-----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, KXi9Kv7ekhO09LlEeC0i4zki9Xl3H2jqWoELX4Qv/HcPW3XSS6BD8arMhvsLA6S7 1oEe2y0Stpv0BOcY8T7vbg== 0000931763-99-000975.txt : 19990402 0000931763-99-000975.hdr.sgml : 19990402 ACCESSION NUMBER: 0000931763-99-000975 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IVI CHECKMATE CORP CENTRAL INDEX KEY: 0001057207 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 582375201 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29772 FILM NUMBER: 99580070 BUSINESS ADDRESS: STREET 1: 1003 MANSELL ROAD CITY: ROSWELL STATE: GA ZIP: 30076 BUSINESS PHONE: 7705946000 MAIL ADDRESS: STREET 1: 1003 MANSELL ROAD CITY: ROSWELL STATE: GA ZIP: 30076 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number: 000-29772 IVI Checkmate Corp. (Exact name of Registrant as Specified in Its Charter) Delaware (State or other jurisdiction of incorporation) 58-2375201 (I.R.S. Employer Identification No.) 1003 Mansell Road Roswell, Georgia 30076 (Address of Principal Executive Offices) (770) 594-6000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of class) Series C Junior Participating Preferred Stock Purchase Rights (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's common stock (including exchangeable shares which are exchangeable into common stock) held by non- affiliates of the registrant was $52,161,553.00 at March 29, 1999, based on the closing sale price of $3.375 per share for the common stock on such date on the Nasdaq National Market. The number of shares of the registrant's common stock (including exchangeable shares which are exchangeable into common stock) outstanding at March 29, 1999 was 18,112,140. Documents Incorporated by Reference Specifically identified portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders to be held on May 20, 1999 are incorporated by reference in Part III. IVI CHECKMATE CORP. ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 1998 TABLE OF CONTENTS
Item Page Number Number - ---------- ------ PART I 1. Business ................................................................................. 1 2. Properties ............................................................................... 5 3. Legal Proceedings ........................................................................ 5 4. Submission of Matters to a Vote of Security Holders ...................................... 5 4(A) Executive Officers of the Registrant ..................................................... 5 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................ 7 6. Selected Financial Data .................................................................. 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10 7(A) Quantitative and Qualitative Disclosures about Market Risk ............................... 23 8. Financial Statements and Supplementary Data .............................................. 24 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 51 PART III 10. Directors and Executive Officers of the Registrant ....................................... 52 11. Executive Compensation ................................................................... 52 12. Security Ownership of Certain Beneficial Owners and Management ........................... 52 13. Certain Relationships and Related Transactions ........................................... 52 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 52 Signatures ................................................................................ 57
PART I Item 1. Business. Overview IVI Checkmate Corp. is the third largest electronic transaction solutions provider in North America. IVI Checkmate was incorporated under the laws of the State of Delaware on January 15, 1998 and became active on June 25, 1998 as a result of the combination of International Verifact Inc., or IVI, a Canadian corporation, and Checkmate Electronics, Inc., or Checkmate, a Georgia corporation. IVI Checkmate operates in the electronic payment business through its subsidiaries. IVI Checkmate owns all of the capital stock of IVI Checkmate Ltd. (formerly IVI), IVI Checkmate, Inc. (formerly Checkmate) and their subsidiaries. Through our subsidiaries, we design, develop and market innovative payment and value-added solutions that optimize transaction management at the point-of- service in the retail, financial, hospitality, healthcare and transportation industries. Our software, hardware and professional services minimize transaction costs, reduce operational complexity and improve profitability for our customers in the U.S., Canada and Latin America. We distribute our products through direct sales and various third party distribution arrangements. Our customers include banks, payment processors, retail merchants, petroleum service stations, convenience-store operators, supermarkets and other mass merchandisers, and government benefits disbursers. No single customer accounted for more than 10 percent of our net revenues in 1998. We employ approximately 345 persons in the U.S. and 93 persons in Canada. These employees are located in approximately five facilities, including development centers, manufacturing and distribution centers, customer service centers, and sales and support offices. Our principal executive office is located at 1003 Mansell Road, Roswell, Georgia 30076, and our telephone number is (770) 594-6000. Electronic Payment Industry During the 1980s, automating the processing of transactions -- credit and debit card authorization, check verification, and the like -- was not cost- effective, and most transactions were completed manually. In the late 1980s, however, major changes in computer and telecommunications technology helped IVI and Checkmate, among others, develop transaction automation systems that could rapidly capture and process transaction data electronically. The most established alternative to cash and checks is credit cards. After credit cards, debit cards were introduced. Debit cards make direct withdrawals from an account and are often used to make cash withdrawals at automatic teller machines, or ATMs. Now, stored value cards based on smart card technology have been developed, and their utility is being tested in the general public. Companies like us in the electronic payment industry develop, manufacture and market systems that facilitate various payment methods for an array of customers. These systems provide greater convenience to consumers; speed settlement and customer throughput for merchants; and potentially reduce processing costs and losses from fraud for financial institutions. Since the 1980s, IVI and Checkmate continued to develop and deliver low- cost, highly reliable, easy-to-use transaction systems and played a major role in developing the market for electronic payment processing. Today, IVI Checkmate is a leading provider of transaction automation systems in the electronic payment industry. 1 Developments in 1998 - Introduction of Wireless Terminals and Customer Interactive Terminals In 1998, IVI Checkmate introduced wireless terminals and customer interactive terminals. One such wireless terminal is one of the first fully portable long range wireless terminal available in Canada for both debit and credit applications. It is a complete hand-held point-of-sale solution that is compact, lightweight and suited to portable applications where the terminal is brought to the customer. The customer interactive terminal is a multi-function terminal with a touch sensitive screen that helps customers participate in more complex transactions, such as applying for in-store credit. It satisfies the retailers' identified need to increase customer intimacy. For example, personalized loyalty messages, cross-selling suggestions and revenue generating electronic advertising can be delivered to the customer while he or she is waiting for items to be processed for payment. It can also digitally capture signatures written on its screen. Neither of our principal competitors has a device with the same sophistication or capabilities currently available to customers. Other business developments in 1998 included several strategic mergers, including the mergers with Plourde Computer Services, Inc. and Debitek Holdings Limited. Primary Objective - To Further Increase Our Sales and Market Share IVI Checkmate's primary objective is to further increase its sales and share of the electronic payment market by attracting new customers in existing and new market segments. Key elements of our strategy include: Investing in Market Development and Technology Initiatives. The electronic payment industry is characterized by rapid change and new technologies. Consequently, we must continually assess the impact and risks that these changes, as well as our competitors' responses to these changes, will have on our technology and market development initiatives. In anticipation of these changes, we continue to invest in market development and technology initiatives that we believe will help us increase our share of the electronic payment market and allow us to better focus on our short and long-term product development activities. Expanding Our Product Offerings. Historically, IVI and Checkmate had derived the majority of their net revenues from direct sales of hardware products. In recent years, a business strategy was adopted to transition IVI Checkmate from a provider of hardware products to a provider of end-to-end solutions. In the transition, IVI Checkmate has expanded its expertise and capabilities to provide software products and solutions to support software applications within its hardware solutions and the integration within a retailer's point of sale system. Furthermore, IVI Checkmate also provides professional services such as hardware and software maintenance and other help desk facilities to ensure that its customers receive optimal value for their investments. Leveraging Existing Business Relationships. IVI and Checkmate have developed a variety of business relationships over the years. We intend to leverage our relationships with technology solution providers such as Ingenico, S.A., a French public company, which will allow us to bring global technology and products to our local markets. We also intend to leverage our existing customer relationships to market and sell to them end-to-end solutions that are capable of handling alternative forms of electronic payment transactions. Expanding Our Distribution Network Globally. Historically, IVI and Checkmate have derived a majority of their net revenues from direct sales to major retailers and financial institutions in North America. Our strategy is to expand the marketing and availability of our solutions through sales by independent sales organizations, network distributors and value-added resellers. Furthermore, we also intend to expand our product distribution locally, through new product markets such as banking automation and hospitality, as well as internationally, through our alliance with Ingenico. 2 The IVI Checkmate Products With over 15 years of manufacturing and technology expertise through our subsidiaries, IVI Checkmate is a leading provider of electronic payment systems that enable customers to respond to the demands of a rapidly growing, highly competitive, global marketplace. We provide a variety of point-of-service products such as terminals, check readers and software to facilitate the processing of electronic payment transactions such as check, debit, credit, smart card and electronic benefits transfer among customers, merchants and financial institutions. In particular, IVI Checkmate has been successful at addressing the technology and business requirements of its customers by providing comprehensive product functionality and high quality customer service on a cost-effective basis. Product and Services Development Our ongoing product development efforts focus on addressing the emerging needs of the market by expanding the breadth and depth of the functionality of our products and services and incorporating new technologies into them. Gross product development expenditures for fiscal 1996, 1997 and 1998 are $6.9 million, $9.8 million and $9.1 million, respectively. Development direction is established by senior management with guidance from the marketing staff. The development team is responsible for design and design verification, coding, quality assurance, documentation and products and releases. In addition, we developed products and services in 1998 through strategic mergers and alliance, including those summarized below. Strategic Mergers In September 1998 and December 1998, Plourde Computer Services, Inc. and Debitek Holdings Limited were merged into IVI Checkmate. Plourde's flagship product, PaymentMaster, is a suite of feature-rich Windows/NT based application modules designed to manage electronic payments in multi-lane stores. The merger with Plourde positions IVI Checkmate to provide payment solutions that integrate into a retailer's store systems. Including Plourde and National Transaction Network, Inc., or NTN, of which IVI Checkmate is the majority stockholder, IVI Checkmate now has an installed base of 8,800 stores, making it a market leader of in-store payment systems and a leading supplier of integrated payment solutions to major users. The merger with Debitek expands IVI Checkmate's presence in the point-of-sale market because Debitek has implemented systems using smart cards and magnetic stripes in closed environments, such as university and corporate campuses, correctional facilities and other government facilities. Strategic Alliance with Ingenico. In December 1996, IVI entered into a strategic alliance with Ingenico. Ingenico is a major global company in the electronic payment industry. Ingenico develops, distributes, markets and manufactures transaction terminals with application to payment systems, loyalty programs, electronic benefits transfer systems and terminal systems for smart card technology, principally in Europe, Australia and the Asia Pacific region. In the combination, IVI Checkmate was assigned all the rights and obligations of IVI under the strategic alliance with Ingenico. The strategic alliance provides the following benefits to IVI Checkmate: . an exclusive right to distribute Ingenico's products in the Americas through 2006; . an exclusive license to use and incorporate Ingenico's UNICAPT and other smart card technology into our future products; . joint development of future products to lower manufacturing costs and enhance the universal acceptance of products; and . equity financing and support from a major global company in our industry. 3 Customers IVI Checkmate's primary customers are major retailers and financial institutions, but our customers also include distributors, independent sales organizations, value-added resellers and original equipment manufacturers. Our customers generally seek electronic payment products and services to help manage processing transactions. We believe that we meet the practical business requirements of our customers by offering cost-effective products that integrate a variety of electronic payment needs while enhancing consumer satisfaction. Our products assist customers in meeting their internal goals of maintaining operational flexibility and responding to market changes, while minimizing cost, waste and disruption. We have over 15 years of experience in the development of our products and rely upon our considerable industry knowledge to continually anticipate the needs of our customers. None of our customers accounted for more than 10% of our total revenues in the fiscal year ended December 31, 1998. See, however, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Future Performance We rely on large customers." Marketing and Sales IVI Checkmate's marketing strategy focuses on positioning IVI Checkmate as a leading provider of electronic payment products and increasing the name recognition of IVI Checkmate and our products and services. In support of this strategy, our marketing programs include trade shows, advertising, public relations, direct marketing, worldwide web marketing, customer and internal events and product management. We sell our products to customers located throughout the U.S., Canada, and Latin America. We market and sell our products and services directly and, when more efficient, through strategic alliances with other companies. Customer Support, Service and Maintenance IVI Checkmate believes that providing high quality customer service and technical support is necessary to achieve rapid product implementation which, in turn, is essential to long-term customer satisfaction and continued revenue growth. We provided extended support services through our TotalCARE(TM) program. IVI Checkmate presently maintains support centers in Roswell, Georgia and Westborough, Massachusetts. Competition, Proprietary Rights, Technology and Manufacturers and Suppliers See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Future Performance" for discussions on competition, proprietary rights, technology and manufacturers and suppliers. Item 2. Properties. IVI Checkmate's principal administrative, marketing, product development and support facilities are located in Roswell, Georgia, where IVI Checkmate leases a total of approximately 100,000 square feet under a lease that expires on December 30, 2001. Our Canadian operations are located in Toronto, Ontario, where we lease a total of approximately 30,000 square feet under a lease that expires in 2008. We believe that our facilities are suitable and adequate for our current needs. 4 Item 3. Legal Proceedings. IVI Checkmate is not currently subject to any legal proceedings or claims. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of IVI Checkmate's stockholders during IVI Checkmate's fourth fiscal quarter ended December 31, 1998. Item 4(A). Executive Officers of the Registrant. Set forth below is certain information as of December 31, 1998 regarding the executive officers of IVI Checkmate. L. Barry Thomson has been the President, Chief Executive Officer and a director of IVI Checkmate since June 1998. Mr. Thomson joined IVI in April 1994 as President and Chief Operating Officer. He was named a director of IVI in May 1995 and was promoted to Chief Executive Officer in May 1996. Formerly President and CEO of Aluma Systems Corporation, a construction technology company, Mr. Thomson brought to IVI extensive Canadian, U.S. and international experience in managing the growth of a technological and market driven organization. Mr. Thomson built Aluma over 21 years from start up to the largest company in its industry in North America and one of the four largest in the world. He also served as Executive Vice President, director and member of the Executive Committee of Aluma's parent company, Tridel Enterprises, Inc., Canada's largest builder of condominium dwellings. He graduated with a degree in mechanical engineering from the University of Toronto in 1967 and became a member of the Ontario Association of Professional Engineers in 1968. In 1970, Mr. Thomson received his Chartered Accountant designation from Clarkson Gordon (now Ernst & Young). Gregory A. Lewis has been a director of IVI Checkmate and the President and Chief Executive Officer of IVI Checkmate's U.S. operations since June 1998. Mr. Lewis joined Checkmate as President and Chief Operating Officer in August 1997, and he was named a director of Checkmate in October 1997. From 1984 until joining Checkmate, Mr. Lewis was employed by VeriFone, Inc., an electronic payment provider. Mr. Lewis was one of the founding executives of VeriFone and served in various executive positions during his employment, most recently as Vice President and General Manager of the Emerging Markets Division. Earlier in his career, Mr. Lewis held various executive positions during a 14 year career at National Data Corporation, a transaction processing company, and also served as Executive Vice President of Business Development with BuyPass Corporation, a third party point-of-sale processor and debit transaction acquirer. John J. Neubert has been the Executive Vice President-Finance and Administration, Chief Financial Officer, Secretary and Treasurer of IVI Checkmate since June 1998. Mr. Neubert has served as the Senior Vice President- Finance and Administration and Chief Financial Officer of Checkmate since 1990 and a director of Checkmate since 1994. Mr. Neubert also was the Chief Operating Officer of Checkmate from May 1994 until September 1997. Mr. Neubert was Executive Vice President and Chief Financial Officer of Technology Research Group, Inc., a software development and system integrator company, from 1987 until 1990. He was Vice President of RIM Incorporated, a manufacturer and distributor of leisure furniture, from 1985 to 1987. Prior to that time he was employed by Uniroyal Incorporated in various financial and operational positions for approximately 15 years. 5 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Common Stock Price Prior to the combination of IVI and Checkmate on June 25, 1998, the common stocks of IVI and Checkmate were traded on the Nasdaq National Market under the symbols "IVIAF" and "CMEL", respectively, and the common stock of IVI was also traded on the Toronto Stock Exchange under the symbol "IVI". Following the combination, the common stock of IVI Checkmate began trading on the Nasdaq National Market and the Toronto Stock Exchange under the symbols "CMIV" and "IVC," respectively, and exchangeable shares of IVI that were issued in the combination to stockholders of IVI instead of shares of IVI Checkmate common stock began trading on the Toronto Stock Exchange under the symbol "IVI". The IVI exchangeable shares, which are considered Canadian property for Canadian deferred benefit plans, are convertible at any time, on a one-for-one basis, into common stock of IVI Checkmate. The table set forth below provides, on a per share basis for the periods indicated, the high and low sales prices of the common stock of IVI, Checkmate and IVI Checkmate as reported on the Nasdaq National Market, and the common stock of IVI Checkmate and the exchangeable shares of IVI as reported on the Toronto Stock Exchange.
IVI Checkmate ------------------- Common Shares Common Stock -------------------------------------------- ------------------- Toronto Stock Nasdaq National Nasdaq National ------------------- Exchange Market Market ------------------- ------------------- ------------------- (Canadian $) (US $) (US $) High Low High Low High Low -------- -------- -------- -------- -------- -------- 1997 Quarter ended March 31, 1997 ..................... 7.150 6.000 5.375 4.391 13.875 11.500 Quarter ended June 30, 1997 ...................... 8.300 6.000 6.000 4.250 13.500 8.000 Quarter ended September 30, 1997 ................. 10.200 7.000 7.375 5.125 9.125 6.875 Quarter ended December 31, 1997 .................. 13.500 9.250 9.815 6.500 9.000 6.250 1998 Quarter ended March 31, 1998 ..................... 11.950 9.400 8.375 6.625 9.500 6.844 Quarter ended June 30, 1998 (through June 25, 1998) ......................................... 10.750 7.703 7.625 5.188 9.000 6.500
IVI Checkmate IVI Common Stock Exchangeable Shares ------------------------------------------ -------------------- Nasdaq National Toronto Stock Toronto Stock Market Exchange Exchange ------------------- -------------------- -------------------- (US $) (Canadian $) (Canadian $) High Low High Low High Low -------- -------- --------- -------- -------- --------- 1998 Quarter ended June 30, 1998 (from June 26, 1998).. 7.125 6.250 10.094 9.406 9.000 8.000 AQuarter ended September 30, 1998 ................ 7.000 3.719 10.000 5.750 9.000 5.750 Quarter ended December 31, 1998 ................. 6.250 2.500 9.500 5.094 9.500 5.000
6 Holders As of February 28, 1999, there were approximately 320 and 170 record holders of the common stock and exchangeable shares, respectively, and IVI Checkmate estimates that there were approximately 12,000 and 6,000 beneficial owners of the common stock and exchangeable shares, respectively. Dividend Policy IVI has not declared or paid any cash dividends or distributions on its capital stock since its initial public offering in 1984, other than dividends on its Series A Preference Shares in the aggregate amounts of Cdn. $245,000 in 1994 and Cdn.$110,000 in 1993. Checkmate has not declared or paid any cash dividends or distributions on its capital stock since its initial public offering in 1993. IVI Checkmate has never paid any cash dividends on its common stock. IVI Checkmate currently intends to all retain future earnings to fund future development and growth in the operation of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of IVI Checkmate's board of directors and will depend upon IVI Checkmate's results of operations, financial condition, capital requirements and such other factors as the board of directors deems relevant. Recent Sales of Unregistered Securities On September 29, 1998, IVI Checkmate issued 538,232 shares of common stock of IVI Checkmate in exchange for 2,906,250 shares of common stock of Plourde. On December 18, 1998, IVI Checkmate issued 916,644 shares of common stock of IVI Checkmate, of which 430,355 shares are currently held in escrow, in exchange for 468,758 "A" ordinary shares of Debitek and 1,200,000 "B" ordinary shares of Debitek. The issuances of such shares of common stock of IVI Checkmate were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. Such shares will be eligible for sale in the public market subject to the conditions of Rule 144 of the Securities and Exchange Commission. Item 6. Selected Financial Data. The following table sets forth selected statements of operations and balance sheet data of IVI Checkmate for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. The selected financial data for the years ended December 31, 1998, 1997 and 1996 and as of December 31, 1998 and 1997 have been derived from IVI Checkmate's consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors. The selected financial data for the years ended December 31, 1995 and 1994 and as of December 31, 1996, 1995 and 1994 have been derived from IVI Checkmate's unaudited consolidated financial statements which, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of IVI Checkmate's financial position as of such date. The selected financial data, which have been restated for all periods to reflect the combination of IVI and Checkmate and the subsequent mergers with Plourde and Debitek, should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data." 7
Year Ended December 31 ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------------------------------- (In thousands of dollars, except per share amounts) Statements of Operations Data: Net revenues: By Region United States $ 79,473 $62,647 $ 55,113 $48,822 $22,282 Canada 27,649 30,018 22,272 30,864 30,305 -------------- ----------- ------------ ------------ ---------- $107,122 $92,665 $ 77,385 $79,686 $52,587 ============== =========== ============ ============ ========== By Product Line Electronic funds transfer $ 70,413 $63,488 $ 49,172 $50,046 $32,699 Check reader 26,157 19,927 23,375 25,829 15,843 Professional services 10,552 9,250 4,838 3,811 4,045 -------------- ----------- ------------ ------------ ---------- 107,122 92,665 77,385 79,686 52,587 -------------- ----------- ------------ ------------ ---------- Cost of sales 65,818 58,015 47,378 50,568 33,959 -------------- ----------- ------------ ------------ ---------- Gross profit 41,304 34,650 30,007 29,118 18,628 -------------- ----------- ------------ ------------ ---------- Operating expenses: Selling, general and administrative 25,118 24,769 20,327 16,216 13,921 Research and development 4,963 5,603 4,459 4,264 3,335 Depreciation and amortization 4,153 2,823 2,198 2,817 1,828 Unusual charges (1) 12,634 - 8,023 - 6,972 -------------- ----------- ------------ ------------ ---------- 46,868 33,195 35,007 23,297 26,056 -------------- ----------- ------------ ------------ ---------- Operating income (loss) (5,564) 1,455 (5,000) 5,821 (7,428) Other: Minority interest 53 448 20 - - Share of equity investee loss (342) - (147) - - Interest income, net 302 478 512 346 291 -------------- ----------- ------------ ------------ ---------- Income (loss) before income taxes (5,551) 2,381 (4,615) 6,167 (7,137) Income tax benefit (expense) 580 855 (5,684) (2,687) 3,197 -------------- ----------- ------------ ------------ ---------- Net income (loss) $ (4,971) $ 3,236 $(10,299) $ 3,480 $(3,940) ============== =========== ============ ============ ========== Net income (loss) per common share $(0.28) $0.19 $(0.69) $0.24 $(0.32) ============== =========== ============ ============ ========== As of December 31 ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- ----------- ------------ ------------ ---------- Balance Sheet Data: Total assets $ 82,829 $76,584 $ 69,787 $66,357 $59,079 Long-term liabilities 787 2,085 1,124 1,598 609 Stockholders' equity 55,017 57,412 53,029 51,130 44,865
(1) Unusual charges consist principally of merger costs in 1998 and writedown of assets in each of 1998, 1996 and 1994. See also Note 10 of the Notes to the Consolidated Financial Statements Any trends that may be derived from the above table are not necessarily indicative of our future operations. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview IVI Checkmate is a full-service solutions provider in the electronic payment industry in the U.S., Canada and South America. We provide point-of-service products such as terminals, check readers and software to facilitate the processing of electronic payment transactions such as check, debit, credit, smart card and electronic benefits transfer among consumers, merchants and financial institutions. IVI Checkmate was formed in June 1998 in a combination of IVI and Checkmate, which was accounted for as a pooling-of-interests. Consequently, the financial statements and other financial information as of dates and for all periods included herein are consolidated, consisting of the combined historical financial statements of IVI and Checkmate and their subsidiaries, as well as the combined historical financial statements of Plourde and Debitek, which were merged into IVI Checkmate in 1998 in transactions accounted for as poolings-of- interests. The following discussion and analysis of our consolidated financial condition and results of operations for the years ended December 31, 1998, 1997 and 1996 should be read in conjunction with the IVI Checkmate consolidated financial statements and accompanying notes. The financial statements have been prepared based on U.S. generally accepted accounting principles. As used herein, the terms "fiscal 1996", "fiscal 1997" and "fiscal 1998" refer to our fiscal years ended December 31, 1996, 1997 and 1998, respectively. Results of Operations Fiscal 1998 Compared to Fiscal 1997 Revenues. Total revenues increased 16% from $92.7 million in fiscal 1997 to $107.1 million in fiscal 1998. The increase in total revenues was attributed to: . an 11% increase in sales of terminals and peripherals used for electronic funds transfer due to the introduction of a new customer interactive touch screen terminal, and the successful marketing of our eN-Scribe point-of-sale printer; . a 31% increase in check reader sales as a result of increased demand from financial institutions and the success of our eN-Check 3000 dial check reader, the only stand-alone dial-based check reader available in the market; and . a 14% increase in professional service revenues as a result of long-term hardware and software maintenance agreements and services provided through the TotalCARE program, our help desk facility. Cost of Sales. Cost of sales increased 13% from $58.0 million in fiscal 1997 to $65.8 million in fiscal 1998 as a result of a 16% increase in revenues over the same period. As a percentage of revenues, cost of sales decreased from 63% in fiscal 1997 to 61% in fiscal 1998. The improvement is a result of continued cost reduction programs and on-going business integration and manufacturing efficiencies related to the combination of IVI and Checkmate. Selling, General and Administrative. Selling, general and administrative expenses increased 1% from $24.8 million in fiscal 1997 to $25.1 million in fiscal 1998. These expenses represented 27% and 23% of total revenues in fiscal 1997 and 1998, respectively. The decrease in selling, general and administrative expenses as a percentage of revenues reflects synergies from the combination of IVI and Checkmate and subsequent mergers in fiscal 1998, our commitment to sell more effectively, and our commitment to provide a wider range of end-to-end payment solutions to our customers with limited increases in selling costs. 9 Research and Development. Gross development expenditures include research and development expense and capitalized software development costs, and consist primarily of labor. Gross product development expenditures fluctuate from quarter to quarter and year to year depending on the timing of product development projects. In fiscal 1998, we announced several new products, including the Elite 780 wireless point-of-sale terminal and the eN-Touch 1000 terminal. Gross expenditures for fiscal 1998 are net of expenditures of $669,000 that were incurred by NTN in its development of a Windows/NT software platform, which costs were subsequently written off upon our merger with Plourde and are classified in merger costs in the statements of operations. Gross expenditures in fiscal 1997 included development costs of new products such as the eN-Check 3000 dial check reader and the eN-Scribe printers, as well as the development cost of the eN-Touch 1000 touch screen terminal which continued into fiscal 1998 and 1999. The table set forth below provides a summary of our product development expenditures in the last three fiscal years.
