued at each
respective balance sheet date if the Company's period ending fair market price
per share is below the price per share at which the loan was made. The
offsetting entry is made to additional paid in capital.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Catuity is a provider of Point of Sale (POS) software and services to the
retail, financial and transaction processing industries.
The Company has two major software applications developed to help the
administration of customer loyalty programs. Each system functions in both
in-store as well as internet (e-commerce) environments and work with all methods
of consumer payment - existing magnetic stripe credit or debit cards, chip
cards, RFID, gift cards, private label payment cards, checks and cash. Loyalty
programs based on points, frequency, discounts or coupons can be managed by a
merchant electronically and can track total spend, frequency of visits and
individual product based SKU purchase data.
The Company also provides information technology services around retailer needs
at the point of sale.
In the third quarter of 2004 the Company took a number of actions that have
previously been disclosed.
On September 23, 2004, the Board of Directors hired Alfred H. (John) Racine III
as its new president, chief executive officer and director. At the same time,
the Board named Clifford W. Chapman Jr. as an independent director of the
Company. Both appointments added to the depth of the Company's team as it
executes a turnaround of Catuity.
During informational meetings with shareholders on October 20-21, 2004 and
during the November 1, 2004 special shareholders meeting, the Company advised
that it has adopted a more narrowly defined direct sales strategy that
emphasizes selling Catuity's loyalty technology to North American retailers with
up to approximately 250 stores. The Company continues to advise that revenue
from these new sales efforts is not expected to materialize until approximately
mid 2005 and that the turnaround of the Company would continue throughout 2005.
As a result, the Company has undertaken a further internal assessment of its
cost structure and implemented cutbacks in staffing, the use of external
services, and other non-employee expenses. The majority of these additional
savings will result from a reduction in the number of development positions in
Australia and the move to smaller office facilities. The Company has shifted its
needs from the development of its product to sales and deployments to new
customers in 2005. The Company's monthly operating costs in the fourth quarter
of 2004 will decline from third quarter levels. The Company expects the full
effect of the cost reductions to be in place by approximately December 2004.
Beginning in December, the Company expects its monthly operating expenses to be
at approximately 50% of its first quarter 2004 average monthly expenses.
The Company is also focused on generating short-term revenue through IT services
work around the POS. While the Company has recently signed a new client, the
amount of forecasted revenue is not yet material. Contracts to generate
non-recurring services revenue are expected to help reduce the Company's cash
utilization as it begins the process of securing contracts for recurring revenue
from mid-tier retailers in 2005.
As part of its turnaround strategy, the Company has continued to have
discussions with merger targets in North America and Australia. In all cases,
the target companies have a forecast of positive cash flow for 2005 and their
business mix matches Catuity's stated strategy of making the point of sale more
profitable for its customers. At this time, the Company has not executed a
definitive agreement to complete a merger and cautions investors that mergers
may not be consummated. The Board of Director's has established M&A guidelines
that include that any transaction must: (a) be with a company that is cash flow
positive; (b) matches Catuity's strategy; (c) is valued appropriately so that
efficient capital can be raised to support the transaction; and (d) can be
managed within the skill set of the merged company.
On November 1, 2004, the Company held, in Sydney Australia, a special
shareholders meeting for the purpose of seeking support of a majority of all
shares outstanding for a reverse stock split, also known as a share
consolidation. The reverse stock split became necessary to bring the Company
into compliance with Nasdaq's on-going listing rule requiring that shares on
Nasdaq trade above $1.00. A record number of shares were voted in favor of the
reverse
8
split. The Company reported that 7,183,173 shares were voted in favor of
authorizing the Board to effect a split. The shares voting in favor of the
proposal represented 61.5% of all shares outstanding. Immediately after the
special shareholders meeting, the Board of Directors met by telephone and
unanimously authorized a 1 for 15 reverse split to be effective on November 12,
2004 the earliest date that trading could begin in the post-reverse shares.
The Board implemented the reverse split immediately because, in informal
conversations with Nasdaq Staff on October 29, 2004, the Company was advised by
Nasdaq Staff that it had no latitude in the rules to delay Catuity's receipt of
a de-listing letter and that the Company would need to follow the normal appeal
process following the Staff's determination. As expected on Thursday, November
4, 2004, the Company received Nasdaq's notification of intent to de-list letter.
The Company formally appealed the notification within the one-week period
provided by Nasdaq rules and, on November 11, 2004 was notified by Nasdaq that
its request for a hearing had been granted. The hearing will be held on December
9, 2004. In the meantime, Catuity's post-reverse split shares began trading on
November 12, 2004 on both Nasdaq and the ASX. The Company's shares need to trade
for 10 consecutive trading days above the bid price of $1.00 in order for the
Company to be eligible to regain compliance with Nasdaq's Marketplace Rules for
minimum share price. Management expects that this will occur on November 29,
2004. In accordance with Nasdaq procedures, the Company plans to notify Nasdaq
Staff on that date. At that point, Management believes that Nasdaq will
determine that the Company has achieved full compliance and that Catuity will
receive a letter from Nasdaq stating such. Technically, Nasdaq could still
de-list the Company, but, in consulting with our advisers, management believes
that a de-listing is not likely to occur.