Year Ended December 31 1998 1997 1996 --------------- --------------- --------------- (In thousands of dollars) Gross product development expenditures $9,076 $9,789 $6,912 Less: capitalized software development costs 4,113 4,186 2,453 --------------- --------------- --------------- Net research and development expense 4,963 5,603 4,459 Amortization of previously capitalized costs 2,075 1,041 780 --------------- --------------- --------------- Total expense $7,038 $6,644 $5,239 =============== =============== =============== Product development as a percentage of net revenues: Gross expenditures 8.5% 10.6% 8.9% Net expense 4.6% 6.0% 5.8% Total expense 6.6% 7.2% 6.8%
Depreciation and Amortization. Depreciation and amortization increased 47% from $2.8 million in fiscal 1997 to $4.2 million in fiscal 1998, primarily as a result of higher amortization of software development costs previously capitalized. Unusual Charges. In fiscal 1998, we recorded charges to earnings in the amount of $12.6 million to reflect costs associated with the combination of IVI and Checkmate and the subsequent mergers with Plourde and Debitek. These costs consisted of the following: . professional fees and other transaction costs; . closure costs, including severance and employee relocation costs, in the immediate closure of IVI's U.S. operations in Boulder, Colorado, and the transfer and integration of these operations into Checkmate's operations in Atlanta, Georgia, which was completed in fiscal 1998, including the termination of 35 employees; . inventory obsolescence provision to reflect product redundancies; . the write-off of a Windows/NT software platform under development by NTN that was made redundant by the availability of Plourde's own commercially viable Windows/NT platform; and . the write-off of the remaining goodwill related to NTN as a result of a permanent impairment in value which arose due to the termination of development of a Windows/NT software platform by NTN. Income Tax Benefit (Expense). Our statutory tax rate is 34%. However, our income taxes were affected in fiscal 1998 and 1997 by utilization of non- operating loss carryovers of previous years, and by a valuation allowance adjustment on the realization of these non-operating loss carryovers in future years. As a result of these 10 factors, the taxes recorded on the statements of operations in fiscal 1998 and 1997 may not have direct correlation to the level of the pre-tax earnings in each of those years. We recorded income tax benefits of $580,000 and $855,000 for fiscal 1998 and 1997, respectively. The net deferred tax assets at December 31, 1998 were $3.3 million, net of a valuation allowance of $6.3 million, primarily relating to the tax benefits associated with net operating loss carryforwards. Realization of our net deferred tax assets depends on us generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from net operating loss and credit carryforwards. In our assessment, we believe that future levels of taxable income will be sufficient to realize the net deferred tax asset. See Note 6 of Notes to Consolidated Financial Statements. Net Income (Loss). Net income (loss) for fiscal 1998 and 1997 was $(5.0) million and $3.2 million, respectively. The decrease in net income was a result of merger costs in fiscal 1998 associated with the combination of IVI and Checkmate and subsequent mergers with Plourde and Debitek, and a tax benefit recognized in fiscal 1997 due to an adjustment in the valuation of U.S. tax loss carryforwards. Fiscal 1997 Compared to Fiscal 1996 Revenues. Total revenues increased 20% from $77.4 million in fiscal 1996 to $92.7 million in fiscal 1997. The increase in total revenues is attributed to: . a 29% increase in sales of terminals and peripherals used for electronic funds transfer due to the introduction in 1997 of a new low cost dial terminal, and renewed ordering in fiscal 1997 from one of our largest customers after order delays in fiscal 1996; . a 15% decline in check reader sales due to reduced demand from large customers for check reader products, which prompted the release in late fiscal 1997 of a new dial check reader to expand the check reader market to the mid-to-low tier retail level; . a 91% increase in professional service revenues, primarily due to the introduction of TotalCARE, a help desk facility, and a higher number of maintenance contracts received and software development projects completed. Cost of Sales. Cost of sales increased 22% from $47.4 million in fiscal 1996 to $58.0 million in fiscal 1997 as a result of a 20% increase in revenues over the same period. As a percentage of revenues, cost of sales increased from 61% in fiscal 1996 to 63% in fiscal 1997, primarily as a result of an unfavorable product and customer mix, which was partially offset by manufacturing efficiencies and cost reduction programs. Selling, General and Administrative. Selling, general and administrative expenses increased 22% from $20.3 million in fiscal 1996 to $24.8 million in fiscal 1997. These expenses represented 26% and 27% of total revenue in fiscal 1996 and 1997, respectively. The increase in expenses was due to an increase in personnel and related costs required to support the anticipated growth in new products and net revenues, and inclusion for a full year in fiscal 1997 of these expenses from NTN which was acquired by IVI in September 1996. Research and Development. Gross development expenditures increased 42% from fiscal 1996 to fiscal 1997 primarily as a result of our continuing efforts in expanding our software expertise and the introduction of several new products such as the dial check reader and point-of-sale printers. Unusual Charges. In fiscal 1996, we recorded charges to earnings totaling $8.0 million. These charges consisted of the following: . Write-off of goodwill. We reviewed the recoverability of unamortized goodwill, which arose from the acquisition of Soricon Corporation in December 1994. The financial results of Soricon subsequent to 11 the acquisition were below anticipated results upon which we based the purchase price. Soricon did not meet sales targets for its check reader and costs were much higher than anticipated. As a result, we compared the unamortized goodwill against an estimate of the undiscounted cash flows from the business to which the goodwill related over the remaining amortization period, and determined that there was a permanent impairment in the carrying value of the goodwill. Consequently, the remaining unamortized balance of $6.8 million was written off in its entirety. . Product redundancy. The incorporation of Ingenico's smart card technology into our product line resulted in certain of our products becoming unmarketable, and deferred development costs related to these products becoming unrecoverable. Consequently, a charge of $1.2 million was recorded. Income Tax Benefit (Expense). Our statutory tax rate is 34%. However, our income taxes were affected in fiscal 1997 and 1996 by utilization of non- operating loss carryovers of previous years, and by a valuation allowance adjustment on the realization of these non-operating loss carryovers in future years. As a result of these factors, the taxes recorded on the statements of operations in fiscal 1997 and 1996 may not have direct correlation to the level of the pre-tax earnings in each of those years. We recorded an income tax benefit of $855,000 for fiscal 1997 and an income tax expense of $5.7 million for fiscal 1996. The net deferred tax assets at December 31, 1997 were $1.9 million, net of a valuation allowance of $9.0 million, primarily relating to the tax benefits associated with net operating loss carryforwards. Realization of our net deferred tax assets depends on us generating sufficient taxable income in future years in appropirate tax jurisdictions to obtain benefit from the reversal of tempoary differences and from net operating loss and credit carryforwards. In our assessment, we believe that future levels of taxable income will be sufficient to realize the net deferred tax asset. See Note 6 of Notes to Consolidated Financial Statements. Net Income (Loss). Net income (loss) for fiscal 1997 and 1996 were $3.2 million and $(10.3) million, respectively. The increase in net income was a result of several factors, including the unusual charges that were recorded in fiscal 1996, and adjustments in fiscal 1997 and 1996 to the valuation of U.S. tax loss carryovers. Liquidity and Capital Resources We finance our operations primarily through cash flows from operations. Net cash provided by (used in) operating activities was $3.5 million in fiscal 1998, $(1.0) million in fiscal 1997 and $3.9 million in fiscal 1996. The fluctuations in each year were the result of the timing of sales, which affected the levels of accounts receivable, inventory and accounts payable balances. Net cash used in investing activities was $5.1 million in fiscal 1998, $7.1 million in fiscal 1997 and $6.1 million in fiscal 1996. Purchases of property and equipment and additions to deferred development costs and other non-current assets were $8.8 million, $8.3 million and $6.5 million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. These uses of net cash were offset by net proceeds from the sale of investments of $3.7 million and $1.2 million in fiscal 1998 and fiscal 1997, respectively, and cash of $662,000 acquired in connection with the acquisition of NTN in fiscal 1996. Net cash provided by financing activities was $2.7 million in fiscal 1998, $5.1 million in fiscal 1997 and $9.6 million in fiscal 1996, and was primarily the result of the issuance of common stock upon stock option exercises and an equity interest acquired by Ingenico. As of December 31, 1998, we had working capital of $36.0 million, including $9.8 million in cash and cash equivalents. Furthermore, lines of credit have been established for several of our subsidiaries with maximum borrowings totaling, in aggregate, approximately $5.0 million. As of December 31, 1998, no borrowings under these lines of credit were outstanding. As of December 31, 1998, we did not have any material commitments for capital expenditures. 12 We believe that cash and cash equivalents on hand as of December 31, 1998, together with cash flows from operations and available borrowings under the lines of credit, will be sufficient to maintain our current level of operations for at least the next 12 months. Year 2000 Issue Many existing computer hardware and software systems are designed to use only two digits to identify a year in date fields (e.g. "98" for "1998"). These systems may not properly recognize a year that begins with "20" instead of "19". If not corrected, these systems could fail or could create erroneous results when working with dates beyond the year 1999. This is commonly referred to as the "Year 2000 issue". We believe that the Year 2000 issue may affect us in two principal ways: through our products and through our operations. IVI Checkmate designates each of the statements made herein as a Year 2000 Readiness Disclosure. Such statements are being made pursuant to the Year 2000 Information and Readiness Disclosure Act. IVI Checkmate's Readiness Status We develop and market hardware and software products which are date sensitive and affected by the Year 2000 issue. We believe that we have taken all steps necessary to ensure that our hardware and software products are Year 2000 compliant. Nevertheless, the Year 2000 issue could negatively affect the demand for our products and the spending patterns of our customers. Many hardware, operating system and application products developed by third parties interact or operate with our hardware and software products, as well as our operating systems. In addition, customers or others may modify our hardware and software products or our operating systems after they have been installed. We cannot assess the Year 2000 readiness of these hardware and software products, operating systems or modified hardware and software products and operating systems. If these products are not Year 2000 compliant, it could adversely affect the performance and functionality of our applications that work with these products. While we would not be responsible for these Year 2000 problems, we are unable to assess the effect they may have on our business, financial condition and results of operations. We principally rely on software products to support our internal accounting, payables and invoicing operations. While these software products have been or are in the process of being tested for Year 2000 compliance, we also rely on third party systems developed by others for many of our critical internal operations. In addition, our internal operations may also be affected by Year 2000 issues affecting third parties with whom we have relationships, including contract manufacturers and other vendors (e.g., utilities, distributors, banks and other suppliers). A Year 2000 problem affecting our systems or those of third parties that we rely upon may have a material adverse effect on our business, financial condition and results of operations. We have assembled a Year 2000 taskforce consisting of representatives from our development, marketing, support, information systems, facilities and finance departments to assess the Year 2000 readiness of our internal operations and the readiness of third parties on which we rely. The taskforce has identified and assessed the Year 2000 readiness of most of the material information technology and non-information technology systems used internally as part of our operations, but such work is ongoing. The taskforce has tested or will test these systems where feasible and practicable. We expect testing to be complete by mid-1999. We believe the taskforce to have appropriate plans in place to achieve timely Year 2000 readiness for our internal systems. However, our ongoing assessment program may in the future reveal Year 2000 issues which are not currently identified or fully understood. The taskforce has identified those third parties on which our operations materially rely. This includes our contract manufacturers and other suppliers. The taskforce has gathered written materials published by such third parties or otherwise communicated directly with such third parties to determine the Year 2000 readiness of their business operations or the readiness of the products or services they supply to us. While the taskforce collected many responses and other materials from such third parties regarding their Year 2000 readiness, the process is ongoing. We expect this process to last until mid-1999. 13 Company Costs to Address the Year 2000 Issue We have been seeking Year 2000 compliance while upgrading our hardware and software in the ordinary course of business and have not separately allocated Year 2000 expenses during such process. However, we do not believe that these Year 2000 costs are material. We do not expect to incur material additional costs to remedy any remaining Year 2000 problems with our products and internal systems. We, however, cannot currently assess the costs of remedying problems which may result from the Year 2000 issues of others. Risks Our customer operations are heavily dependent on the constant availability of telecommunications equipment and other utilities. As a result, IVI Checkmate currently believes that the most reasonably likely worst case Year 2000 scenario would involve the temporary interruption of electric power, telephone or other utility supplies to our offices or our support operations facilities due to a failure of a utility supplier to be Year 2000 compliant. In addition, despite assurances and testing, it is also possible that our internal systems or those of our customers and suppliers may not be Year 2000 ready. In addition, "business interruption" litigation may arise out of the Year 2000 issue. We are not currently aware of any possible claim against us arising from instances of business interruption. We currently believe our hardware and software products to be Year 2000 compliant, but cannot ensure such compliance for software products which were designed exactly to customer specifications for their internal systems. Consequently, we cannot assure that all of these customers are aware of the Year 2000 issue or that they have adopted appropriate corrective solutions, and will therefore not bring Year 2000-related claims against us which, with or without merit, could be time consuming and expensive for us to defend or resolve. Contingency Plans We will establish a contingency plan to address the most reasonably likely worst case scenario if, in our assessments, we identify a material business function that is substantially at risk. Our assessments to date have not identified such a risk. We have, however, not completed the testing of those internal systems which we can test feasibly and practically, and have not received all responses from those suppliers on which we rely, to fully assess the potential Year 2000 exposures. Cautionary Statements The continued assessment, progress and timing of our Year 2000 readiness efforts and potential exposures as described above depend upon the cooperation and responsiveness of third parties, the accuracy and reliability of responses provided and testing procedures, and the availability of skilled resources, both internal and external, to address Year 2000 issues that exist or may arise. There can be no assurance that assessments to date will prove to be accurate. Serious deficiencies which are not currently identified or fully understood may arise in the future and may have a material adverse impact on our business, financial condition and results of operations. We plan to continue our taskforce into the Year 2000 to assess Year 2000 issues affecting us, review the status of our findings and develop appropriate contingency plans where necessary in an effort to minimize the potential exposure to the Year 2000 issue. Impact of Recent Accounting Standards In 1998, FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", and AICPA Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use", were released. We believe that the adoption of these statements, which are not required for fiscal 1998, will not have a significant effect on our financial statements. 14 Inflation and Foreign Exchange Exposure To date, we believe that inflation has not had a material impact on our operations. We are, however, exposed to certain foreign exchange currency risks. Our exposure to foreign currency exchange risk at December 31,1998 with regard to Canadian dollars was reflected in a currency translation adjustment to Stockholders' Equity of approximately $1.4 million. The weakened Canadian dollar further impacted, but to a lesser degree, sales and expenses in 1998 that were denominated in Canadian currency. FACTORS AFFECTING FUTURE PERFORMANCE We must adapt to changes in technology The electronic payment industry is constantly changing. These changes include, among others: . rapid technological advances; . evolving industry standards in electronic fund transfer and point-of-sale products; . changes in customer requirements; and . frequent new product introductions and enhancements. To be successful, IVI Checkmate must develop and use leading technologies effectively, and continue to satisfy customer needs on a timely and cost- effective basis. While IVI Checkmate continues to develop new products and technologies, we may not successfully keep up with the new products and technological advances of others. Several of our competitors have introduced products and technologies that will compete with our products and technologies. We cannot guarantee that present or potential customers will accept our new products and technologies or that they will not choose to use our competitors' products and technologies. If we are unable to develop and market new products and product enhancements that achieve market acceptance on a timely and cost- effective basis, it could materially and adversely affect our business, financial condition and results of operations. We rely on large customers IVI Checkmate relies upon large banks and retail customers with a large number of point-of-sale stations for a significant percentage of our revenues. We continue to diversify our customer base by developing strategic alliances and partnerships to open more distribution channels and limit our reliance on large customers. While we continue to transact business with our current customers and attract new ones, our revenues will decrease significantly if we lose a large customer. We may also be unsuccessful in attracting new customers. The demand for our products and services, especially from our large customers, may decline. If these things occur, it could materially and adversely affect our business, financial condition and results of operations. The electronic payment industry is very competitive The electronic payment industry is very competitive and subject to rapid technological change. We expect competition to increase in the future. To compete successfully in the future, IVI Checkmate must respond promptly and effectively to changes in technology. We must also respond to our competitors' innovations and provide low cost products through manufacturing efficiencies and other costs savings measures. Certain of our competitors have significantly greater financial, marketing, service, support and technical resources than us. Certain of these competitors also have greater name recognition than us. Accordingly, our competitors may be able to respond more quickly than us to new or emerging technologies or changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of products than us. In addition, our profit margins could decline because of competitive pricing pressures that may have a material adverse effect on our business, financial condition, and results of operations. Consequently, we may not compete successfully against current or future competitors, and the competitive pressures that we face may negatively affect our business, financial condition and operating results. 15 We attempt to differentiate ourselves from our competitors by providing end-to-end solutions. Our competitors include VeriFone, Inc., a division of Hewlett-Packard Company, Hypercom Corp. and NBS Technologies, Inc. Current and potential IVI Checkmate competitors may make acquisitions or establish alliances among themselves or with others. These acquisitions or alliances could increase the ability of competitors' products to address the needs of our current or prospective customers. As a result, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain a significant share of the electronic payment market. For IVI Checkmate, this could result in price reductions, the loss of current or prospective customers, fewer customer orders and reduced net income. Our hardware and software may contain defects and undetected errors Our hardware and software, including the security features on our point-of- sale payment systems, may contain undetected defects and errors. Although we test our hardware and software before releasing it, we may discover defects and errors in the future. Once detected, we may not be able to correct defects and errors in a timely manner. The cost to fix defects and errors may be high. Consequently, any undetected defects and errors in our hardware and software may result in any of the following: . delays in the shipment of the products; . loss of market acceptance of the products; . additional warranty expense; . diversions of engineering and other resources from our other product development efforts; and . loss of credibility with our distributors and customers. Therefore, any undetected defects and errors in our hardware and software could adversely affect our business, financial conditions and results of operations. Government and industry regulations may affect our financial condition and ability to compete Various regulatory factors affect our financial performance and ability to compete. Governmental regulatory policies affect charges and terms for both private-line and public network electronic payment services. Accordingly, changes in such policies may: . make it more costly to communicate on such networks; . increase the costs of development; . increase the opportunity for additional competition; or . result in additional compensation. If such regulatory action occurs, our business, financial condition and operating results could be negatively affected. IVI Checkmate must also obtain product certification on the applicable customer's systems in the U.S., Canada and other countries. Any delays in obtaining necessary certifications with respect to future products may delay the introduction or result in the cancellation of such products. If we have any delays in obtaining necessary certifications with respect to future products, our business, financial condition and operating results could be negatively affected. We are subject to regulation by the Federal Communications Commission, or FCC, with respect to the performance of certain products. Compliance with future regulations or changes in the interpretation of existing regulations may result in a need to modify products or systems. In the event that FCC rules are added or their interpretations are changed, we could be negatively affected. 16 We may be unable to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights Our operations could be materially and adversely affected if we are not adequately able to protect our proprietary software, audit techniques and methodologies, and other proprietary intellectual property rights. We rely on a combination of patents, copyrights, trademarks, trade secrets, nondisclosure and other contractual arrangements and technical measures to protect our proprietary rights. While we currently hold several U.S. and Canadian patents, we mainly rely on copyright to protect our operating systems and various other software programs. Nevertheless, we could be negatively affected if our competitors successfully incorporate this technology into their products. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. We could be negatively affected if our means of protecting our proprietary information is inadequate. We may also be unable to deter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Furthermore, our competitors also may independently develop technologies that are substantially equivalent or superior to our technology. We may not be successful in avoiding claims that we infringe others' proprietary rights Although we believe that our services and products do not infringe on the intellectual property rights of others, we can not prevent someone else from asserting a claim against us in the future for violating their technology rights. In the ordinary course of our business, third parties may claim that our services infringe on their patent, copyright or trademark rights. We also may be subject to court actions alleging that we violated a third party's patent, copyright or trademark rights. Third parties making infringement claims may have significantly greater resources than we do to pursue litigation, and we cannot be certain that we would prevail in an infringement action. Infringement claims, whether with or without merit, could be time consuming, distract management, result in costly litigation, delay the introduction of new services and require us to enter into royalty or licensing agreements. As a result of an infringement claim, we could be required to discontinue use of a specific technology, tradename or service mark. In such instances, it could be expensive for us to develop or buy replacement technology or market a new name. Consequently, whether justified or not, infringement claims could have a negative effect on our business, financial condition and operating results. We depend on manufacturers and suppliers We currently assemble certain products and components at our manufacturing facility in Roswell, Georgia. However, we depend on other manufacturers and suppliers for some of our products and certain components used in our products. The components we obtain from other manufacturers and suppliers are only available from a limited number of sources. Certain components and products are currently purchased from single suppliers. While we maintain additional inventory of certain products and continually evaluate alternative sources of supply, the failure of any such single supplier to meet its commitment on schedule could adversely affect us. If a sole source supplier goes out of business or becomes unable to meet its supply commitments to us, our production could be delayed. Such delays could adversely affect our business, financial conditions and results of operations. The use of outside manufacturers and suppliers also subjects IVI Checkmate to the following additional risks: 17 . potential quality assurance problems; . availability of suitable competitive and cost effective manufacturers and suppliers; . potential loss of product margin; and . price fluctuation, particularly for certain static random access memory products. IVI Checkmate is subject to the risk of product liability claims IVI Checkmate's products are generally used to manage data critical to large organizations. As a result, IVI Checkmate's development, sale and support of products may entail the risk of product liability claims. IVI Checkmate's license agreements with its customers typically contain provisions designed to limit IVI Checkmate's exposure to potential product liability claims. However, these provisions may not be effective under the laws of all jurisdictions. The insurance maintained by IVI Checkmate may not be sufficient in scope or amount to cover all personal injury, property damage and other claims if the limitations on IVI Checkmate's liability contained in its license agreements are ineffective. A successful product liability claim brought against IVI Checkmate could therefore materially and adversely affect IVI Checkmate's business, financial condition and results of operations. In addition, defending such a suit, regardless of its merits, could require IVI Checkmate to incur substantial expense and require the time and attention of key management personnel. This could also materially and adversely affect our business, financial condition and results of operations. Our success depends upon our ability to attract and retain key personnel IVI Checkmate's future performance depends upon the continued service of a number of senior management and key technical personnel. The loss or interruption of the services of one or more key employees could have a material adverse effect on our business, financial condition and results of operations. IVI Checkmate currently maintains no key-person life insurance on any of its key employees. IVI Checkmate's future financial results also will depend upon its ability to attract and retain highly skilled technical, managerial and marketing personnel. Competition for qualified personnel is significant and intense, and is likely to intensify in the future. We compete for qualified personnel against numerous companies, including larger, more established companies with significantly greater financial resources than ours. Significant competition exists for such personnel. At times we have experienced and continue to experience difficulty recruiting and retaining qualified personnel. If we are unable to hire and retain qualified personnel in the future, it could materially and adversely affect our business, financial condition and results of operations. Our directors, officers and Ingenico hold a large percentage of shares Our directors, officers and their affiliates, including Ingenico, beneficially own approximately 3,800,000 shares (approximately 20%) of our common stock, including exchangeable shares and exercisable options. Our directors, officers and their affiliates also hold options to acquire 265,000 shares of common stock that are not immediately exercisable. Consequently, our directors, officers and their affiliates could, as stockholders, control or exercise significant influence over the election of directors and all other matters requiring stockholder approval, including a change of control or ownership of IVI Checkmate. Failure to obtain Year 2000 compliance may negatively affect our business The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that store dates as two digits rather than four (e.g., "99" for 1999). On January 1, 2000, these 18 systems and equipment may read "00" as the year 1900 instead of the year 2000. This problem could result in an interruption in, or failure of, certain of our normal business activities and operations. We have analyzed the Year 2000 issue with respect to our hardware and software products, the hardware and software we use to provide our services and our computerized information and operating systems. We do not believe that the costs necessary to resolve the known Year 2000 problems will be material to our operating results. However, if our projected timetable or cost estimates are incorrect, our business, financial condition and results of operation could be negatively affected. We are also discussing the Year 2000 issues with our significant customers, manufacturers and suppliers. If they are unprepared for Year 2000 problems, our business activities and operations could be negatively affected. We are not yet certain to what extent our significant customers, manufacturers and suppliers are Year 2000 compliant. If their systems are not timely converted or if their converted systems are not compatible with ours, we may experience a significant number of operational inconveniences and inefficiencies for us and our customers that may divert our time and attention and financial and human resources from our ordinary business activities. Any Year 2000 problems we encounter may have a materially adverse affect on our business, financial condition or operating results. Many factors may affect our operating results and cause potential fluctuations in our quarterly results Our future success depends on a number of factors, many of which are unpredictable and beyond our control. Moreover, many of these factors are likely to cause IVI Checkmate's operating results, cash flows and liquidity to fluctuate significantly from quarter to quarter in the future. These factors include, among others: . customers' acceptance of our new and enhanced services; . the demand for IVI Checkmate's products; . how quickly we are able to develop new products and services that our customers require; . whether and how quickly alternative technologies, products and services introduced by our competitors gain market acceptance; . the timing of the introduction of new or enhanced products and services offered by IVI Checkmate or our competitors; . changes in laws and regulations that affect our business; . the number, size and successful integration of acquired companies and relationships with alliance partners; . prevailing conditions in the electronic payment marketplace and other general economic and political factors; . Year 2000 issues not identified or resolved on a timely basis, which may affect our operations or the operations of our suppliers on whom we rely upon; . foreign currency exposures; . our customers' inventory levels of IVI Checkmate products, which may affect the timing of future orders; . condition of the stock market; and . competitive pricing pressures. 19 Quarterly revenues and expenses are difficult to predict because the market for our products and services is rapidly evolving. Our expense levels are based, in part, on our expectations about future revenues. We typically record a disproportionate amount of our revenue for each quarter in the final month of the quarter, while expenses are generally incurred more evenly throughout the period. If our actual revenue levels do not meet our projections or if our expenses exceed our projections, operating results would likely be negatively affected. Due to many factors, we believe that period-to-period comparisons of our business are not necessarily meaningful. Because our industry changes so quickly, our operating results in future quarters could be below the expectations of public market analysts and investors. If we do not meet these expectations, our stock price could fall significantly. In addition, from time to time the stock market experiences significant price and volume fluctuations. Stock market fluctuations have particularly affected the stock prices of technology companies, such as IVI Checkmate. We cannot assure you that we will effectively manage our growth Our future operating results will depend heavily on our ability to manage our business and make appropriate changes in the face of our growth and changing industry conditions. If we do not respond appropriately to growth and change, the quality of our services, our ability to retain key personnel and our business in general could be negatively affected. If we do not correctly predict our growth, our business, financial condition and operating results could be negatively affected. IVI Checkmate is subject to risks associated with making acquisitions and may not be able to grow through acquisitions As part of its business strategy, IVI Checkmate continually evaluates potential acquisitions of, and cooperative ventures to acquire, complementary technologies, products and businesses in the electronic payment market. In its pursuit of strategic alliances, partnerships and acquisitions, IVI Checkmate may be unable to: . identify suitable strategic alliances, partnerships and acquisition candidates; . compete for strategic alliances, partnerships and acquisitions with other companies, many of which have substantially greater resources than us; . obtain sufficient financing on acceptable terms to fund strategic alliances, partnerships and acquisitions; . complete the strategic alliances, partnerships and acquisitions on terms favorable to us; . integrate acquired technologies, products and businesses into its existing operations; and . profitably manage acquired technologies, products and businesses. Strategic alliances, partnerships and acquisitions may also involve a number of risks including, among others, that: . technologies, products or businesses acquired by us may not perform as expected; . technologies, products or businesses acquired by us may not achieve levels of revenues, profitability or productivity comparable to those of our existing technologies, products and operations; 20 . strategic alliances, partnerships and acquisitions may divert the attention of management and our resources; . we may experience difficulty in assimilating the acquired operations and personnel; and . we may experience difficulty in retaining, hiring and training key personnel. Any or all of these risks could materially and adversely affect our business, financial condition or results of operations. IVI Checkmate has adopted measures that have anti-takeover effects Under our Certificate of Incorporation, the board of directors may issue preferred stock, with any rights it may wish to assign, without stockholder action. IVI Checkmate has also adopted a stockholder rights plan under which it has distributed rights to purchase shares of our Series C Junior Participating Preferred Stock to its stockholders. If certain triggering events occur, the holders of the rights will be able to purchase shares of common stock at a price substantially discounted from the then applicable market price of the common stock. Exchange rate fluctuations between the U.S. dollar and other currencies in which we do business may result in currency transaction losses A significant portion of our revenues are denominated in Canadian Dollars. Consequently, fluctuations in exchange rates between the U.S. and Canadian Dollar may have a material adverse effect on our business, financial condition and operating results and could also result in significant exchange losses. Foreign currency transaction gains and losses are a result of transacting business in certain foreign locations in currencies other than the functional currency of the location. We attempt to balance our revenues and expenses in each currency to minimize net foreign currency risk. To the extent that we are unable to balance revenues and expenses in a currency, fluctuations in the value of the currency in which we conduct our business relative to the functional currency have caused and will continue to cause currency transaction gains and losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. These currency exchange risks could materially and adversely affect our business, financial condition and operating results. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." We have not sought to hedge the risks associated with fluctuations in exchange rates but may undertake such transactions in the future. Any hedging techniques which we implement in the future may not be successful, and exchange rate losses could be exacerbated by hedging techniques that we use. A large number of shares of our stock are currently eligible for public sale, which could cause our stock price to drop Sales of a substantial number of shares of our common stock in the public market, or the prospect of these sales, could adversely affect the market price of the common stock. These sales or the prospect of these sales could also impair our ability to raise needed funds in the capital markets at a time and price favorable to IVI Checkmate. As of December 31, 1998, IVI Checkmate had approximately 17,835,000 shares of common stock outstanding, including approximately 5,800,000 outstanding IVI exchangeable shares outstanding which are exchangeable by the holders at any time for shares of IVI Checkmate common stock on a one-for-one basis. Substantially all of the currently outstanding IVI Checkmate common stock and all of the IVI Checkmate common stock for which the exchangeable shares are exchangeable have been registered under the Securities Act of 1933. Approximately 14,000,000 outstanding shares of IVI Checkmate common stock are eligible for sale in the public market. The remaining unregistered outstanding shares of IVI Checkmate common stock, as well as approximately the outstanding shares owned by our directors and executive officers and their affiliates, including Ingenico, will be 21 eligible for sale in the public market at various times pursuant to Rule 144 of the Securities and Exchange Commission. As of December 31, 1998, IVI Checkmate had options outstanding under its stock option plans for the purchase of a total of approximately 3,174,000 shares of common stock at a weighted average exercise price of $6.29 per share. IVI Checkmate had reserved an additional 1,797,900 shares of common stock that it may issue upon the exercise of options granted in the future under these plans. IVI Checkmate has in effect a registration statement under the Securities Act of 1933 covering its issuance of shares upon the exercise of these outstanding options and IVI Checkmate's issuance of shares under its employee stock purchase plan. All of these shares will be freely tradable in the public market, except for shares held by affiliates of IVI Checkmate which will be eligible for public sale at various times pursuant to Rule 144. Our holding company structure may affect our performance and ability to pay dividends and other distributions IVI Checkmate is a holding company and our principal assets are all of the outstanding stock of our operating subsidiaries, including IVI Checkmate Ltd. and IVI Checkmate Inc. All of our operations are conducted through our subsidiaries. Consequently, we depend on the earnings and cash flows of the operations of our subsidiaries, as well as other dividends and distributions from our subsidiaries. SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This report as well as other documents that we file with the Securities and Exchange Commission include forward-looking statements, including in particular the statements about our plans, objectives, expectations and prospectus under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this document. The words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions identify forward-looking statements. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by such forward-looking statements are reasonable, such statements involve uncertainties and risks, and we can give no assurance that such plans, objectives, expectations and prospects will be achieved. Important factors that could cause actual results to differ materially from the results anticipated by the forward-looking statements are set forth in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Factors Affecting Future Performance" above and elsewhere in this document. All written or oral forward-looking statements attributable to IVI Checkmate Corp. are expressly qualified in their entirety by those cautionary statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. IVI Checkmate does not engage in trading market risk sensitive instruments. We also do not purchase, for investment, hedging or for purposes "other than trading," instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk, except as discussed in the following paragraph. IVI Checkmate has issued no debt instruments, entered into no forward or futures contracts, purchased no options and entered into no swaps, except as discussed in the following paragraph. Our Canadian operations generate cash denominated in foreign currency. Consequently, we are exposed to certain foreign currency exchange rate risks. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the Canadian dollar. When the U.S. dollar strengthens against the Canadian dollar, the value of non-functional currency sales decreases. When the U.S. dollar weakens, the value of non-functional currency sales increases. Our exposure to foreign currency exchange rate risk at December 31, 1998 with regard to Canadian dollars was reflected in a currency translation adjustment to Stockholder's Equity of approximately $1.4 million. The weakened Canadian dollar further impacted, but to a lesser degree, sales and expenses in 1998 that were denominated in Canadian currency. Considering both the anticipated cash flows from changes in net working capital and anticipated revenues for the next quarter, a hypothetical 10% strengthening of the U.S. dollar relative to the Canadian dollar would not materially adversely affect expected first quarter 1999 earnings or cash flows. This analysis is dependent on actual Canadian dollar sales during the next quarter. The effect of this hypothetical change in exchange rates ignores the affect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Our Future Performance -- 22 Exchange rate fluctuations between the U.S. Dollar and other currencies in which we do business may result in currency translation losses". Item 8. Financial Statements and Supplementary Data. The following is a list of the Consolidated Financial Statements:
Page ----- Reports of Independent Auditors .................................................................... 29 Consolidated Balance Sheets as of December 31, 1998 and 1997 ....................................... 31 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996........... 32 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 ................................................................ 33 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996........... 34 Notes to Consolidated Financial Statements ......................................................... 35
23 REPORT OF INDEPENDENT AUDITORS Board of Directors IVI Checkmate Corp. We have audited the consolidated balance sheets of IVI Checkmate Corp. as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of International Verifact Inc. which statements reflect total assets constituting 39% at December 31, 1997 of the related consolidated financial statement totals, and which reflect net revenues constituting approximately 50% and 45% of the related consolidated financial statement totals for the years ended December 31, 1997 and 1996, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for International Verifact Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IVI Checkmate Corp. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP February 12, 1999 Atlanta, Georgia 24 REPORT OF INDEPENDENT AUDITORS To the Directors of International Verifact Inc. We have audited the consolidated balance sheet of International Verifact Inc. as of December 31, 1997 and the consolidated statements of operations, stockholders' equity, and cash flows for years ended December 31, 1997 and 1996. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated fiancial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of the company as at December 31, 1997, and the consolidated results of its operations and cash flows for years ended December 31, 1997 and 1996 in accordance with generally accepted accounting principles in the United States. COOPERS & LYBRAND February 12, 1998 Toronto, Ontario 25 IVI CHECKMATE CORP. CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except for Share Amounts)