Although it had no disagreements of any kind with Ernst & Young LLC, its
previous independent accountants, during the third quarter Catuity placed its
annual audit out for bid. Following an evaluation of the bids received,
management recommended and the Audit Committee approved, the appointment of BDO
Seidman LLP to serve as Catuity's auditors for 2004. BDO Seidman also performed
the review of Catuity's third quarter 2004 financial statements.
OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
SEPTEMBER 30, 2003
REVENUE
Total revenues for the three month period ended September 30 ("third quarter")
decreased $1,013,000, to $104,000 in 2004 compared to $1,117,000 in 2003. The
third quarter 2004 revenue decrease was primarily due to the end of software
development work for Visa USA in the second quarter of 2004, resulting in no
software development revenue recognized for the third quarter. A reduction in
service and support activities for Visa in the third quarter of 2004 also
contributed to the revenue decline.
Total revenues for the nine month period ended September 30 decreased
$3,541,000, to $718,000 in 2004 compared to $4,259,000 in 2003. The overall
decline in year-to-date revenue, as has previously been reported, was due to
Target Corporation's decision in late February of this year to stop the issuance
of smart cards. This resulted in the phase-out of the smart Visa Rewards system
that utilized Catuity's loyalty software. The software development portion of
the revenue decrease of $1,547,000, was due to the completion and end of
development work for Visa in the second quarter of 2004, in conjunction with no
software development work for other customers during the nine month period
ending September 30, 2004. The decrease in service revenue of $280,000, was due
to the reduction in service and support activities for Visa beginning in April
2004. License revenue was $1,714,000 higher in 2003 due to the recognition of
license revenue from Visa and Target. No license fees were earned from Visa or
Target during the nine month period ended September 30, 2004.
COST OF SOFTWARE DEVELOPMENT REVENUE
Cost of software development revenue primarily consists of salaries, employee
benefits, related expenses and office overhead for the portion of time spent by
our technical staff who work on software development for customers. Cost of
software development decreased $350,000, or 100%, in the third quarter of 2004
compared to the third quarter of 2003. The elimination of software development
cost corresponded with the elimination of software development revenue and
reductions made in staffing.
9
Expenses for the nine months ended September 30, 2004, decreased $969,000, or
91%, compared with the corresponding 2003 period. The decrease in cost
corresponded with the decrease in software development revenue.
COST OF SERVICE REVENUE
Cost of service revenue primarily consists of salaries, employee benefits,
related expenses and office overhead for our customer implementation and support
personnel, for the portion of their time spent on service related activities.
Cost of service decreased $252,000, or 79%, in the third quarter of 2004
compared to the third quarter of 2003. Expenses for the nine months ended
September 30, 2004, decreased $254,000, or 47%, compared with the corresponding
2003 period. The decrease in cost for both the three and the nine month periods
was principally due to reductions in staff and overhead costs, which were made
in response to the decline in service revenue.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, employee benefits,
travel, marketing, public relations and related overhead costs of our sales and
marketing personnel. Sales and marketing expenses decreased $72,000, or 24%, in
the third quarter of 2004 compared to the third quarter of 2003. Expenses for
the nine months ended September 30, 2004, decreased $241,000, or 25%, compared
with the corresponding 2003 period. The decrease in cost for both the three and
the nine month periods was principally due to reductions in staff size and lower
travel costs.
RESEARCH AND DEVELOPMENT
Research and Development expenses consist primarily of salaries, employee
benefits and overhead cost, incurred by our technical staff, for the portion of
their time spent on furthering the development of Catuity's software products.
Research and development expenses increased $240,000, in the third quarter of
2004 compared to the third quarter of 2003. Expenses for nine months ended
September 30, 2004, increased $847,000 compared with the corresponding 2003
period. While overall spending on software development costs continued to
decline, the increase in R&D cost for both the three and the nine month periods
reflected the Company's commitment to complete the development of Catuity's new
loyalty software suite. Research and Development costs are expected to decline
beginning in December 2004 as discussed on page 8 in the Overview section of the
MD&A in this Form 10-Q.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries, employee
benefits, related overhead costs and professional services fees. General and
administrative expenses increased $190,000, or 40%, in the third quarter of 2004
over the third quarter of 2003. Costs were higher in the third quarter of 2004
compared to the same period in 2003 due to a third quarter 2004 severance pay
accrual for the Company's former CEO, per contractual obligations. This cost was
partially offset by lower staffing, legal, insurance and facilities costs.