December 31 ------------------------------------------------- 1998 1997 ----------------- ------------------ ASSETS Current assets Cash and cash equivalents $ 9,846 $ 9,390 Investments - 3,572 Accounts receivable, less allowance of $715 and $477 at December 31, 1998 and 1997, respectively 31,820 21,086 Inventories 15,743 18,111 Deferred tax asset 4,060 3,765 Refundable income taxes - 809 Prepaid expenses and other assets 1,581 1,198 ----------------- ------------------ Total current assets 63,050 57,931 Property and equipment, net 8,224 8,567 Deferred development costs, net of accumulated amortization of $4,765 and $2,900 at December 31, 1998 and 1997, respectively 10,150 8,234 Identifiable intangible assets, net of accumulated amortization of $1,295 and $1,014 at December 31, 1998 and 1997, respectively 1,320 1,159 Goodwill - 642 Other assets 85 51 ----------------- ------------------ $ 82,829 $ 76,584 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank line of credit $ - $ 938 Accounts payable 17,547 10,150 Accrued liabilities 6,622 4,141 Deferred revenue 2,805 1,628 Other 51 230 ----------------- ------------------ Total current liabilities 27,025 17,087 Deferred tax liability 769 1,872 Minority interest and other 18 213 ----------------- ------------------ 27,812 19,172 Stockholders' Equity Preferred stock, $0.01 par value Authorized - 1,000,000 shares, none issued - - Common stock, $0.01 par value Authorized - 99,000,000 shares Issued and outstanding 17,835,000 and 17,399,000 at December 31, 1998 and 1997, respectively 178 174 Additional paid-in capital 80,109 78,285 Accumulated deficit (23,132) (18,161) Foreign currency translation adjustment (2,138) (727) ----------------- ------------------ 55,017 59,571 Less: treasury stock, at cost 332,150 shares at December 31, 1997 - (2,159) ----------------- ------------------ Total stockholders' equity 55,017 57,412 ----------------- ------------------ $ 82,829 $ 76,584 ================= ==================
See accompanying notes. 26 IVI CHECKMATE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands of Dollars, Except for Per Share Amounts)
Year Ended December 31 ------------------------------------------------------------------------------ 1998 1997 1996 ----------------- ------------------- ------------------ Net revenues $107,122 $92,665 $ 77,385 Cost of sales 65,818 58,015 47,378 -------- ------- -------- Gross profit 41,304 34,650 30,007 -------- ------- -------- Operating expenses: Selling, general and administrative 25,118 24,769 20,327 Research and development 4,963 5,603 4,459 Depreciation and amortization 4,153 2,823 2,198 Merger and related costs (Note 10) 11,334 - - Write-off of long-lived assets (Note 10) 1,300 - 8,023 -------- ------- -------- 46,868 33,195 35,007 -------- ------- -------- Operating income (loss) (5,564) 1,455 (5,000) Other: Minority interest 53 448 20 Share of equity investee loss (342) - (147) Interest income 423 588 585 Interest expense (121) (110) (73) -------- ------- -------- Income (loss) before income taxes (5,551) 2,381 (4,615) Income tax benefit (expense) 580 855 (5,684) -------- ------- -------- Net income (loss) $ (4,971) $ 3,236 $(10,299) -------- ------- -------- Net income (loss) per share: Basic $(0.28) $0.19 $(0.69) Diluted $(0.28) $0.19 $(0.69) Weighted average shares outstanding (000's): Basic 17,528 16,817 15,011 Diluted 17,528 17,318 15,011
See accompanying notes. 27 IVI CHECKMATE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands)
COMMON STOCK FOREIGN $0.01 PAR VALUE ADDITIONAL CURRENCY TOTAL -------------------- PAID-IN ACCUMULATED TRANSLATION TREASURY STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK EQUITY -------- ---------- ------------ ------------- -------------- ----------- --------------- Balance at January 1, 1996 14,578 $146 $62,034 $(11,073) $ 514 $ - $ 51,621 Comprehensive loss: Net loss - - - (10,299) - - (10,299) Currency translation adjustment - - - - (69) - (69) --------- Comprehensive loss (10,368) Exercise of stock options 380 4 2,588 - - - 2,592 Issuance of common stock 1,443 14 7,513 - - - 7,527 Issuance of common stock on acquisition of subsidiary 230 2 1,259 - - - 1,261 Exercise of warrants - - 4 - - - 4 Tax benefit related to employee stock options - - 392 - - - 392 ------ ---- ------- -------- ------- ------ --------- Balance at December 31, 1996 16,631 166 73,790 (21,372) 445 - 53,029 Comprehensive income: Net income - - - 3,236 - - 3,236 Currency translation adjustment - - - - (1,172) - (1,172) --------- Comprehensive income 2,064 Exercise of stock options 739 7 3,866 - - - 3,873 Issuance of common stock 29 1 409 - - - 410 Purchase of treasury stock - - - - - (2,159) (2,159) Exercise of warrants - - 4 - - - 4 Capital dividend - - - (25) - - (25) Tax benefit related to employee stock options - - 216 - - - 216 ------ ---- ------- -------- ------- ------ --------- Balance at December 31, 1997 17,399 174 78,285 (18,161) (727) (2,159) 57,412 Comprehensive loss: Net loss - - - (4,971) - - (4,971) Currency translation adjustment - - - - (1,411) - (1,411) --------- Comprehensive loss (6,382) Exercise of stock options 363 4 1,396 - - - 1,400 Issuance of common stock 73 - 333 - - - 333 Sale of treasury stock - - 95 - - 2,159 2,254 ------ ---- ------- -------- ------- ------ --------- Balance at December 31, 1998 17,835 $178 $80,109 $(23,132) $(2,138) $ - $ 55,017 ====== ==== ======= ======== ======= ====== =========
See accompanying notes. 28 IVI CHECKMATE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
Year Ended December 31 ---------------------------------------------------------------------------- 1998 1997 1996 ------------------- -------------------- ------------------ OPERATING ACTIVITIES Net income (loss) $ (4,971) $ 3,236 $(10,299) Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities: Depreciation and amortization 6,174 3,682 2,732 Minority interest (54) (448) (20) Share of equity investee loss 342 - 147 Accretion of marketable securities discount 9 30 74 Deferred income taxes (1,398) (554) 4,214 Write-off of goodwill 630 - 6,806 Product writedown - - 1,217 Changes in operating assets and liabilities: Accounts receivable (11,284) (4,931) 2,720 Inventories 2,181 (2,541) (4,489) Refundable income taxes 809 (469) 99 Prepaid expenses and other assets (423) 258 (718) Accounts payable and accrued liabilities 10,267 1,301 442 Deferred revenue 1,202 (568) 986 ------------------- -------------------- ------------------ Net cash provided by (used in) operating activities 3,484 (1,004) 3,911 ------------------- -------------------- ------------------ INVESTING ACTIVITIES Purchase of property and equipment (3,559) (4,156) (3,061) Deferred development costs (4,113) (4,186) (2,455) Purchases of investments (10,656) (11,673) (21,483) Proceeds from sale of investments 14,390 12,882 21,293 Purchase of intangible assets (514) - (990) Cash acquired on acquisition of subsidiary - - 662 Other (600) (8) (28) ------------------- -------------------- ------------------ Net cash used in investing activities (5,052) (7,141) (6,062) ------------------- -------------------- ------------------ FINANCING ACTIVITIES Proceeds from issuance of common stock 3,987 4,282 10,123 Borrowings of debt - 500 195 Repayments of debt (1,260) (141) (747) Received from minority stockholders 20 411 - ------------------- -------------------- ------------------ Net cash provided by financing activities 2,747 5,052 9,571 ------------------- -------------------- ------------------ Effect of exchange rate fluctuations on cash (723) (472) (37) ------------------- -------------------- ------------------ Net increase (decrease) in cash and cash equivalents 456 (3,565) 7,383 Cash and cash equivalents at beginning of year 9,390 12,955 5,572 ------------------- -------------------- ------------------ Cash and cash equivalents at end of year $ 9,846 $ 9,390 $ 12,955 ------------------- -------------------- ------------------ Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 121 $ 86 $ 73 =================== ===================== ================== Cash paid for income taxes $ 439 $ 300 $ 1,073 =================== ==================== ==================
See accompanying notes. 29 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Business IVI Checkmate (also "we" and "our") designs, develops and markets point-of- sale payment systems in North and South America. Our automated payment solutions handle electronic payment transactions such as check, debit, credit, smart card and electronic benefits transfer, serving the retail, financial, hospitality, banking, healthcare and transportation industries. The industry in which we operate is subject to rapid change due to the development of new competing technologies and products. Basis of Presentation In June 1998, the operations of International Verifact Inc. ("IVI") and Checkmate Electronics, Inc. ("Checkmate") were combined pursuant to the Combination Agreement ("the Combination"). Under the terms of the Combination, IVI stockholders received, for each IVI common share, either one share of common stock of IVI Checkmate, or one IVI exchangeable share, which can be exchanged at any time for the IVI Checkmate common stock. Checkmate stockholders received 1.2775 shares of IVI Checkmate common stock for each Checkmate common stock and, accordingly, approximately 5,140,000 shares were converted. The Combination was accounted for as a pooling-of-interests, and accordingly, the consolidated financial statements have been restated to reflect the historical results of both companies for all periods presented. Information concerning common stock and per share data has been restated on an equivalent share basis and assumes the exchange of all exchangeable shares. In 1998, we also completed mergers with Plourde Computer Services, Inc. ("Plourde") and Debitek Holdings Limited ("Debitek"). These mergers were also accounted for as a pooling-of-interests and, accordingly, our consolidated financial statements have been restated for all prior periods to give effect to these mergers. The consolidated financial statements include the accounts of our subsidiaries: IVI Checkmate Inc. (formerly Checkmate Electronics, Inc.), IVI Checkmate Ltd. (formerly International Verifact Inc.), Plourde, Debitek and 82% owned National Transaction Network, Inc. ("NTN"). In addition, financial statements presented for 1997 also include the consolidation of IVI Ingenico Inc., a 51% owned business venture formed in January 1997. However, in January 1998, we reduced our ownership in IVI Ingenico Inc. to 50%, with a third party owning the other 50% interest. Consequently, the financial statements presented for 1998 reflect a prospective change in accounting policy in accordance with U.S. GAAP, as the investment in IVI Ingenico Inc. was accounted for under the equity method, instead of consolidation. All intercompany balances and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to our consolidated financial statements. Foreign Currency Translation Our Canadian subsidiary considers the Canadian dollar to be its functional currency. The assets and liabilities of our Canadian operations are translated at year-end rates of exchange and revenues and expenses are translated at the weighted average monthly rates of exchange during the year. 30 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Gains and losses resulting from currency translation are accumulated as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the determination of net income. Cash and Cash Equivalents Cash and cash equivalents consist of cash, bank deposits and highly liquid investments with maturities of three months or less when purchased, and are stated at cost plus accrued interest which approximates market value. Investments Investments consist of U.S. Treasury bills with maturities greater than three months when purchased and are stated at cost plus accrued interest, which approximate market value. At December 31, 1998 and 1997, investments held were $0 and $3.6 million, respectively. Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method:
December 31 1998 1997 ------------------ ------------------ (In thousands of dollars) Finished goods $ 6,222 $ 8,302 Work in process 1,320 874 Raw materials and supplies 11,944 10,898 ------- ------- 19,486 20,074 Less: obsolescence reserve (3,743) (1,963) ------- ------- $15,743 $18,111 ======= =======
Obsolescence expense, including additional charges for product writedown and redundancy (see Note 10) approximated $2.8 million, $393,000 and $1.3 million for the three years ended December 31, 1998, 1997 and 1996, respectively. Property and Equipment Property and equipment is stated at cost. Depreciation is computed over the estimated useful lives of the related assets (generally three to five years) using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Property and equipment comprises the following:
December 31 1998 1997 ------------------ ------------------ (In thousands of dollars) Equipment $ 17,444 $15,180 Furniture and fixtures 2,465 2,554 -------- ------- 19,909 17,734 Less: accumulated depreciation (11,685) (9,167) -------- -------
31 $ 8,224 $ 8,567 -------- -------
Depreciation expense approximated $3.8 million, $2.3 million and $1.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. 32 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred Development Costs Costs related to internally developed software for new products and subsequent enhancements are capitalized only after the establishment of technological feasibility. Software development costs incurred prior to achieving technological feasibility are considered research and development expenditures and are expensed as incurred. Capitalized costs are amortized over the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current anticipated future gross revenues for that product or (b) the straight-line method over the estimated economic life of the related product (currently not to exceed five years). Amortization expense was approximately $2.1 million, $1.0 million and $780,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Identifiable Intangible Assets Identifiable intangible assets consist of costs related to copyrights; patents; trademarks; technology property rights; licensing rights; and non- compete agreements. Such assets are being amortized on a straight-line basis from five to eleven years, with amortization expense of approximately $292,000, $216,000 and $133,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Goodwill Goodwill is amortized on a straight-line basis over its useful life, not to exceed 10 years. Amortization expense was approximately $38,000, $75,000 and $19,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Goodwill is written down to its estimated net recoverable amount when it is determined that a permanent impairment in value has occurred. The recoverability of unamortized goodwill is assessed based on an estimate of undiscounted cash flows over the remaining period of amortization for each business to which the goodwill relates. Revenue Recognition Revenues are derived from sales of products and related service agreements. Revenues from hardware product sales are recognized at the time of shipment. Revenue from the sale and installation of proprietary software products are recognized using the percentage of completion method, as the products may require significant customization and modification of the software during installation. Revenues from maintenance agreements are deferred and recognized ratably over the life of the related service agreements. Deferred Income Taxes 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 tax purposes. Such amounts are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Employee Stock Options In October 1995, the FASB issued Statement No. 123, "Accounting for Stock- Based Compensation" ("Statement 123"). Under Statement 123, we could continue following previously existing accounting rules or adopt a new fair value method of valuing stock-based awards to employees. We have elected to continue following the existing accounting rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations in accounting for employee stock options. The pro forma 33 effect on the accompanying consolidated statements of operations of reporting under Statement 123 is presented in Note 4. 34 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Net Earnings Per Share of Common Stock In February 1997, the FASB issued Statement No. 128, "Earnings Per Share" ("Statement 128"), which establishes standards for computing and presenting earnings per share for entities with publicly held common stock. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Potential common stock is not included in the per share calculations where the effect of its inclusion would be anti-dilutive. Statement 128 requires the presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. We adopted Statement 128 in 1997. All earnings (loss) per share amounts for all periods have been presented and, where appropriate, restated to conform to the provisions of Statement 128. Impact of Recently Issued Accounting Standards In 1998, we adopted FASB Statement No. 130, "Reporting Comprehensive Income" ("Statement 130"). This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Stockholders' Equity. The adoption of Statement 130 had no impact on total stockholders' equity. Prior year consolidated financial statements have been reclassified to conform to the Statement 130 requirements. In 1998, we adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131"). This statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Prior year consolidated financial statements have been reclassified to conform to the Statement 131 requirements. In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", was released. The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the derivative and the resulting designation. We are required to implement the statement in the first quarter of fiscal 2000. We have not used derivative instruments and we believe the impact of adoption of this statement will not have significant effect on our financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This statement is effective for fiscal years beginning after December 15, 1998. This statement provides guidance on accounting for the cost of computer software developed or obtained for internal use. We adopted this statement on January 1, 1999 and are currently in the process of evaluating its impact. 35 Reclassifications and Restatements Certain reclassifications were made in the 1997 and 1996 consolidated financial statements to conform with the 1998 presentation. In addition, share information and amounts have been restated to reflect the effects of the pooling-of-interests of IVI, Checkmate, Plourde and Debitek. 36 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and trade accounts receivable. IVI Checkmate maintains cash and cash equivalents and certain other financial instruments with various financial institutions. Our policy is designed to limit exposure at any one institution. We try to maintain a diversity of customers such that total revenues are not dependent on any one customer. In each of 1997 and 1998, no one customer accounted for more than 10% of total revenues, while in 1996, one such customer accounted for 15% of total revenues in that year. We perform ongoing credit approvals of our customers. Trade receivables are unsecured, and we are at risk to the extent such amounts become uncollectible. However, losses on receivables have in the past been within our expectations. For the years ended December 31, 1998, 1997 and 1996, we recorded bad debts expense of $226,000, $178,000 and $163,000, respectively. The carrying amounts reported in the balance sheet for cash and cash equivalents, investments, accounts receivable, accounts payable and bank lines of credit approximate their estimated fair values based on discounted cash flow analyses using current market rates. 3. BORROWINGS AND OTHER DEBT Borrowings and other debt consist of bank lines of credit with a total of $0 and $938,000 outstanding at December 31, 1998 and 1997, respectively. We currently have several lines of credit available to us that expire throughout 1999, with total borrowings available of approximately $5 million at various interest rate terms. 37 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. EQUITY Exchangeable Shares Effective June 25, 1998, as a result of the Combination, IVI stockholders received, for each IVI common share, either one share of common stock of IVI Checkmate or one IVI exchangeable share. Accordingly, 6.0 million exchangeable shares were issued. Each exchangeable share is intended to have substantially identical economic and legal rights as, and will ultimately be exchanged on a one-for-one basis for, a share of IVI Checkmate common stock. As of December 31, 1998, we had 17.8 million shares outstanding, including 5.8 million exchangeable shares still outstanding as of December 31, 1998. Preferred Stock The board of directors of IVI Checkmate is authorized to issue up to 1,000,000 shares of Preferred Stock, par value $.01 per share, in one or more series and to fix the powers, voting rights, designations and preferences of each series. IVI Checkmate designated and issued one share of Series A Preferred Stock and one share of Series B Preferred Stock in connection with the Combination. The one share of Series A Preferred Stock was cancelled as a result of the Combination. The one share of Series B Preferred Stock remains outstanding and does not entitle its holder to any rights to dividends but does entitle its holder to voting rights equivalent to the number of exchangeable shares outstanding from time to time and a $1.00 liquidation preference. On September 16, 1998, the board of directors designated 100,000 shares of Series C Junior Participating Preferred Stock. See "--Stockholder's Rights Plan" below for a description of the Series C Junior Participating Preferred Stock. Stockholder's Rights Plan On September 16, 1998, the board of directors adopted a Stockholder Protection Rights Agreement and, in connection with such agreement, designated 100,000 shares of Series C Junior Participating Preferred Stock. The rights plan committee of the board of directors declared a dividend of one stock purchase right on each outstanding share of common stock and exchangeable share. The right will be exercisable only if a person or group becomes a 15% or more beneficial owner of IVI Checkmate. Each right entitles stockholders to buy one one-thousandth (1/1000th) of a share of the Series C Junior Participating Preferred Stock at an exercise price of $30.00. If certain triggering events occur, the holders of the rights will be able to purchase shares of common stock at a price substantially discounted from the then applicable market price of our common stock. Prior to the time that they become exercisable, the rights are redeemable for one cent per right at the option of the board of directors. Stock Option Plans We reserved 2,500,000 common shares for issuance pursuant to our 1998 Long- Term Incentive Plan and 250,000 common shares for issuance pursuant to our 1998 Director Plan (the "Plans"). The Plans provide for the awarding of non-qualified stock options and director options, to purchase common shares from time to time at our discretion. At December 31, 1998, options totaling 952,000 were issued and outstanding under these Plans. In connection with the Combination, in June 1998 we assumed 380,000 and 1,796,000 outstanding options to purchase common stock originally issued under stock option plans of IVI and Checkmate, respectively. In connection with our merger with Plourde, in September 1998 we assumed an additional 370,000 options to purchase common stock that were originally issued and outstanding under Plourde's stock option plan. Upon our assumption of the stock option obligations of IVI, Checkmate and Plourde, no further options were granted under their respective plans. As of December 31, 1998, a total of 4,972,000 shares of common stock are reserved for issuance under various stock option plans, including 2,222,000 options still outstanding under the stock option plans of IVI, Checkmate and Plourde. 38 IVI CHECKMATE CORP. NOTES TO FINANCIAL STATEMENTS (continued) 4. EQUITY (continued) Stock Option Plans (continued) The following table summarizes stock option plan activities.
Weighted Average Number Of Exercise Options Price ----------------- -------------------- (000's) Outstanding at January 1, 1996 2,724 $7.25 Granted 1,041 5.89 Exercised (380) 6.84 Canceled (330) 9.59 ----------------- Outstanding at December 31, 1996 3,055 $6.58 Granted 1,875 5.93 Exercised (739) 5.24 Canceled (1,504) 7.73 ----------------- Outstanding at December 31, 1997 2,687 $5.81 Granted 1,152 6.80 Exercised (363) 4.00 Canceled (302) 6.69 ----------------- Outstanding at December 31, 1998 3,174 $6.29 ----------------- Options Exercisable: At December 31, 1996 1,796 $6.25 At December 31, 1997 1,519 $5.60 At December 31, 1998 2,489 $6.16
The following table summarizes information concerning options outstanding and exercisable at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ----------------------------------------------------------------------------------------------------------- (000's) (Years) (000's) $ 1.35 - $ 2.70 368 6.95 $2.67 359 $2.67 $ 4.65 - $ 6.66 707 3.64 $5.79 707 $5.79 $ 6.81 - $ 6.85 1,855 7.25 $6.81 1,179 $6.81 $ 7.05 - $11.55 244 6.74 $9.26 244 $9.26 ----------------- ----------------- 3,174 2,489 ----------------- -----------------
We have elected to follow APB 25 and related Interpretations in accounting for our employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement 123, 39 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of our employee stock options is equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if we have accounted for our employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996: risk-free interest rates of approximately 4.5%-6.0%; no dividend yields; volatility factor of the expected market price of our common stock of 35%-60%; and a weighted-average expected life of the options of 1-4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information, assuming Statement 123 had been adopted, is as follows:
Year Ended December 31 1998 1997 1996 ------------------ ------------------ ----------------- (In thousands of dollars, except per share amounts) Pro forma net income (loss) $(6,104) $1,409 $(11,916) Pro forma net income (loss) per share: Basic $ (0.35) $ 0.08 $ (0.79) Diluted $ (0.35) $ 0.08 $ (0.79) Weighted average per share fair value of options granted $ 2.69 $ 3.83 $ 5.87
40 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. OPERATING LEASES We lease certain property and equipment under non-cancelable lease agreements. Rental expense under operating leases was approximately $1.4 million, $1.1 million and $1.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum payments under non-cancelable operating leases with terms of one year or more consisted of the following at December 31, 1998:
1999 $1,177 2000 1,164 2001 1,040 2002 380 2003 340 Thereafter 329 ------ Total future minimum lease payments $4,430 ======
6. INCOME TAXES For U.S. federal income tax purposes, we had at December 31, 1998 approximately $16.8 million of net operating loss carryforwards available to offset future taxable income. These loss carryforwards began expiring in 1998, and will continue to expire through 2018. Utilization of these net operating loss carryforwards for income tax purposes is subject to certain limitations. Further, the utilization of net operating loss carryforwards to offset future taxable income may be further limited by any future changes in ownership in IVI Checkmate. In addition, we had at December 31, 1998 approximately $7.4 million of Federal and Provincial Canadian undepreciated capital and scientific research and development costs available for deduction in future years with no time limits, and unutilized Canadian scientific research and development income tax credits of approximately $1.6 million, which originated from fiscal years 1989 to 1998. The utilization of these Canadian tax credits are subject to a ten year limitation from the date of original claim and these credits begin to expire in 1999. Furthermore, we had Canadian capital loss carryforward of $500,000 at December 31, 1998 available to offset Federal capital gains in future years with no time limits on its expiration, and $700,000 Provincial non-capital loss carryforward available to offset future Provincial taxable income with an expiration date of fiscal year 2001. The valuation allowance consists primarily of the deferred tax benefit of our net operating loss carryforwards in the U.S., due to the uncertainty regarding the utilization of these loss carryforwards in future years. 41 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. INCOME TAXES (continued) The provisions for income taxes consist of the following:
Year Ended December 31 1998 1997 1996 ------------------- -------------------- ------------------ (In thousands of dollars) Current income tax benefit (expense): Federal $ (703) $ 256 $(1,301) State (115) 45 (151) ------------------- -------------------- ------------------ Total current income tax benefit (expense) (818) 301 (1,452) ------------------- -------------------- ------------------ Deferred income tax benefit (expense): Federal 863 (243) (1) State 140 (43) - Foreign 395 840 (4,231) ------------------- -------------------- ------------------ Total deferred income tax benefit (expense) 1,398 554 (4,232) ------------------- -------------------- ------------------ Provision for income tax benefit (expense) $ 580 $ 855 $(5,684) =================== ==================== ==================
A reconciliation of the provision of income taxes to the U.S. Federal statutory rate of 34% is as follows:
Year Ended December 31 1998 1997 1996 ------------------- --------------------- ------------------ (In thousands of dollars) Tax benefit (expense) at statutory rate $ 1,887 $ (810) $ 1,569 State taxes, net of Federal tax benefit (expense) 237 (95) 185 Research and development costs - - 51 Change in valuation allowance - 2,898 (4,611) Tax carryforward items - (1,139) (236) Permanent differences (1,544) 1 (2,642) ------------------- --------------------- ------------------ Provision for income tax benefit (expense) $ 580 $ 855 $(5,684) =================== ==================== ==================
42 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. INCOME TAXES (continued) The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets (liabilities) consist of the following:
December 31 1998 1997 ------------------- -------------------- (In thousands of dollars) Deferred tax assets: Asset valuation allowances $ 1,396 $ 579 Deferred revenue 780 452 Accrued liabilities 94 210 Investment tax credits 626 2,833 Capital loss carryforwards - 3 Net operating loss carryforwards 7,052 8,313 Other 590 295 ------------------- -------------------- 10,538 12,685 Deferred tax liabilities: Depreciation (537) (661) Amortization (388) (1,116) ------------------- -------------------- 9,613 10,908 Valuation allowances (6,322) (9,015) ------------------- -------------------- Net deferred tax assets $ 3,291 $ 1,893 =================== ====================
7. DEFINED CONTRIBUTION BENEFIT PLAN We maintain several contributory retirement plans for our U.S. employees which qualify under Section 401(k) of the Internal Revenue Code. Under these plans, participants may contribute a portion of their annual compensation and receive, at management's discretion, matching employer contributions to specified maximum limits. Total contributions under these plans that were charged to expense were approximately $214,000, $177,000 and $126,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 43 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. NET INCOME (LOSS) PER SHARE Net income (loss) per share on a basic and diluted basis as required by Statement 128 is calculated as follows:
Year Ended December 31 1998 1997 1996 ---------------- ------------------ ----------------- (In thousands, except per share amounts) Net income (loss) $(4,971) $ 3,236 $(10,299) ---------------- ------------------ ----------------- Calculation of weighted average shares outstanding plus assumed conversions: Weighted average basic shares outstanding 17,528 16,817 15,011 Effect of dilutive stock options - 501 - ---------------- ------------------ ----------------- Weighted average diluted shares outstanding 17,528 17,318 15,011 ---------------- ------------------ ----------------- Basic net income (loss) per share $ (0.28) $ 0.19 $ (0.69) ---------------- ------------------ ----------------- Diluted net income (loss) per share $ (0.28) $ 0.19 $ (0.69) ---------------- ------------------ -----------------
9. MERGERS, ACQUISITIONS AND ALLIANCES Mergers During 1998, IVI, Checkmate, Plourde and Debitek were merged together in separate transactions that were accounted for as poolings-of-interest. In connection with these mergers, approximately $12.6 million in related costs (see Note 10) were charged to earnings. Separate results of these combined entities for the quarter ended March 31, 1998 (the last quarter of public reporting for IVI and Checkmate), and for the years ended December 31, 1997 and 1996, are as follows: Unaudited Quarter Ended Years Ended December 31 March 31, ----------------------- 1998 1997 1996 --------- ------- -------- (In thousands of dollars) Revenues: IVI $13,238 $51,419 $ 35,038 Checkmate 9,641 33,526 35,104 Debitek 1,399 5,040 5,211 Plourde 711 2,680 2,032 ------- ------- -------- $24,989 $92,665 $ 77,385 ======= ======= ======== Net income (loss): IVI $ 584 $ 3,507 $(12,936) Checkmate 416 (129) 2,555 Debitek 159 (202) (100) Plourde (115) 60 182 ------- ------- -------- $ 1,044 $ 3,236 $(10,299) ======= ======= ======== There were no significant intercompany transactions between the four companies and no significant conforming accounting adjustments. Ingenico S.A. In December 1996, a global strategic alliance with Ingenico, S.A. ("Ingenico") of Paris, France was formed (see also Note 11--Related Party Transactions). A summary of the terms are: . IVI Checkmate received an exclusive right to distribute Ingenico's products in the Americas through 2006; . in consideration for a payment of $1.0 million, which has been recorded as an identifiable intangible assets to be amortized over 10 years, IVI Checkmate received an irrevocable, royalty-free, exclusive license to use and incorporate the UNICAPT technology and related intellectual property of Ingenico into the Company's products; . joint development of future products to lower manufacturing costs and enhance the universal acceptance of products; . establishment of a business venture to become the exclusive distributor of IVI Checkmate and Ingenico products in Latin America; and . Ingenico acquired 1,439,000 common shares from IVI Checkmate, which represented an ownership in IVI Checkmate of approximately 9% as of December 31, 1998, for a purchase price of $7.2 million less issuance costs of $339,000. National Transaction Network, Inc. In September 1996, we acquired approximately 84% of the outstanding shares of National Transaction Network, Inc. The purchase price of $1.3 million was satisfied by the issuance of 230,850 shares of common stock of IVI Checkmate. The acquisition was accounted for as a purchase transaction, which resulted in goodwill of $746,000 (see also Note 10). 44 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. MERGER COSTS AND OTHER UNUSUAL CHARGES Year Ended December 31, 1998 In 1998, we incurred costs pertaining to the combination of IVI and Checkmate and the subsequent mergers of Plourde and Debitek. The description of and the amount of costs incurred in each of these transactions are as follows:
Combination of IVI and Plourde Debitek Checkmate Merger Merger Total ---------------- ------------------ ------------------ ----------------- (In thousands of dollars) Professional fees $4,007 $ 380 $381 $ 4,768 Closure of facilities in Boulder, Colorado 1,565 - - 1,565 Write-down of long-lived assets - 1,300 - 1,300 Inventory reserve for product redundancy 2,624 - - 2,624 Other expenses 1,699 274 404 2,377 ---------------- ------------------ ------------------ ----------------- Total $9,895 $1,954 $785 $12,634 ---------------- ------------------ ------------------ -----------------
Professional Fees. Costs consist of fees paid for legal and accounting, financial advisors and other consultants in connection with the corresponding transactions, filing and other regulatory fees, share issuance costs and other stockholder related expenses. Closure of Facilities in Boulder, Colorado. On the effective date of the Combination, IVI's facilities in Boulder, Colorado were immediately closed, and the operations relocated and combined with Checkmate's operations in Atlanta, Georgia. The Boulder operations employed 52 people as at December 31, 1997, and all were terminated upon closure of the facilities except for 17 people who were transferred to the Atlanta operations. Costs of $1.6 million were incurred for the transfer of operations to Atlanta, facility closure costs, severance costs to terminated employees and employee relocation costs. Write-down of Long-Lived Assets. NTN was in development of a Windows/NT software platform to improve its market share in the software point-of-sale business. This development, however, was immediately terminated upon the merger with Plourde, which already had a viable and marketable Windows/NT platform. As a result, we wrote off all of NTN's Windows/NT development costs previously deferred, in the amount of $670,000. Furthermore, without a Windows/NT platform, the future profitability of NTN was uncertain, and as a result, we also wrote off entirety the remaining unamortized goodwill of $630,000 related to the acquisition of NTN in 1996. Inventory Reserve for Product Redundancy. While IVI and Checkmate sold different payment solutions, there were in certain areas a duplication of products that resulted upon the combination of these two companies. Upon completion of the combination, we reviewed and assessed our inventory and determined that, due to product redundancy, a permanent impairment in value in the amount of $2.6 million had resulted. Other Expenses. Costs include transitional operating costs such as system integration and conversion for accounting and other operational systems, and marketing and other setup costs to reflect a change in the organization's name, logo and business. 45 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. MERGER COSTS AND OTHER UNUSUAL CHARGES (continued) Year Ended December 31, 1996 In 1996, we reviewed the recoverability of unamortized goodwill that arose from the acquisition of Soricon Corporation ("Soricon") in December 1994. The financial results of Soricon subsequent to the acquisition were below anticipated results upon which we based the Soricon purchase price. Soricon did not meet sales targets for its check reader, and costs were much higher than anticipated. As a result, in accordance with our accounting policy, we compared the unamortized goodwill against an estimate of the undiscounted cash flows arising from the business to which the goodwill related, over the remaining amortization period. On the basis of this, we determined that there was a permanent impairment in the carrying value of the goodwill, and wrote off in 1996 the entire unamortized balance of $6.8 million which remained at December 31, 1995 as the estimated net recoverable amount and fair value of this goodwill was zero. These undiscounted cash flows were only sufficient to recover the value of the fixed assets of approximately $655,000 which approximated fair value. The alliance agreement entered into with Ingenico in December 1996 required us to incorporate the UNICAPT technology into our products. As a result, in our opinion, certain inventory products became unmarketable and deferred development costs related to these products became unrecoverable. This resulted in a charge of $1.2 million against 1996 earnings. 11. RELATED PARTY TRANSACTIONS In a marketing and distribution agreement that we entered into in December 1996 with Ingenico, we became the exclusive distributor of Ingenico's products in the Americas. Consequently, during 1998 and 1997, we purchased products from Ingenico totaling $6.8 million and $1.7 million, respectively, to satisfy customer demands. At December 31, 1998 and 1997, approximately $2.1 million and $910,000, respectively, of these purchases were still payable. 46 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. GEOGRAPHIC SEGMENT DISCLOSURES We operate in a single operating segment, the electronic transactions industry. Our revenues, however, are derived primarily from two geographical regions: the U.S. and Canada. Consequently, our organization is managed based on operating decisions made in each of these regions. The following table presents how we, the management of IVI Checkmate, view our company based on revenue, earnings and identifiable assets.
Year Ended December 31 1998 1997 1996 ------------------- ------------------- ------------------- (In thousands of dollars) Revenue: United States $ 79,473 $62,647 $ 55,113 Canada 27,649 30,018 22,272 ------------------- ------------------- ------------------- $107,122 $92,665 $ 77,385 ------------------- ------------------- ------------------- Income (loss) United States $ 3,301 $(2,858) $ 953 Canada 3,769 4,313 2,070 ------------------- ------------------- ------------------- 7,070 1,455 3,023 Corporate: Unusual charges (12,634) - (8,023) Taxes 580 855 (5,684) Other 13 926 385 ------------------- ------------------- ------------------- $ (4,971) $ 3,236 $(10,299) ------------------- ------------------- ------------------- Identifiable assets: United States $ 60,341 $54,176 Canada 22,488 22,408 ------------------- ------------------- $ 82,829 $76,584 ------------------- -------------------
47 IVI CHECKMATE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly consolidated financial data for 1998 and 1997 is as follows:
Quarter ----------------------------------------------------------------------------------------- First Second Third Fourth ------------------ ------------------ ------------------ -------------- (In thousands of dollars, except per share amounts) 1998: Net revenues $24,989 $25,748 $29,928 $26,457 Gross profit 9,596 10,149 11,531 10,028 Merger costs - (9,946) (1,953) (735) Net income (loss) 1,044 (7,209) 465 729 Basic net income (loss) per share $ 0.06 $ (0.41) $ 0.03 $ 0.04 Diluted net income (loss) per share $ 0.06 $ (0.41) $ 0.03 $ 0.04 1997: Net revenues $22,361 $20,002 $25,599 $24,703 Gross profit 8,892 7,085 9,533 9,140 Net income (loss) 865 (637) 1,340 1,668 Basic net income (loss) per share $ 0.05 $ (0.04) $ 0.08 $ 0.10 Diluted net income (loss) per share $ 0.05 $ (0.04) $ 0.08 $ 0.09
48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 49 PART III Item 10. Directors and Executive Officers of the Registrant. Information relating to the directors of IVI Checkmate will be set forth under the captions "Proposal 2--Election of Directors--Nominees" and "--Information Regarding Nominees" in IVI Checkmate's Proxy Statement for its 1999 Annual Meeting of Stockholders to be held on May 20, 1999 (the "1999 Proxy Statement"). Such information is incorporated herein by reference. Information relating to the executive officers of IVI Checkmate is set forth in Part I, Item 4(A) of this report under the caption "Executive Officers of the Registrant." Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 by directors and executive officers of IVI Checkmate and beneficial owners of more than 10% of IVI Checkmate's Common Stock will be set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement. Such information is incorporated herein by reference. The 1999 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. Item 11. Executive Compensation. Information relating to executive compensation will be set forth under the captions "Proposal 2--Election of Directors--Director Compensation," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in the 1999 Proxy Statement. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding ownership of IVI Checkmate's Common Stock by certain persons will be set forth under the caption "Stock Ownership" in the 1999 Proxy Statement. Such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and transactions between IVI Checkmate and certain of its affiliates will be set forth under the caption "Certain Transactions" in the 1999 Proxy Statement. Such information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Consolidated Financial Statements The following consolidated financial statements of IVI Checkmate Corp. and Subsidiaries are set forth in Item 8 hereof:
Page ---- Reports of Independent Auditors .................................................................................... 25 Consolidated Balance Sheets as of December 31, 1998 and 1997 ....................................................... 27 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 ......................... 28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 ............... 29 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ......................... 30 Notes to Consolidated Financial Statements ......................................................................... 31
50 2. Financial Statement Schedules All schedules to the consolidated financial statements are omitted as they are not required under the related instructions or are inapplicable, or because the required information is included in the consolidated financial statements or related notes thereto. 3. Exhibits The following exhibits either (i) are filed herewith or (ii) have previously been filed with the Securities and Exchange Commission and are incorporated herein by reference to such prior filings. Previously filed registration statements and reports which are incorporated herein by reference are identified in the column captioned "SEC Document Reference." IVI Checkmate will furnish any exhibit upon request to John J. Neubert, Executive Vice President Finance and Administration of IVI Checkmate, 1003 Mansell Road, Roswell, Georgia 30076. There is a charge of $.50 per page to cover expenses of copying and mailing.
Exhibit No. Description SEC Document Reference ---------- ----------- ---------------------- 3.1 Certificate of Incorporation of the Company Exhibit 3.1 to IVI Checkmate's Registration Statement on Form S-4 (No. 333-53629) 3.2 Bylaws of the Company Exhibit 3.2 to IVI Checkmate's Registration Statement on Form S-4 (No. 333-53629) 4.1 Specimen Common Stock Certificate Exhibit 4.1 to IVI Checkmate's Registration Statement on Form S-4 (No. 333-53629) 4.2 Stockholder Protection Rights Agreement, dated Exhibit 99.1 to IVI Checkmate's Form 8-K filed on as of September 16, 1998, between IVI October 15, 1998 Checkmate Corp. and First Union National Bank, as Rights Agent (which includes as Exhibit A thereto the Form of Rights Certificate and as Exhibit B thereto the Form of Certificate of Designations, Preferences, Limitations and Relative Rights of Series C Junior Participating Preferred Stock of IVI Checkmate Corp.) 9.1 Form of Voting and Exchange Trust Agreement Exhibit 9.1 to IVI Checkmate's Registration Statement on Form S-4 (No. 333-53629) 9.2 Stockholders Agreement by and between Exhibit 9.2 to IVI Checkmate's Registration Ingenico, J. Stanford Spence and Dudley L. Statement on Form S-4 (No. 333-53629) Moore, Jr. dated as of January 16, 1998 10.1 Combination Agreement dated January 16, 1998, Exhibit 10.1(a) to Checkmate's Annual Report on Form by and among IVI Checkmate Corp., 10-K for the year ended December 31, 1997 International Verifact Inc., Checkmate Electronics, Inc. and Future Merger Corporation 10.2 Form of Plan of Arrangement and Exchangeable Exhibit 2.2 to IVI Checkmate's Registration Share Provisions Statement on Form S-4 (No. 333-53629) 10.3 Master Alliance Agreement dated December 5, Exhibit 10.6 to IVI Checkmate's Registration 1996, between Ingenico, S.A. and International Statement on Form S-4 (No. 333-53629) Verifact Inc.
51 10.4 Investment Agreement dated December 5, 1996, Exhibit 10.10 to IVI Checkmate's Registration between Ingenico, S.A. and International Statement on Form S-4 (No. 333-53629) Verifact Inc., as amended by the Amendment to Investment Agreement, dated December 17, 1996, between Ingenico, S.A. and International Verifact Inc. 10.5 Marketing and Distribution Agreement dated Exhibit to 10.11 IVI Checkmate's Registration December 17, 1996, between Ingenico, S.A., Statement on Form S-4 (No. 333-53629) International Verifact Inc. and IVI Ingenico Inc. 10.6 Assignment, Assumption and Consent Agreement Exhibit 10.12 to IVI Checkmate's Registration dated as of January 16, 1998 among Statement on Form S-4 (No. 333-53629) International Verifact Inc., Ingenico S.A., and IVI Checkmate Corp. 10.7 Manufacturing Agreement made as of the 22nd Exhibit to 10.16 IVI's Registration Statement on day of March 1993 between The Surface Mount Form F-4 (No. 33-84926) Technology Centre Inc. and International Verifact Inc. 10.8 Settlement Agreement dated June 15, 1989, by Exhibit 10.2 to Checkmate's Registration Statement and among Checkmate Electronics, Inc., J. on Form S-1 (No. 33-67048) Stanford Spence, Diane M. Spence, Stanford Technologies, Inc., and Dudley L. Moore, Jr. 10.9* IVI Checkmate Corp. 1998 Long-Term Incentive Exhibit 10.5.1 to IVI Checkmate's Registration Plan Statement on Form S-4 (No. 333-53629) 10.10* IVI Checkmate Corp. 1998 Directors Stock Exhibit 10.5.2 to IVI Checkmate's Registration Option Plan Statement on Form S-4 (No. 333-53629) 10.11 Latin America Unanimous Shareholders' Exhibit 10.7 to IVI Checkmate's Registration Agreement dated December 17, 1996, between Statement on Form S-4 (No. 333-53629) Ingenico, S.A., International Verifact Inc. and IVI Ingenico Inc. 10.12 Technology License Agreement dated December Exhibit 10.8 to IVI Checkmate's Registration 17, 1996, between Ingenico, S.A. and Statement on Form S-4 (No. 333-53629) International Verifact Inc. 10.13 Joint Development and Procurement Agreement Exhibit 10.9 to IVI Checkmate's Registration dated December 17, 1996, between Ingenico, Statement on Form S-4 (No. 333-53629) S.A. and International Verifact Inc. 10.14* Amendment No. 1 dated September 16, 1998, to the Agreement filed as Exhibit 10.15 10.15* Agreement dated June 25, 1998, between J. Stanford Spence and IVI Checkmate Corp. 10.16* Management Services Agreement between IVI Checkmate, IVI, Checkmate, LBT Investments, Inc. and L. Barry Thomson dated as of June 25, 1998 10.17* Employment Agreement dated as of June 25, 1998 between International Verifact, Inc. and George Whitton
52 10.18* Employment Agreement dated as of January 1, Exhibit 10.4(f) to Checkmate's Form 10-K for the 1998, between Checkmate Electronics, Inc. and period ended December 31, 1997 John J. Neubert 10.19* Employment Agreement dated as of January 1, Exhibit 10.4(g) to Checkmate's Annual Report on Form 1998, between Checkmate Electronics, Inc. and 10-K for the year ended December 31, 1997 Gregory A. Lewis 10.20 Eleventh Amendment, dated July 16, 1998, to the Lease Agreement filed as Exhibit 10.27 10.21 Tenth Amendment, dated May 20, 1998, to the Lease Agreement filed as Exhibit 10.27 10.22 Ninth Amendment, dated August 18, 1997, to the Exhibit 10.1(e) to Checkmate's Annual Report on Form Lease Agreement filed as Exhibit 10.27 10-K for the year ended December 31, 1997 10.23 Eighth Amendment, dated April 1, 1996, to the Exhibit 10.1(d) to Checkmate's Annual Report on Form Lease Agreement filed as Exhibit 10.27 10-K for the year ended December 31, 1996 10.24 Seventh Amendment, dated January 18, 1996, to Exhibit 10.1(c) to Checkmate's Annual Report on Form the Lease Agreement filed as Exhibit 10.27 10-K for the year ended December 31, 1995 10.25 Sixth Amendment, dated February 10, 1995, to Exhibit 10.1(b) to Checkmate's Annual Report on Form the Lease Agreement filed as Exhibit 10.27 10-K for the year ended December 31, 1994 10.26 Fifth Amendment, dated August 16, 1994, to the Exhibit 10.20 to Checkmate's Annual Report on Form Lease Agreement filed as Exhibit 10.27 10-K for the year ended December 31, 1994 10.27 Lease Agreement dated July 17, 1990, as Exhibit 10.1 to Checkmate's Registration Statement amended, by and between Checkmate Electronics. on Form S-1 (No. 33-67048) Inc. and ASE North Fulton Associates Joint Venture, for the premises located at 1011 Mansell Road, Suite C, Roswell, Georgia 30076 10.28 Lease Agreement dated the 1st day of May 1986 Exhibit 10.1 to IVI's Registration Statement on Form between Markborough Properties Limited and F-4 (No. 33-84926) International Verifact Inc. (Incorporated by reference from Exhibit 10.1 to International Verifact Inc.'s Registration Statement on Form F-4, No. 33-84926) 10.29 Amending Agreement dated as of the 1st day of Exhibit 10.2 to IVI's Registration Statement on July 1991 between Morgan Mae Enterprises Form F-4 (No. 33-84926) Limited and International Verifact Inc. 10.30 Assignment, Assumption and Consent Agreement Exhibit 10.12 to IVI Checkmate's Registration dated as of January 16, 1998 among Statement on Form S-4 (No. 333-53629) International Verifact Inc., Ingenico, S.A., and IVI Checkmate Corp. 10.31** Agreement dated June 23, 1994 between Exhibit 10.5 to IVI's Registration Statement on Form Celestica Inc. and IVI S-4 (No. 33-84926)
53 10.32** Agreement dated March 22, 1993 between The Exhibit 10.6 to IVI's Registration Statement on Form Surface Mount Technology Centre Inc. and IVI S-4 (No. 33-84926) 10.33** Agreement dated May 12, 1993 between Nikom Exhibit 10.7 to IVI's Registration Statement on Form Electronics Corporation and IVI S-4 (No. 33-84926) 10.34** Agreement dated May 1, 1994 between Royal Bank Exhibit 10.10 to IVI's Registration Statement on of Canada and IVI Form S-4 (No. 33-84926) 21.1 Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Coopers & Lybrand 24.1 Powers of Attorney 27 Financial Data Schedule (to be filed electronically)
____________ * Compensatory management agreement ** Confidential treatment has been requested for certain portions of this exhibit pursuant to Rule 406(b)(2) under the Securities Act of 1933, as amended. In accordance with Rule 406(b)(2), these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission (b) Reports on Form 8-K IVI Checkmate filed the following Current Reports on Form 8-K during the fourth quarter ended December 31, 1998: . On October 1, 1998, IVI Checkmate filed a Current Report on Form 8-K regarding Item 5, Other Events, and Item 7, Financial Statements and Exhibits, related to the Combination; . On October 13, 1998, IVI Checkmate filed a Current Report dated on Form 8-K/A regarding Item 2, Acquisition or Disposition of Assets, amending a Current Report on Form 8-K dated July 9, 1998 to reflect the proper commission file number; . On October 15, 1998, IVI Checkmate filed a Current Report on Form 8-K/A regarding Item 7, Financial Statements and Exhibits, amending a Current Report on Form 8-K dated October 1, 1998 to reflect the proper commission file number; and . On October 15, 1998, IVI Checkmate filed a Current Report on Form 8-K regarding Item 5 announcing the declaration of a dividend payable in the form of the rights under IVI Checkmate's Stockholder Protection Rights Agreement. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 1999. IVI CHECKMATE CORP. /s/ L. BARRY THOMSO ---------------------- By: L. Barry Thomson President and Chief Executive Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 1999.