Expenses for the nine months ended September 30, 2004, decreased $134,000, or
8%, compared with the corresponding 2003 period. The decrease in expenses for
the nine months ended September 30, 2004, compared with the corresponding 2003
period, was primarily due to lower legal, insurance, and facilities costs. Both
2003 and 2004 expenses reflect significant one-time costs related to severance
payments. In the third quarter 2004, severance pay was accrued for the Company's
former CEO, while in the second quarter of 2003 severance pay was accrued for
the Company's former Chairman. While the full severance payment obligation to
the Company's former CEO was accrued in the third quarter of 2004, severance
payments are expected to be made between the fourth quarter of 2004 and the
first quarter of 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had approximately $3,294,000 in cash and
cash equivalents, a decrease of $2,475,000 from December 31, 2003. Net cash used
in operating activities was $2,412,000 for the nine-month
10
period ended September 30, 2004 compared with $1,794,000 for the nine-month
period ended September 30, 2003. While monthly cash utilization has
progressively declined during each quarter of 2004, the net increase in cash
used primarily resulted from a higher net loss in 2004, which can be attributed
to the decline in total revenue.
Cash used in investing activities was $16,000 for the nine-month period ended
September 30, 2004 compared with cash used of $211,000 for the nine-month period
ended September 30, 2003. The approximately $195,000 decrease was due to
reductions made in capital purchases during the nine month period ended
September 30, 2004 compared to the same period in 2003.
Cash provided by financing activities was $14,000 for the nine-month period
ended September 30, 2004 and related to shares of common stock purchased by an
executive at fair market value under the Company's Executive Director Stock
Purchase Plan. Cash obtained from financing activities was $4,149,000 for the
nine-month period ended September 30, 2003 and primarily related to cash
received from the private placement of 3,000,000 shares of common stock to seven
accredited investors.
The foreign currency effect on cash was a negative $223,000 during the
nine-month period ended September 30, 2004 primarily due to a relative weakening
of the Australian dollar during the nine months ended September 30, 2004.
The Company believes that the reductions made in the Company's operating
expenses and plans discussed in the forepart of this section, result in existing
capital resources being adequate to meet its cash requirements for the next
twelve months.
FORWARD LOOKING INFORMATION
The Management Discussion and Analysis of Financial Condition and Results of
Operations includes "forward-looking" statements within the meaning of the
Private Securities Litigation Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the expected
results. All statements other than statements of historical fact made in this
Form 10-Q are forward looking. In some cases, they can be identified 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 consider various factors that 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 liability for the accuracy and completeness of the forward-looking
statements. Various factors may cause actual performance to differ from any of
the forward-looking statements contained in the Management Discussion and
Analysis of Financial Condition and Results of Operations. These include, but
are not limited to; changes in currency exchange rates from period to period,
inflation rates in the United States and Australia, recession, and other
external economic factors over which the Company has no control; the timing and
speed with which our major customers and prospects execute their plans for the
use of our loyalty software; future development of the Company's software
products; competitive product and pricing pressures; use of internally developed
software applications; patent and other litigation risks; the risk of key staff
leaving the Company; the risk that major customers of the Company's products
reduce their requirements or terminate their arrangements with the Company;
ability to complete one or more merger or acquisition transactions; ability to
raise capital;as well as other risks and uncertainties, including but not
limited to those detailed from time to time in the Company's Securities and
Exchange Commission filings. These forward-looking statements are made only as
of the date hereof, and the Company undertakes no obligation to update or revise
the forward-looking statements, whether as a result of new information, future
events or otherwise.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to foreign currency exchange rate risk inherent in its
expenses, assets and liabilities that are denominated in the Australian dollar.
To date, the Company has not utilized any foreign currency hedging or other
derivative instruments to reduce exchange rate risk. The Company does not expect
to employ these or other strategies to hedge the risk in the foreseeable future.
As of September 30, 2004 and December 31, 2003 the Company's net current assets
(defined as current assets less current liabilities) subject to foreign currency
risk were $691,000 and $1,938,000. The potential decrease/(increase) in net
assets from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be approximately $69,100 and $193,800.
The Company is also exposed to interest rate risk on its deposits of cash, which
is affected by changes in the general level of interest rates in the United
States and Australia. Since the Company generally invests in very short-term
interest bearing deposits, it does not believe it is subject to any material
market risk exposure.
ITEM 4. CONTROLS AND PROCEDURES
Management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the period ended September
30, 2004, pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934.
The Company's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in its periodic SEC filings
is recorded, processed and reported within the time periods specified in the
SEC's rules and forms. Based upon, and as of the date of that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and, therefore,
no corrective actions were taken.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
12
ITEM 6. EXHIBITS
(a) Exhibit Description
- ------------ -----------
EX-31.1 Certification by Alfred H. Racine, President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-31.2 Certification by John H. Lowry, Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
EX-32 Certifications pursuant to pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
13
SIGNATURES AND CERTIFICATIONS
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: /s/ Alfred H. Racine
----------------------------------------
Alfred H. Racine
President and Chief Executive Officer
By: /s/ John H. Lowry
----------------------------------------
John H. Lowry
Chief Financial Officer
Date: November 12, 2004
14
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------
EX-31.1 Certification by Alfred H. Racine, President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-31.2 Certification by John H. Lowry, Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-32 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002