Signature Title - ---------------------------------- -------------------------------------- /s/ L. BARRY THOMSON President, Chief Executive Officer and - ---------------------------------- Director L. Barry Thomson /s/ J. STANFORD SPENCE Chairman of the Board - ---------------------------------- J. Stanford Spence GEORGE WHITTON* Vice Chairman of the Board - ---------------------------------- George Whitton GERARD COMPAIN* Director - ---------------------------------- Gerard Compain /s/ GREGORY A. LEWIS Director - ---------------------------------- Gregory A. Lewis PAUL W. NOBLETT* Director - ---------------------------------- Paul W. Noblett BERTIL D. NORDIN* Director - ---------------------------------- Bertil D. Nordin GARETH OWEN* Director - ---------------------------------- Gareth Owen PETER E. ROODE* Director - ---------------------------------- Peter E. Roode /s/ JOHN J. NEUBERT Executive Vice President-Finance and - ---------------------------------- Administration, Chief Financial Officer, John J. Neubert Treasurer and Secretary
*By: /s/ JOHN J. NEUBERT ------------------- John J. Neubert as attorney-in-fact 55 EX-10.14 2 AMENDMENT NO. 1 TO SPENCE AGREEMENT EXHIBIT 10.14 AMENDMENT NO. 1 TO AGREEMENT AMENDMENT No. 1, dated as of September 16, 1998, to that certain Agreement (the "Agreement"), dated as of June 25, 1998, by and between IVI Checkmate Corp., a Delaware corporation (hereinafter, the "Company"), and J. Stanford Spence (hereinafter, "Spence"); BACKGROUND ---------- The Company and Spence desire to amend the Agreement to extend the term thereof as set forth herein. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein and in the Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment of Agreement. Effective as of the date hereof, Section 3 of the Agreement is deleted in its entirety and the following is substituted therefor: 3. Engagement Period. Unless earlier terminated herein in accordance ----------------- with Section 7 hereof, Spence's engagement under this Agreement shall begin on the Effective Date and extend for a period (the "Engagement Period") ending on December 31, 2005. ************************************* The terms of the Agreement not hereby amended shall be and remain in full force and effect and are not affected by this Amendment. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first above written. IVI CHECKMATE CORP. By: /s/ L. Barry Thomson ----------------------------- Title: President & CEO -------------------------- EXECUTIVE: /s/ J. Stanford Spence -------------------------------- J. Stanford Spence EX-10.15 3 SPENCE AGREEMENT EXHIBIT 10.15 AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into this 25th day of June, 1998, by and between IVI Checkmate Corp., a Delaware corporation (hereinafter, the "Company"), and J. Stanford Spence (hereinafter, "Spence"). BACKGROUND ---------- Spence is the Chairman of the Board and Chief Executive Officer of Checkmate Electronics, Inc., a Georgia corporation ("Checkmate Electronics, Inc."). Checkmate Electronics, Inc. was acquired by the Company on the date hereof pursuant to a Combination Agreement, dated as of January 16, 1998, by and among the Company, Checkmate Electronics, Inc., International Verifact Inc., a Canadian corporation, and a merger subsidiary of the Company (the "Combination Transaction"). The Company desires to engage Spence in the capacity set forth herein, in accordance with the terms and conditions of this Agreement. Spence is willing to serve as such in accordance with the terms and conditions of this Agreement. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Effective Date. This Agreement shall be effective as of the -------------- effective date (the "Effective Date") of the Combination Transaction. 2. Engagement. Spence is hereby engaged on the Effective Date as ---------- a consultant to the Company and as the Chairman of the Board of Directors of the Company. In his capacity as consultant and Chairman of the Board, Spence will report directly to the Board of Directors of the Company. 3. Engagement Period. Unless earlier terminated herein in ----------------- accordance with Section 7 hereof, Spence's engagement under this Agreement shall begin on the Effective Date and extend for a period (the "Engagement Period") ending on the date which is five (5) years after the Effective Date. 4. Directorship. Pursuant to the Combination Transaction, as of ------------ the Effective Date, Spence was elected to a one-year term as a director of the Company. At the end of such term as director and thereafter during the Engagement Period, the Board of Directors of the Company shall, subject to the satisfaction of its fiduciary responsibilities, nominate Spence for re-election to the Board of Directors and, if so elected by the shareholders of the Company, shall appoint Spence as Chairman of the Board. 5. Extent of Service. During the Engagement Period, Spence ----------------- agrees to devote substantial time and attention to the performance of his duties as Chairman of the Board and to make himself reasonably available on a substantially full-time basis for consultation with the Board of Directors and executive management of the Company on matters pertaining to the business of the Company, including, without limitation, such matters as acquisitions and corporate strategy, as well as ongoing operational and business issues. 6. Compensation and Benefits. ------------------------- (a) Compensation. During the Engagement Period, the Company ------------ will pay to Spence compensation ("Compensation") at the Adjusted Annual Rate, less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company's payroll practices from time to time. For purposes of this Section 6(a), the following terms have the following meanings. "Adjusted Annual Rate" shall mean, for each calendar year during the Engagement Period, the product of the Base Rate, multiplied by the sum of (1.00) plus the Percent Index Change for such calendar year. "Rate" shall mean U.S.$220,000 per year, provided that the Base Rate shall be automatically reduced from U.S.$220,000 to U.S.$150,000 per year upon the occurrence of any of the events described in Section 8(b) hereof. "Percent Index Change" shall mean with respect to each January 1, a percentage equal to: (Current Index for such January 1 - the Base Index)/Base Index, but not less than zero. "Current Index" shall mean with respect to each January 1 during the Engagement Period, the CPI published as final for August of the previous calendar year. "Base Index" shall mean the CPI published as final for August 1997. "CPI" shall mean the Consumer Price Index for All Urban Consumers, U.S. City Average, for all Items (1982-1984 = 100), as published from time to time by the Bureau of Labor Statistics of the U.S. Department of Labor (or if such index is no longer published, another comparable measure established by a source mutually agreeable to Spence and the Company). For example, if the Base rate is U.S.$220,000, and the Percent Index Change for calendar year 1999 is +5%, then the Adjusted Annual Rate for calendar year 1999 is U.S.$231,000. -2- (b) Welfare Benefit Plans. During the Engagement Period, Spence --------------------- and Spence's family shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, disability, life, and accidental death insurance plans and programs) to the extent applicable generally to the executive officers of the Company and its affiliated companies, and on the same basis as such other executive officers. Without limiting the foregoing, during the Engagement Period, the Company shall at a minimum provide Spence and his spouse with comprehensive medical and hospitalization insurance coverage. (c) Expenses. During the Engagement Period, Spence shall be -------- entitled to receive prompt reimbursement for all reasonable expenses incurred by Spence in accordance with the policies, practices and procedures of the Company and its affiliated companies to the extent applicable generally to other executive officers of the Company and its affiliated companies. (d) Fringe Benefits. During the Engagement Period, Spence shall be --------------- entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company and its affiliated companies in effect for executive officers of the Company and its affiliated companies. Without limiting the foregoing, during the Engagement Period, the Company shall provide Spence with an automobile of Spence's choosing and pay related lease payments, insurance and maintenance expenses thereon. 7. Termination of Engagement. ------------------------- (a) Death or Disability. Spence's engagement shall terminate ------------------- automatically upon Spence's death during the Engagement Period. If the Company determines in good faith that the Disability of Spence has occurred during the Engagement Period (pursuant to the definition of Disability set forth below), it may give to Spence written notice in accordance with this Agreement of its intention to terminate Spence's engagement. In such event, Spence's engagement with the Company shall terminate effective on the 30th day after receipt of such written notice by Spence (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Spence shall not have returned to full- time performance of Spence's duties. For purposes of this Agreement, "Disability" shall mean a mental or physical disability as determined by the Board of Directors of the Company in accordance with standards and procedures similar to those under the Company's employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, Disability shall mean the inability of Spence, as determined by the Board, to substantially perform the essential functions of his regular duties and responsibilities due to a medically determinable physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months. (b) Termination by the Company. The Company may terminate Spence's -------------------------- consulting engagement during the Engagement Period with or without cause. -3- (c) Termination by Spence. Spence may at any time resign as --------------------- Chairman of the Board with or without retaining his consulting engagement for the remainder of the Engagement Period. Spence may at any time terminate his consulting engagement with or without Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Spence's Compensation and benefits as in effect on the Effective Date or as the same may be increased from time to time; or (ii) Spence's removal or failure to be reelected as a director of the Company or as Chairman of the Board, but not including Spence's voluntary resignation or failure to accept nomination as a director or as Chairman of the Board; or (iii) any failure by the Company to comply with and satisfy Section 14(b) of this Agreement. (d) Notice of Termination. Any termination by the Company, or by --------------------- Spence for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Spence's engagement under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by Spence to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of Spence hereunder or preclude Spence from asserting such fact or circumstance in enforcing Spence's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if ------------------- Spence's engagement is terminated by the Company other than for Spence's death or Disability, or by Spence for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, and (ii) if Spence's engagement is terminated by reason of death or Disability, the Date of Termination shall be the date of death or the Disability Effective Date, as the case may be. 8. Obligations of the Company upon Termination. ------------------------------------------- (a) Termination by the Company other than for Death or Disability; -------------------------------------------------------------- Termination by Spence for Good Reason. If, during the Engagement Period, the - ------------------------------------- Company shall terminate Spence's consulting engagement other than for death or Disability, or Spence shall terminate his consulting engagement for Good Reason, then in consideration of Spence's services rendered prior to such termination and of Spence's covenants contained in Section 9 hereof: -4- (i) the Company shall pay to Spence in a lump sum in cash within 30 days after the Date of Termination the sum of (1) Spence's Compensation through the Date of Termination to the extent not theretofore paid, and (2) any compensation previously deferred by Spence (together with any accrued interest or earnings thereon) to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and (ii) the Company shall continue to pay to Spence his Compensation in accordance with 6(a) hereof for the period beginning on the Date of Termination and ending on the last day of the scheduled Engagement Period (the "Remaining Engagement Period"); and (iii) for the Remaining Engagement Period, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to Spence and/or Spence's family at least equal to those which would have been provided to them in accordance with the welfare plans, programs, practices and policies described in Section 6(b) of this Agreement if Spence's engagement had not been terminated or, if more favorable to Spence, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if Spence becomes re- employed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility ("Welfare Benefits"); and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Spence any other amounts or benefits required to be paid or provided or which Spence is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(a) shall include, without limitation, Spence's continued use during the Engagement Period of a Company automobile as provided in Section 6(e) hereof. (b) Termination by Spence other than for Good Reason; Termination -------------------------------------------------------------- due to Disability. If, during the Engagement Period, Spence shall terminate his - ----------------- consulting engagement other than for Good Reason, or Spence's engagement is terminated due to his Disability, then in consideration of Spence's services rendered prior to such termination and of Spence's covenants contained in Section 9 hereof: (i) the Company shall pay to Spence in a lump sum in cash within 30 days after the Date of Termination the Accrued Obligations; and -5- (ii) the Company shall continue to pay Spence his Compensation in accordance with Section 6(a) hereof (but with the Base Rate reduced to U.S.$150,000) for the Remaining Engagement Period; and (iii) the Company shall continue to provide Spence the Welfare Benefits for the Remaining Engagement Period, or such longer period as may be provided by the terms of the applicable Welfare Benefits; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Spence the Other Benefits. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(b) shall include, without limitation, and Spence shall be entitled (i) to the continued use during the Engagement Period of a Company automobile as provided in Section 6(e) hereof, and (ii) to receive, benefits under such plans, programs, practices and policies relating to disability benefits, if any, as applicable generally to executive officers of the Company and its affiliated companies and their beneficiaries, and on the same basis as such executive officers and their beneficiaries. (c) Death. If Spence's engagement is terminated by reason of ----- Spence's death during the Engagement Period, this Agreement shall terminate without further obligations to Spence's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Spence's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(c) shall include, without limitation, and Spence's estate and/or beneficiaries shall be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as applicable generally to executive officers of the Company and its affiliated companies and their beneficiaries, and on the same basis as such executive officers and their beneficiaries. 9. Restrictive Covenants. --------------------- (a) General. Spence and the Company understand and agree that the ------- purpose of the provisions of this Section 9 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate Spence's post-engagement competition with the Company per se, nor is it intended to impair or infringe upon Spence's right to work, earn a living, or acquire and possess property from the fruits of Spence's labor. Spence hereby acknowledges that the restrictions set forth in this Section 9 are reasonable and that they do not, and will not, unduly impair Spence's ability to earn a living after the termination of this Agreement. Therefore, subject to the limitations of reasonableness imposed by law upon the restrictions set forth herein by the time and geographical area described below, Spence shall be subject to the restrictions set forth in this Section 9. -6- (b) Definitions. The following capitalized terms used in this ----------- Section 9 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: "Competitive Services" means the manufacture and sale to distributors, retailers and financial service institutions of point-of-sale software and terminals, comprising check readers, MICRO analyzers, payment authorization and point-of-transaction promotion loyalty systems, signature capture devices and electronic transaction processing equipment. "Confidential Information" means any confidential or proprietary information possessed by the Company or its affiliated entities or relating to its or their business, including without limitation, any confidential "know-how", customer lists, details of client or consultant contracts, current and anticipated customer requirements, pricing policies, price lists, market studies, business plans, operational methods, marketing plans or strategies, product development techniques or plans, computer software programs (including object code and source code), data and documentation, data base technologies, systems, structures and architectures, inventions and ideas, past, current and planned research and development, compilations, devices, methods, techniques, processes, financial information and data, business acquisition plans, new personnel acquisition plans and any other information that would constitute a trade secret under the common law or statutory law of the State of Georgia. "Determination Date" means the date of termination of Spence's engagement with the Company hereunder. "Person" means any individual or any corporation, partnership, joint venture, association or other entity or enterprise. "Principal or Representative" means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. "Protected Clients" means clients of the Company that obtained any of the Competitive Services from the Company within one (1) year prior to the Determination Date. "Protected Employees" means employees of the Company who were employed by the Company at any time within six (6) months prior to the Determination Date. "Restricted Period" means the original Engagement Period, regardless of any earlier termination of Spence's engagement with the Company hereunder. "Restricted Territory" means the northern part of the State of Georgia. -7- "Restrictive Covenants" means the restrictive covenants contained in Section 9(c) hereof. (c) Restrictive Covenants. --------------------- (i) Restriction on Disclosure and Use of Confidential ------------------------------------------------- Information. Spence understands and agrees that the Confidential Information - ----------- constitutes avaluable asset of the Company and its affiliated entities, and may not be converted to Spence's own use. Accordingly, Spence hereby agrees that he shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and Spence shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the Company. The parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company's rights or Spence's obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices. Anything herein to the contrary notwithstanding, Spence shall not be restricted from disclosing or using Confidential Information that: (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by Spence or Spence's agent; (ii) becomes available to Spence in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representatives) that is not bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (iii) was known to Spence on a non- confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to Spence by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (iv) is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, Spence shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Spence. (ii) Nonsolicitation of Protected Employees. Spence -------------------------------------- understands and constitutes agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to Spence's own use. Accordingly, Spence hereby agrees that during the Restricted Period Spence shall not directly or indirectly on Spence's own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into employment with any other Person. (iii) Restriction on Relationships with Protected Clients. --------------------------------------------------- Spence understands and agrees that the relationship between the Company and each of its -8- Protected Clients constitutes a valuable asset of the Company and may not be converted to Spence's own use. Accordingly, Spence hereby agrees that, during the Restricted Period, Spence shall not, without the prior written consent of the Company, directly or indirectly, on Spence's own behalf or as a Principal or Representative of any Person or otherwise, solicit a Protected Client for the purpose of providing or selling Competitive Services; provided, however, that the prohibition of this covenant shall apply only to Protected Clients with whom Spence had Material Contact on the Company's behalf during the twelve (12) months immediately preceding the termination of Spence's engagement hereunder. For purposes of this Agreement, Spence had "Material Contact" with a Protected Client if (a) Spence had business dealings with the Protected Client on the Company's behalf; (b) Spence was responsible for supervising or coordinating the dealings between the Company and the Protected Client; or (c) Spence obtained Confidential Information about the customer as a result of Spence's association with the Company. (iv) Noncompetition with the Company. During the Restricted ------------------------------- Period, Spence, unless acting in accordance with the Company's prior written consent, will not directly provide any Competitive Services to, and will not, directly or indirectly, on his own or on behalf of any Person, be affiliated with as a Principal or Representative any Person engaged, in whole or in part, in the provision of Competitive Services in a capacity where Spence's duties or responsibilities for such Person will include strategic planning, policymaking or management; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by Spence of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended. 10. Non-exclusivity of Rights. Nothing in this Agreement shall ------------------------- prevent or limit Spence's continuing or Checkmate Electronics, Inc. participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which Spence may qualify, nor, subject to Section 15(d), shall anything herein limit or otherwise affect such rights as Spence may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which Spence is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 11. Limitation of Benefits in Certain Instances. ------------------------------------------- (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any benefit, payment or distribution by the Company to or for the benefit of Spence (whether payable or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would, if paid, be subject to the excise tax (the -9- "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then prior to the making of any Payment to Spence, a calculation shall be made comparing (i) the net benefit to Spence of the Payment after payment of the Excise Tax, to (ii) the net benefit to Spence if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payment shall be reduced to the extent necessary of avoid the imposition of the Excise Tax. Spence may select the Payments to be limited or reduced. (b) All determinations required to be made under this Section 11, including whether an Excise Tax would otherwise be imposed and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by Spence (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Spence within 15 business days of the receipt of notice from Spence that a Payment is due to be made, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the change of control, Spence may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and Spence. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments hereunder will have been unnecessarily limited by this Section 11 ("Underpayment"), consistent with the calculations required to be made hereunder. The Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Spence. 12. Full Settlement. The Company's obligation to make the --------------- payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Spence or others. In no event shall Spence be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Spence under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not Spence obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which Spence may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, Spence or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by Spence about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. -10- 13. Representations and Warranties. Spence hereby represents and ------------------------------ warrants to the Company that Spence's execution of this Agreement and performance of his obligations hereunder will not violate the terms or conditions of any contract or obligation, written or oral, between Spence and any other person or entity. By executing this Agreement, Checkmate Electronics, Inc. hereby consents to Spence's entrance into this Agreement and acknowledges that the same does not constitute a violation of the covenants of Spence contained in that certain Settlement Agreement, dated as of June 15, 1989, by and among Spence, Diane M. Spence, Stanford Technologies, Inc. and Dudley L. Moore, Jr. (the "Settlement Agreement"). 14. Assignment and Successors. ------------------------- (a) Spence. This Agreement is personal to Spence and without the ------ prior written consent of the Company shall not be assignable by Spence otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Spence's legal representatives. (b) The Company. This Agreement shall inure to the benefit of ----------- and be binding upon the Company and its successors and assigns. The Company will require any successor to all or substantially all of the business and/or assets of the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 15. Miscellaneous. ------------- (a) Waiver. Failure of either party to insist, in one or more ------ instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the Checkmate Electronics, Inc. performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. (b) Severability. If any provision or covenant, or any part ------------ thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. (c) Other Agents. Nothing in this Agreement is to be interpreted ------------ as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it. -11- (d) Entire Agreement. Beginning on the Effective Date and except ---------------- as specifically provided herein, this Agreement contains the entire agreement between the Company and Spence with respect to the subject matter hereof, and, except as provided to the contrary herein, it supersedes and invalidates any previous agreements or contracts between them which relate to the subject matter hereof; provided, however, that this Agreement does not supersede or invalidate the Settlement Agreement. No representations, inducements, promises or agreements, oral or otherwise, which are not embodied herein shall be of any force or effect. (e) Governing Law. Except to the extent preempted by federal law, ------------- and without regard to conflict of laws principles, the laws of the State of Georgia shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. (f) Notices. All notices, requests, demands and other ------- communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid: To the Company: IVI Checkmate Corp. 1003 Mansell Road Roswell, Georgia 30076 Facsimile No. (770) 594-6019 Attention: Chief Executive Officer To Spence: J. Stanford Spence 7209 Valburn Drive Austin, Texas 78731 Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein. (g) Amendments and Modifications. This Agreement may be amended ---------------------------- or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement. (signatures on following page) -12- IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. IVI CHECKMATE CORP. By: ------------------------------ Title: ---------------------------- EXECUTIVE: ---------------------------------- J. Stanford Spence Acknowledged for purposes of Section 13: CHECKMATE ELECTRONICS, INC. By: ------------------------------- Title: ---------------------------- -13- EX-10.16 4 MANAGEMENT SERVICES AGREEMENT EXHIBIT 10.16 THIS MANAGEMENT SERVICES AGREEMENT is made as of the 25th day of June, 1998. B E T W E E N IVI CHECKMATE CORP., a corporation incorporated under the laws of the State of Delaware, (hereinafter individually referred to as the "IVI Checkmate" and collectively with International Verifact Inc. and Checkmate Electronics, Inc. as the "Corporations") OF THE FIRST PART - and - INTERNATIONAL VERIFACT INC., a corporation incorporated under the laws of the Province of Ontario, (hereinafter individually referred to as "IVI" and collectively with IVI Checkmate Corp. and Checkmate Electronics, Inc. as the "Corporations") OF THE SECOND PART - and - CHECKMATE ELECTRONICS, INC., a company incorporated under the laws of the State of Georgia, (hereinafter individually referred to as "Checkmate" and collectively with IVI Checkmate Corp. and International Verifact Inc. as the "Corporations") OF THE THIRD PART - and - L.B.T. INVESTMENTS INC., a corporation incorporated under the laws of the Province of Ontario, (hereinafter referred to as the "Manager") OF THE FOURTH PART - and - L. BARRY THOMSON, of the Town of Oakville, in the Province of Ontario, (hereinafter referred to as the "Thomson") OF THE FIFTH PART WHEREAS the Manager has heretofore provided certain services to IVI pursuant to a Management Services Agreement made as of the 8th day of May, 1996, as amended by agreements made as of October 1, 1996, July 30. 1997 and February 25, 1998 (the "Original Services Agreement"); AND WHEREAS effective as of the date of this Agreement IVI Checkmate has become the parent company of IVI and Checkmate; AND WHEREAS the Corporations desire to retain the Manager to provide certain services to the Corporations, including the provision of Thomson to act in the capacity of President and Chief Executive Officer of IVI Checkmate, President and Chief Executive Officer of IVI, and the Chief Executive Officer of Checkmate; AND WHEREAS the Manager is prepared to provide the services required by the Corporation; AND WHEREAS Thomson is prepared, at the request of the Manager, to accept the appointments set forth above; AND WHEREAS the Manager and IVI have agreed to terminate the Original Services Agreement upon the execution of this Agreement; and sufficiency of which is hereby acknowledged) and for other good and valuable consideration, the parties agree as follows: 1. Term ---- This Agreement shall be in effect immediately upon execution and shall remain in effect until it is terminated as provided in Section 5 hereafter. 2. Appointment, Acceptance and Duties ---------------------------------- (a) The Corporations hereby retain the Manager to provide to the Corporations the services of Thomson to serve the Corporations and any subsidiaries and affiliates of the Corporations in such capacity or capacities and to perform such duties and to exercise such powers pertaining to the management and operation of the Corporations and their respective subsidiaries and affiliates as may be determined from time to time by the Board of Directors of IVI Checkmate consistent with Thomson's experience and, without limiting the generality of the -2- foregoing, to serve as the President and Chief Executive Officer of IVI Checkmate, and initially, until such time as determined otherwise by the Board of Directors of IVI Checkmate, as the President and Chief Executive Officer of IVI, the Chief Executive Officer of Checkmate and the Chairman of IVI Ingenico Inc. and the Manager agrees to provide such services. During the currency of this Agreement, Thomson shall: (i) report to the board of directors of IVI Checkmate and shall devote his full time and attention and his best efforts during normal business hours to the business and affairs of the Corporations; (ii) exercise the powers and authorities and fulfil the responsibilities of his position honestly, diligently and faithfully to the best of his abilities and in the best interests of the Corporations; and (iii) use his best efforts to promote the interests and goodwill of the Corporations. (b) During the currency of this Agreement the Corporations and the Manager agree that the Corporations shall, unless Thomson otherwise requests, ensure that Thomson will be nominated by management of the Corporations as a director of each of IVI Checkmate, IVI, Checkmate and IVI Ingenico Inc. 3. Management Fee -------------- (a) For the provision of the services herein set forth, subject to review as hereinafter provided, the Corporations agree to pay to the Manager in the aggregate a fee at an annual rate of US$275,000 for the period from the date hereof to December 31, 1998, an annual fee of US$300,000 for the calendar year 1999 and an annual fee of US$335,000 for the calendar year 2000; provided always that the annual fee for the remainder of the calendar year 1998 and calendar years 1999 and 2000 may be at such higher amount as may be agreed by the Manager and IVI Checkmate. The Manager agrees that it will provide invoices to the Corporations as they may direct in writing, on a monthly basis, in arrears, for one-twelfth of the then current annual fee. The Corporations and the Manager agree that on or before October 1, 2000 and thereafter before October 1 of each subsequent year during the currency of this Agreement, the annual fee shall be reviewed by the Manager and the board of directors of IVI Checkmate with a view to ensuring that the Manager's fee is fair and reasonable considering the services to be provided and considering the performance of Thomson in carrying out his obligations set forth in Subsection 2(a) hereof. It is understood and agreed that in no event shall the annual fee to be paid to the Manager be reduced without the Manager's prior written consent. The amount of any increase in the annual fee shall be determined solely by the board of directors of IVI Checkmate in their absolute discretion. (b) The Manager shall be entitled to receive a performance bonus of not less than US$50,000.00 during each calendar year of this Agreement (including the 1998 calendar year). The Manager and the board of directors of IVI Checkmate shall determine the Manager's bonus program on or before April I in each year (commencing April 1, 1999) for that calendar year and -3- such program will be based upon the Manager meeting reasonably set, measurable performance objectives approved by the board of directors of IVI Checkmate. (c) The Manager shall permit Thomson to participate in such stock options plans as may from time to time be established for directors and senior officers of the Corporations. including the 1998 Long-Term Incentive Plan of IVI Checkmate (the "Plan") and any like plan adopted by the Corporations or any of them, in such manner as the board of directors of IVI Checkmate may, in their absolute discretion, determine. IVI Checkmate hereby confirms and agrees that: (i) Thomson has been granted 233,250 Options (as such term is defined in the Plan) as of the date of this Agreement which Options vest immediately, expire, subject to the terms of the Plan, on the 25th day of June, 2007 and are exercisable at an exercise price per share of Stock (as such term is defined in the Plan) at the greater of US$6.81 and the Fair Market Value (as such term is defined in the Plan) as of the date of this Agreement; and (ii) Thomson shall be granted, so long as this Agreement shall not be otherwise terminated in accordance with the terms hereof, 150,000 Options (as such term is defined in the Plan) on January 14, 1999, which Options shall vest on the date of the grant, shall expire, subject to the terms of the Plan, on January 14, 2007 and shall be exercisable at an exercise price per share of Stock (as such term is defined in the Plan) at the Fair Market Value (as such term is defined in the Plan) as of January 14, 1999. (d) The Manager shall submit to the Corporations or as they may direct in writing, monthly in arrears, in addition to the invoice in respect of its fees, an invoice in respect of its reasonable expenses actually and properly incurred by it in connection with carrying out its duties hereunder which such expenses will include an amount (presently Cdn.$1,000.00 per month (the "automobile payment") plus reasonable operating and maintenance expenses) as agreed by the Manager and IVI Checkmate from time to time, in respect of the provision of an automobile for Thomson. The Corporations agree that they shall reimburse the Manager for such expenses no later than the 15th day of the month following the month in which the Manager submitted same. (e) The Corporations shall permit Thomson to be registered with such health benefit programs as the Corporations may implement from time to time on behalf of its employees (which shall include at least life insurance, medical insurance, disability insurance, dental insurance and a drug plan) and the Corporations will reimburse the Manager for the costs of providing such benefits to Thomson. (f) The Corporations shall reimburse the Manager for its costs in paying for Thomson's annual membership or association fees for such trade and C.E.O. associations as the Corporation and the Manager may agree (to an aggregate maximum amount of Cdn.$6,000.00 -4- per year) and its costs in paying for Thomson's annual fees in a social club (to a maximum of Cdn.$3,000.00 per year). (g) The Corporations acknowledge that IVI is presently a Corporate Member of The Lake Joseph Club (the "Club") with Thomson designated as the designated executive entitled to the privileges of Club membership. The Corporations agree to maintain the membership in the Club on behalf of IVI and to designate Thomson as the designated executive entitled to membership privileges during the currency of this agreement and to pay on a timely basis all annual fees with respect to such membership. If this Agreement is terminated for any reason other than reasons set forth in Section 5, then the Corporations shall forthwith take all necessary steps, at their expense, including without limitation, the payment of all transfer fees, to transfer the membership in the Club to the Manager or Thomson, as directed in writing by the Manager. 4. Vacation -------- The Manager agrees that Thomson shall be entitled to only four weeks vacation per year and that Thomson shall only take such vacation at the most appropriate time considering the demands of the business of the Corporations and taking into account the staffing requirements of the Corporations and the need for the timely performance of the services to be provided pursuant to the terms of this Agreement. 5. Termination ----------- (a) IVI Checkmate, on behalf of the Corporations, may terminate this Agreement without notice or any payment in lieu of notice for cause. (b) This Agreement may immediately be terminated by IVI Checkmate, on behalf of the Corporations, without notice to the Manager if Thomson becomes permanently disabled. Thomson shall be deemed to have become permanently disabled if in any year during the currency of this Agreement, because of ill health, physical or mental disability, or for other causes beyond control of Thomson, Thomson has been continuously unable or unwilling or has failed to perform his duties for 120 consecutive days, or if, during any year during the currency of this Agreement he has failed to perform his duties for a total of 180 days, consecutive or not. The term "any year during the currency of this Agreement" means any period of 12 consecutive months during which the Agreement is in full force and effect. (c) IVI Checkmate, on behalf of the Corporations, may terminate this Agreement without notice upon the death of Thomson. (d) The Manager may terminate this Agreement on not less than 30 days' notice to the Corporation. 6. Termination Payments -------------------- (a) Upon termination of this Agreement for the reason set forth in Subsection 5(a) above, the Manager shall not be entitled to any termination payment other than its fees calculated -5- pro rata up to and including the date of termination and payment of any outstanding amounts due under Subsections 3(d), 3(e) and 3(f) hereof. Upon termination of this Agreement for any of the reasons set forth in Subsections 5(b), (c) or (d) above, the Manager shall be entitled to Attorney's fees calculated pro rata up to and including the date of termination, payment of any outstanding amounts due under Subsections 3(d), 3)(e) and 3(f) hereof and the Corporations shall pay to the Manager its pro rata entitlement under the then current bonus program contemplated by Subsection 3(b) hereof. (b) If this Agreement is terminated by IVI Checkmate, on behalf of the Corporations, for any reason, other than the reasons set forth in Section 5, then the Corporations shall forthwith pay to the Manager or as the Manager directs the following: (i) three times the aggregate of the annual fee (referred to in Subsection 3(a)) and the performance bonus (referred to in Subsection 3(b)) paid and/or earned by the Manager in the year immediately preceding the year of termination; (ii) three times the total automobile payments referred to in Subsection 3(d) paid in the year immediately preceding the year of termination; (iii) three times the cost of providing the benefits referred to in Subsections 3(e) and 3(f) in the year immediately preceding the year of termination; and (iv) the cost of the Manager retaining on behalf of Thomson outplacement services provided by the KPMG Management Consulting C.E.O. Program or an equivalent firm acceptable to the Manager. The termination payments described in this Subsection are the only payments the Manager will receive in the event of the termination of this Agreement for the reasons contemplated in this Subsection (b). 7. Confidentiality --------------- Each of the Manager and Thomson acknowledge and agree that: (a) in the course of providing the services contemplated by this Agreement and in particular in the case of Thomson performing his duties and responsibilities as the Chief Executive Officer of the Corporations, each of them has had and will continue in the future to have access to and has been and will be entrusted with detailed confidential information and trade secrets (printed or otherwise) concerning past, present, future and contemplated products, services, operations, technology and marketing techniques and procedures of the Corporations and their subsidiaries, including, without limitation, Information relating to addresses, preferences, needs and requirements of past, present and prospective clients, customers, suppliers and employees of the Corporations and their subsidiaries -6- (collectively, "Confidential Information"), the disclosure of any of which to competitors of the Corporations or to the general public, or the use of same by the Manager, Thomson or any competitor of the Corporations or any of its subsidiaries, would be highly detrimental to the interests of the Corporations; (b) in the course of performing his duties and responsibilities for the Corporations, Thomson has been and will continue in the future to be a representative of the Corporations to their customers, clients and suppliers and as such has had and will continue in the future to have significant responsibility for maintaining and enhancing the goodwill of the Corporations with such customers, clients and suppliers and would not have, except by virtue of the provision of services pursuant to this Agreement, developed a close and direct relationship with the customers, clients and suppliers of the Corporations; (c) Thomson, in acting in the capacity of the Chief Executive Officer of the Corporations, owes fiduciary duties to the Corporations, including the duty to act in the best interests of the Corporations; (d) the right to maintain the confidentiality of the Confidential Information, the right to preserve the goodwill of the Corporations and the right to the benefit of any relationship that has developed between Thomson and the customers, clients and suppliers of the Corporations by virtue of the provision of service pursuant to this Agreement constitute proprietary rights of the Corporations, which the Corporations are entitled to protect; and (e) the Manager and Thomson shall forthwith transfer to the benefit of the Corporations any rights and interest in any invention and discovery of any process or technology related in any manner to the business of the Corporations Thomson could imagine, conceive or create during the term of this Agreement. In acknowledgement of the matters described above and in consideration of the payments to be paid to the Manager pursuant to this Agreement, the Manager and Thomson hereby agree that they will not, directly or indirectly, disclose to any person or in any way make use of (other than for the benefit of the Corporations), in any manner, any of the Confidential Information, provided that such Confidential Information shall be deemed not to include information that is or becomes generally available to the public other than as a result of disclosure by the Manager or Thomson. 8. Non-Solicitation ---------------- The Manager and Thomson hereby agree that they will not, during the currency of this Agreement and for a period of three years after the termination of this Agreement, be a party to or abet any solicitation of customers, clients or suppliers of the Corporations or any of their subsidiaries, to transfer business from the Corporations or any of its subsidiaries to any other person, or seek in any way to persuade or entice any employee of the Corporations (except the -7- person who fills the position of Executive Assistant to Thomson) or any of their subsidiaries to leave that employment or to be a party to or abet any such action. 9. Disclosure ---------- During the currency of this Agreement, the Manager and Thomson shall promptly disclose to the board of directors of IVI Checkmate, IVI, and Checkmate, as applicable, by written notice to the Secretary of such company full information concerning any interest, direct or indirect, of the Manager or Thomson (as owner, shareholder, partner, lender or other investor, director, officer, employees, consultant or otherwise) or any member of Thomson's family in any business that is reasonably known to the Manager or to Thomson to purchase or otherwise obtain services or products from, or to sell or otherwise provide services or products to any of the Corporations or to any of their suppliers or customers. Notwithstanding the foregoing it is agreed and acknowledged that both the Manager and Thomson shall be entitled to engage in normal dealings with any customer of or supplier to the Corporations and to invest in any public company provided that any such investment does not exceed 5% of the outstanding securities of such public company. 10. Return of Materials ------------------- All files, forms, brochures, books, materials, written correspondence, memoranda, documents, manuals, computer disks, software products and lists (including lists of customers, suppliers, products and prices) pertaining to the business of the Corporations or any of their subsidiaries and associates that may come into the possession or control of the Manager or Thomson shall at all times remain the property of the Corporations or such subsidiary or associate, as the case may be. On termination of this Agreement for any reason, the Manager and Thomson agree to deliver promptly to the Corporations all such property of the Corporations in their possession or directly or indirectly under their control. The Manager and Thomson agree not to make for their own use or that of any other party reproductions or copies of any such property or other property of the Corporations. 11. Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario. The parties do hereby irrevocably attorn to the non-exclusive jurisdiction of the courts of the Province of Ontario. 12. No Assignment ------------- This Agreement may not be assigned without the consent of all of the parties hereto. 13. Survival -------- The parties agree and acknowledge that notwithstanding the termination of this Agreement pursuant to Section 5 hereof the provisions of Section 7, 10 and 15 hereof shall -8- survive in perpetuity and the provisions of Section 8 shall survive for three (3) years from the date of such termination. 14. Severability ------------ If any provision in this Agreement including the breadth or scope of such provision, is determined to be invalid or unenforceable in whole or in part by any court of competent jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining provisions. or part thereof, of this Agreement and such remaining provisions, or part thereof, shall remain enforceable and binding. 15. Enforceability -------------- The Manager and Thomson hereby confirm and agree that the covenants and restrictions pertaining to them contained in this Agreement are reasonable and valid and hereby further acknowledge and agree that the Corporations would suffer irreparable injury in the event of any breach by the Manager or Thomson of their obligations under any such covenant or restriction. Accordingly, each of the Manager and Thomson hereby acknowledge and agree that damages would be an inadequate remedy at law in connection with any such breach and that the Corporations shall therefore be entitled in lieu of any action for damages, temporary and permanent injunctive relief enjoining and restraining the Manager and Thomson from any such breach. 16. Successors ---------- This Agreement shall be binding on and enure to the benefit of the successors and permitted assigns of the Corporations and the Manager and the heirs, executors, personal legal representatives and permitted assigns of Thomson. 17. Notices ------- Any notice or other communication required or permitted to be given hereunder shall be in writing and either delivered by hand or telecommunications facility or mailed by prepaid registered mail. At anytime other than during a general discontinuance of postal service due to strike, lock-out or otherwise, a notice so mailed shall be deemed to have been received three business days after the post-marked date thereof or, if delivered by hand or telecommunications facility, shall be deemed to have been received at the time it is delivered. If there is general discontinuance of postal service due to strike, lock-out or otherwise, a notice sent by prepaid registered mail shall be deemed to have been received three business days after the resumption of postal service. Notices shall be addressed as follows: (a) if to the Corporations: IVI Checkmate Corp. 1003 Mansell Road Roswell, GA -9- USA 30076 (b) if to the Manager: 200 Poplar Drive Oakville, Ontario L6J 4C6 (c) if to Thomson: 200 Poplar Drive Oakville, Ontario L6J 4C6 18. Legal Advice ------------ Thomson hereby represents and warrants to the Manager and to the Corporations and acknowledges and agrees that he had the opportunity to seek and was not prevented nor discouraged by the Corporations or the Manager from seeking independent legal advice prior to the execution and delivery of this Agreement and that, in the event that he did not avail himself with that opportunity prior to signing this Agreement, he did so voluntarily without any undue pressure and agrees that his failure to obtain independent legal advice shall not be used by him as a defense to the enforcement of his obligations under this Agreement. 19. Waiver of Breach ---------------- The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach thereof. 20. Termination of Original Services Agreement ------------------------------------------ The Manager and Thomson agree that upon execution of this Agreement they shall execute an agreement terminating the Original Services Agreement with IVI. 21. Amendments ---------- This Agreement may only be amended by instrument in writing executed by all of the parties hereto. -10- IN WITNESS THEREOF the parties have executed this Agreement on the date first written above. IVI CHECKMATE CORP. Per: /s/ J. S. Spence ------------------------- Name: J. Stanford Spence ------------------ Title: Chairman ------------------ INTERNATIONAL VERIFACT INC. Per: /s/ G. Whitton ------------------------- Name: G. Whitton ------------------ Title: Chairman ----------------- CHECKMATE ELECTRONICS, INC. Per: /s/ Gregory A. Lewis -------------------------- Name: Gregory A. Lewis ------------------- Title: President ------------------ L.B.T. INVESTMENTS INC. Per: /s/ L. Barry Thomson -------------------- Name: ------------------- Title: ------------------ /s/ Mark A. Convery /s/ L. Barry Thomson - ---------------------------- -------------------- Witness L. BARRY THOMSON -11- EX-10.17 5 EMPLOYMENT AGREEMENT EXHIBIT 10.17 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made as of June 25, 1998. B E T W E E N INTERNATIONAL VERIFACT INC., a corporation continued under the laws of Canada, (hereinafter referred to as the "Corporation") OF THE FIRST PART - and - GEORGE WHITTON, of P.O. Box 573, The Valley, Anguilla, British West Indies, (hereinafter referred to as the "Executive") OF THE SECOND PART WHEREAS effective as at the date of this Agreement IVI Checkmate Corp. ("IVI Checkmate") has become the parent company of the Corporation; AND WHEREAS by agreement dated January 6, 1995, amended and restated by agreement dated as of March 15, 1996 and further amended by an acknowledgement and amending agreement made as of the 25th day of February, 1998 (the "Original Contract as Amended") the Corporation and the Executive set out the terms and conditions governing the Executive's employment with the Corporation; AND WHEREAS the parties have agreed that the Original Contract as Amended be terminated and that the terms and conditions that govern the Executive's employment be as formally set out herein. NOW THEREFORE in consideration of the mutual covenants and agreements contained in this Agreement and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by each of the parties), the parties hereto agree as follows: 1. Definitions ----------- (a) "Change of Control" means the occurrence of: (i) the acquisition or continuing ownership of common shares of the Corporation and/or securities ("Convertible Securities") convertible into, exchangeable for or representing the right to acquire common shares of the Corporation as a result of which a person, group of persons or persons acting jointly or in concert, or persons associated or affiliated within the meaning of the Canada Business Corporations Act with any such person, group of persons or any of such persons acting jointly or in concert (collectively the "Acquirors"), beneficially own shares of the Corporation and/or Convertible Securities such that, assuming only the conversion, exchange or exercise of Convertible Securities beneficially owned by the Acquirors, the Acquirors would beneficially own shares that would entitle the holders thereof to cast more than 30% of the votes attaching, to all shares in the capital of the Corporation that may be cast to elect directors of the Corporation; or (ii) the exercise of the voting power of all or any such shares so as to cause or result in the election of three or more directors of the Corporation who were not Incumbent Directors. (b) "Incumbent Director" means any member of the Board of Directors of the Corporation who was a member of the Board of Directors of the Corporation immediately prior to a Change of Control and any successor to an Incumbent Director who was recommended or elected or appointed to succeed any Incumbent Director by the affirmative vote of a majority of the Incumbent Directors then on the Board of Directors of the Corporation. 2. Termination of Original Contract as Amended ------------------------------------------- The parties hereto agree that effective upon execution of this Agreement the Original Contract as Amended be and the same is hereby terminated. 3. Term ---- This Agreement shall be in effect immediately as at and from the date first written above and shall remain in effect until the earlier of June 25, 2001 and the date of termination as provided in Section 8 hereafter. 4. Duties ------ The Executive shall serve the Corporation and any subsidiaries and affiliates of the Corporation in such capacity or capacities and shall perform such duties and exercise such powers pertaining to the management and operation of the Corporation and any subsidiaries and affiliates of the Corporation (as those terms are defined in the Canada Business Corporations Act) as may be determined from time to time by the Board of Directors of the Corporation -2- consistent with the office of the Executive. Without limiting the foregoing, the Executive shall occupy the office of Chairman of the Board of Directors of the Corporation. The Executive shall: (a) devote his full time and attention and his best efforts during normal business hours to the business and affairs of the Corporation; (b) perform those duties that may reasonably be assigned to the Executive diligently and faithfully to the best of the Executive's abilities and in the best interests of the Corporation; and (c) use his best efforts to promote the interests and goodwill of the Corporation. 5. Remuneration ------------ (a) During the term of this Agreement, the annual base salary payable to the Executive for his services hereunder shall be US $150,000 exclusive of those benefits set forth herein. The annual base salary payable to the Executive pursuant to this subsection shall be payable semi-monthly in arrears or in such other manner as may be mutually agreed upon, less, in any case, any deductions or withholdings required by law. (b) The Corporation shall provide the Executive with employee benefits comparable to those provided by the Corporation from time to time to other senior executives of the Corporation through its existing group life or group insurance plans. At the option of the Executive, to be exercised by notice in writing to the Corporation, the Executive may chose to arrange his own insurance program in which event the Corporation shall pay to the Executive the value of the benefits otherwise to be provided pursuant to this Subsection 5(b), the annual cost of which shall be paid in 24 equal installments on the same days as the base salary is paid pursuant to Subsection 5(a) hereof. (c) The Executive shall be entitled to participate in the 1998 Long-Term Incentive Plan of IVI Checkmate (the "Plan") and in any subsequently adopted plan of IVI Checkmate and the Corporation hereby confirms and agrees that: (i) the Executive has been granted 103,850 Options (as such term is defined in the Plan) as of the date of this Agreement which Options vest immediately, expire, subject to the terms of the Plan, on the 25th day of June, 2007 and are exercisable at an exercise price per share of Stock (as such term is defined in the Plan) at the greater of US$6.81 and the Fair Market Value (as such term is defined in the Plan) as of the date of this Agreement; and (ii) the Corporation shall use its best efforts to ensure that so long as the Executive's employment has not been terminated in accordance with the terms of this Agreement, the Executive will be granted 75,000 Options (as -3- such term is defined in the Plan) on January 14, 1999 which Options will vest on the date of grant, will expire, subject to the terms of the Plan, on January 14, 2007 and will be exercisable at an exercise price per share of Stock (as such term is defined in the Plan) at the Fair Market Value (as such term is defined in the Plan) as of January 14, 1999. 6. No Further Salary or Bonus Adjustments -------------------------------------- Other than as herein provided, there shall be no further salary, bonus, cost-of-living, or merit increase in the annual base salary unless agreed to in writing by the Corporation. 7. Expenses -------- The Executive shall be entitled to a car allowance of U.S. $500 per month. The Executive shall be reimbursed for all reasonable travel and other out-of-pocket expenses, including reasonable operating, maintenance and insurance costs of the Executive's vehicle, actually and properly incurred by the Executive from time to time in connection with carrying out his duties hereunder. For all such expenses the Executive shall furnish to the Corporation originals of all invoices or statements in respect of which the Executive seeks reimbursement. 8. Termination ----------- (a) The Corporation may terminate the employment of the Executive by the Corporation and any employment or offices held by the Executive with an affiliate of the Corporation without notice or any payment in lieu of notice for cause which, without limiting the generality of the foregoing, shall include: (i) if there is a repeated and demonstrated failure on the part of the Executive to perform the material duties of the Executive's position in a competent manner and where the Executive fails to substantially remedy the failure within a reasonable period of time after receiving written notice of such failure from the Corporation; (ii) if the Executive is convicted of a criminal offense involving fraud or dishonesty; (iii) if the Executive or any member of his family makes any personal profit arising out of or in connection with a transaction to which the Corporation or any affiliate of the Corporation is a party or with which it is associated without obtaining the prior written consent of the Corporation; (iv) if the Executive fails to honour his fiduciary duties to the Corporation, including the duty to act in the best interests of the Corporation; or -4- (v) if the Executive disobeys reasonable instructions given in the course of employment by the Board of Directors of the Corporation that are not inconsistent with the Executive's management position and not remedied by the Executive within a reasonable period of time after receiving written notice of such disobedience. (b) This agreement may be immediately terminated by the Corporation by notice to the Executive if the Executive becomes permanently disabled. The Executive shall be deemed to have become permanently disabled if in any year during the employment period, because of ill health, physical or mental disability, or for other causes beyond the control of the Executive, the Executive has been continuously unable or unwilling or has failed to perform the Executive's duties for 120 consecutive days, or if, during any year during the employment period, the Executive has failed to perform his duties for a total of 180 days, consecutive or not. The term "any year during the employment period" means any period of 12 consecutive months during which the Executive is employed by the Corporation. (c) This agreement shall terminate without notice upon the death of the Executive. (d) This agreement shall terminate upon the effective date of the Executive's voluntary termination of employment. 9. Severance Payments ------------------ (a) Upon termination of the Executive's employment: (i) for cause; or (ii) by the Executive's voluntary termination of employment; the Executive shall not be entitled to any severance payment other than compensation earned by the Executive before the date of termination calculated pro rata up to and including the date of termination, together with any amount to which the Executive is entitled under the Employment Standards Act (Ontario), as amended. (b) If the Executive's employment is terminated for any reason other than as stated in Subsection 9(a) above: (i) on or before June 25, 1999 or at any time thereafter, if the date of termination is within one (1) year of a Change of Control, the Executive shall be entitled to receive: -5- A. seventy-two (72) month's salary at the then applicable annual base salary rate. The term "annual base salary rate" means the annual salary rate then in effect; and B. the continuation of the benefits provided for in Subsection 5(b) hereof for six (6) months after the employment is terminated. (ii) in any other circumstances, the Executive shall be entitled to receive the remuneration provided for in Section 5 up to June 25, 2001. 10. Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario. The parties do hereby irrevocably attorn to the non-exclusive jurisdiction of the courts of the Province of Ontario. 11. No Assignment ------------- The Executive may not assign, pledge or encumber the Executive's interest in this agreement nor assign any of the rights or duties of the Executive under this agreement without the prior written consent of the Corporation. 12. Severability ------------ If any provision in this Agreement including the breadth or scope of such provision, is determined to be invalid or unenforceable in whole or in part by any court of competent jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining provisions, or part thereof, of this agreement and such remaining provisions, or part thereof, shall remain enforceable and binding. 13. Enforceability -------------- The Executive hereby confirms and agrees that the covenants and restrictions pertaining to the Executive contained in this agreement are reasonable and valid and hereby further acknowledges and agrees that the Corporation would suffer irreparable injury in the event of any breach by the Executive of his obligations under any such covenant or restriction. Accordingly, the Executive hereby acknowledges and agrees that damages would be an inadequate remedy at law in connection with any such breach and that the Corporation shall therefore be entitled in lieu of any action for damages, temporary and permanent injunctive relief enjoining and restraining, the Executive from any such breach. 14. Successors ---------- This agreement shall be binding on and enure to the benefit of the successors and assigns of the Corporation and the heirs, executors, personal legal representatives and permitted assigns of the Executive. -6- 15. Notices ------- Any notice or other communication required or permitted to be given hereunder shall be in writing and either delivered by hand or telecommunications facility or mailed by prepaid registered mail. At any time other than during a general discontinuance of postal service due to strike, lock-out or otherwise, a notice so mailed shall be deemed to have been received three business days after the post-marked date thereof or, if delivered by hand or telecommunications facility, shall be deemed to have been received at the time it is delivered. If there is general discontinuance of postal service due to strike, lock-out or otherwise, a notice sent by prepaid registered mail shall be deemed to have been received three business days after the resumption of postal service. Notices shall be addressed as follows: (a) if to the Corporation: International Verifact Inc. 79 Torbarrie Road Toronto, Ontario M3L 1G5 (b) if to the Executive: P.O. Box 573 The Valley Anguilla, British West Indies 16. Legal Advice ------------ The Executive hereby represents and warrants to the Corporation and acknowledges and agrees that he had the opportunity to seek and was not prevented nor discouraged by the Corporation from seeking independent legal advice prior to the execution and delivery of this agreement and that, in the event that he did not avail himself with that opportunity prior to signing this agreement, he did so voluntarily without any undue pressure and agrees that his failure to obtain independent legal advice shall not be used by him as a defense to the enforcement of his obligations under this agreement. 17. Waiver of Breach ---------------- The waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach thereof. 18. Amendment --------- This Agreement may only be amended by an instrument in writing executed by the parties hereto. -7- IN WITNESS THEREOF the parties have executed this Agreement on the date first written above. INTERNATIONAL VERIFACT INC. By:/s/ L. Barry Thomson -------------------- Name: Title: EXECUTIVE /s/ Mark A. Convery /s/ George Whitton - ------------------- ------------------ Witness GEORGE WHITTON -8- EX-10.20 6 ELEVENTH AMENDMENT EXHIBIT 10.20 ELEVENTH AMENDMENT TO LEASE AGREEMENT ------------------------------------- THIS ELEVENTH AMENDMENT TO LEASE AGREEMENT (hereinafter referred to as the "Eleventh Amendment") is made as of the 16th day of July, 1998, by and between WEEKS REALTY, L.P. (hereinafter referred to as "Landlord") and CHECKMATE ELECTRONICS, INC. (hereinafter referred to as "Tenant"). W I T N E S S E T H : -------------------- WHEREAS, ASC North Fulton Associates Joint Venture and Tenant entered into that certain Lease Agreement dated July 17, 1990, as amended by that certain First Amendment to Lease dated December 20, 1990, as amended by that certain Second Amendment to Lease dated October 15, 1992, as amended by that certain Third Amendment to Lease April 30, 1993, as amended by that certain Fourth Amendment to Lease July 15, 1993, as amended by that certain Fifth Amendment to Lease dated August 16, 1994, as amended by that certain Sixth Amendment to Lease dated February 20, 1995, as amended by that certain Seventh Amendment to Lease dated January 18, 1996, as amended by that certain Eighth Amendment to Lease dated April 1, 1996, as amended by that certain Ninth Amendment to Lease Agreement dated August 18, 1997, and as further amended by that certain Tenth Amendment to Lease Agreement dated May 20, 1998 (hereinafter collectively referred to as the "Agreement") for the lease of 70,938 square feet of office/ warehouse space at 999, 1003, 1009, and 1011 Mansell Road, Roswell, Georgia which is more particularly described in the Agreement and certain easements, rights and privileges appurtenant thereto (hereinafter referred to as the "Leased Premises"); and WHEREAS, Weeks Realty, L.P. succeeded to the interest of the landlord under the Agreement and is the Landlord with respect to the Leased Premises; and WHEREAS, the Agreement will expire by its terms on September 30, 1999 and Tenant desires to enter into this Eleventh Amendment in order to extend the term of the Agreement; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid by Landlord and Tenant to one another, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Landlord and Tenant, Landlord and Tenant amend the Agreement as follows: 1. The Agreement is hereby extended for an additional two (2) year term effective October 1, 1999 and continuing until midnight on September 30, 2001 on all of the same terms, covenants and conditions as the original Agreement with the same base year except that the base rental for the new term shall be as set forth below: 1003 Mansell Road, Suite A-1 (4,200 square feet): ------------------------------------------------- October 1, 1999 - September 30, 2000 $2,865.98/month $34,391.70/year October 1, 2000 - September 30, 2001 $2,951.95/month $35,423.45/year 1003 Mansell Road, Suite A-A (4,430 square feet): ------------------------------------------------- October 1, 1999 - September 30, 2000 $3,022.92/month $36,275.06/year October 1, 2000 - September 30, 2001 $3,113.61/month $37,363.31/year 1009 Mansell Road, Suite D (11,200 square feet): ------------------------------------------------ October 1, 1999 - September 30, 2000 $7,642.60/month $91,711.20/year October 1, 2000 - September 30, 2001 $7,871.88/month $94,462.54/year 1009 Mansell Road, Suite F (2,350 square feet): ----------------------------------------------- October 1, 1999 - September 30, 2000 $1,603.58/month $19,242.98/year October 1, 2000 - September 30, 2001 $1,651.69/month $19,820.27/year 1009 Mansell Road, Suite G, J, K (11,466 square feet): ------------------------------------------------------ October 1, 1999 - September 30, 2000 $7,824.11/month $93,889.34/year October 1, 2000 - September 30, 2001 $8,058.84/month $96,706.02/year 1011 Mansell Road, Suite C (15,522 square feet): ------------------------------------------------ October 1, 1999 - September 30, 2000 $10,591.82/month $127,101.90/ year October 1, 2000 - September 30, 2001 $10,909.58/month $130,914.96/ year 999 Mansell Road (9,600 square feet): ------------------------------------- October 1, 1999 - September 30, 2000 $4,636.15/month $55,633.84/year October 1, 2000 - September 30, 2001 $4,775.24/month $57,302.86/year 1003 Mansell Road, Suite C (7,370 square feet): ----------------------------------------------- October 1, 1999 - September 30, 2000 $3,453.95/month $41,447.41/year October 1, 2000 - September 30, 2001 $3,557.57/month $42,690.83/year 1003 Mansell Road, Suite D (4,800 square feet): ----------------------------------------------- October 1, 1999 - September 30, 2000 $3,213.60/month $38,563.20/year October 1, 2000 - September 30, 2001 $3,310.01/month $39,720.10/year Total Leased Premises (70,938 square feet): - ------------------------------------------- October 1, 1999 - September 30,2000 $44,854.71/month $538,256.63/year October 1, 2000 - September 30,2001 $46,200.37/month $554,404.34/year which payments shall be due and payable on or before the first day of each calendar month during the applicable term, together with any other additional rental as set forth hereunder or as set forth in the Agreement. 3. As consideration for Tenant's performance of all obligations to be performed by Tenant under the Agreement, Landlord shall contribute the sum of Seventy -2- Thousand and no/100 Dollars ($70,000.00) (the "Allowance") towards the cost of tenant improvements to the Leased Premises. The Allowance shall be used for alterations, improvements, fixtures and equipment which become part of or are attached or affixed to the Leased Premises, including walls, wall coverings and floor coverings, but excluding trade fixtures, furniture and furnishings or other personal property. In the event the cost of tenant improvements exceeds the cost of tenant improvement Allowance, the excess shall be paid by Tenant within thirty (30) days of Tenant's receipt of Landlord's notice. 4. Except as expressly modified by this Eleventh Amendment, all provisions, terms and conditions of the Agreement shall remain in full force and effect. 5. In the event a provision of this Eleventh Amendment conflicts with a provision of the Agreement, the Eleventh Amendment shall supersede and control. 6. All terms and phrases used herein shall have the same meaning as assigned to them in the Agreement. 7. This Eleventh Amendment shall not be of any legal effect or consequence unless signed by Landlord and Tenant, and once signed by Landlord and Tenant it shall be binding upon and inure to the benefit of Landlord, Tenant, and their respective legal representatives, successors and assigns. 8. This Eleventh Amendment has been executed and shall be construed under the laws of the State of Georgia. [SIGNATURES CONTAINED ON THE FOLLOWING PAGE] -3- IN WITNESS WHEREOF, the undersigned have caused this Eleventh Amendment to be executed under seal and delivered as of the day and year first above. LANDLORD: Signed, sealed and delivered WEEKS REALTY, L.P., in the presence of: a Georgia limited partnership /s/ Kelly A. Kinnery By: Weeks GP Holdings, Inc., - -------------------- a Georgia corporation, Witness its sole general partner /s/ Patrick L. Adams - -------------------- Notary Public By: /s/ Forrest W. Robinson ----------------------- Name: Forrest W. Robinson ----------------------- Its: President/C.O.O. ----------------------- TENANT: Signed, sealed and delivered CHECKMATE ELECTRONICS, INC., in the presence of: /s/ Tanya K. Meiss By: /s/ John J. Neubert - ------------------ ------------------- Witness Name: John J. Neubert ------------------- Its: Exec. V.P. and CFO ------------------- /s/ Valerie J. David - -------------------- Notary Public ATTEST: By: /s/ Margaret L. Burkett ----------------------- Name: Margaret L. Burkett ----------------------- Its: Corporate Secretary ----------------------- (Corporate Seal) -4- EX-10.21 7 TENTH AMENDMENT EXHIBIT 10.21 TENTH AMENDMENT TO LEASE AGREEMENT ---------------------------------- THIS TENTH AMENDMENT TO LEASE AGREEMENT (hereinafter referred to as the "Tenth Amendment") is made as of the 20th day of May, 1998, by and between WEEKS REALTY, L.P. (hereinafter referred to as "Landlord") and CHECKMATE ELECTRONICS, INC. (hereinafter referred to as "Tenant"). W I T N E S S E T H : -------------------- WHEREAS, ASC North Fulton Associates Joint Venture and Tenant entered into that certain Lease Agreement dated July 17, 1990, as amended by that certain First Amendment to Lease dated December 20, 1990, as amended by that certain Second Amendment to Lease dated October 15, 1.992, as amended by that certain Third Amendment to Lease April 30, 1993, as amended by that certain Fourth Amendment to Lease July 15, 1993, as amended by that certain Fifth Amendment to Lease dated August 16, 1994, as amended by that certain Sixth Amendment to Lease dated February 20, 1995, as amended by that certain Seventh Amendment to Lease dated January 18, 1996, as amended by that certain Eighth Amendment to Lease dated April 1, 1996, and as further amended by that certain Ninth Amendment to Lease Agreement dated August 18, 1997 (hereinafter collectively referred to as the "Agreement") for the lease of 49,168 square feet of office/ warehouse space at 1003,1009, and 1011 Mansell Road, Roswell, Georgia which is more particularly described in the Agreement and certain easements, rights and privileges appurtenant thereto (hereinafter referred to as the "Leased Premises"); and WHEREAS, Weeks Realty, L.P. succeeded to the interest of the landlord under the Agreement and is the Landlord with respect to the Leased Premises; and WHEREAS, Tenant desires to lease an additional 9,600 square feet of office/ warehouse space at 999 Mansell Road, art additional 7,370 square feet of office/ warehouse space at 1003-C Mansell Road, and an additional 4,800 square feet of office/ warehouse space at 1003-D Mansell Road (for a total of 21,770 additional square feet, hereinafter collectively referred to as the "Additional Space"); and WHEREAS, Landlord and Tenant desire to enter into this Tenth Amendment in order to provide for said expansion of the Leased Premises upon terms and conditions mutually acceptable to Landlord and Tenant; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid by Landlord and Tenant to one another, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Landlord and Tenant, Landlord and Tenant amend the Agreement as follows: 1. Effective May 1, 1998, and continuing until midnight on September 30, 1999, Tenant shall lease the Additional Space as shown on the plans attached hereto as Exhibits "A-1", "A-2" and "A-3", which together with the 49,168 square feet being leased by Tenant under the original Agreement (hereinafter the "Existing Space"), equals a total of 70,938 square feet (the Additional Space and the Existing Space shall be collectively hereinafter referred to as the "Leased Premises" for all purposes of the Agreement, as amended hereby). 2. Effective May 1, 1998, Paragraph 3(b) of the Agreement is hereby amended to provide that Tenant shall pay the base rental as set forth below: Existing Space (49,168 total square feet): - ------------------------------------------ 1003 Mansell Road, Suite A-1 (4,200 square feet): ------------------------------------------------- May 1, 1998 - September 30,1999 $2,782.50/month $33,390.00/year 1003 Mansell Road, Suite A-A (4,430 square feet): ------------------------------------------------- May 1, 1998 - September 30,1999 $2,934.88/month $35,218.50/year 1009 Mansell Road, Suite D (11,200 square feet): ------------------------------------------------ May 1, 1998 - September 30,1999 $7,420.00/month $89,040.00/year 1009 Mansell Road, Suite F (2,350 square feet): ----------------------------------------------- May 1, 1998 - September 30,1999 $1,556.88/month $18,682.50/year 1009 Mansell Road, Suite G, J, K (11,466 square feet): ------------------------------------------------------ May 1, 1998 - September 30,1999 $7,596.23/month $91,154.70/year 1011 Mansell Road, Suite C (15,522 square feet): ------------------------------------------------ May 1, 1998 - September 30 1999 $10,283.33/month $123,399.90/year Additional Space (21,770 total square feet): - -------------------------------------------- 999 Mansell Road (9,600 square feet): ------------------------------------- May 1, 1998 - September 30,1998 $4,328.00/month $51,936.00/year October 1, 1998 - September 30, 1999 $4,501.12/month $54,013.44/year 1003 Mansell Road, Suite C (7,370 square feet): ----------------------------------------------- May 1, 1998 - September 30,1998 $3,224.38/month $38,692.50/year October 1, 1998 - September 30, 1999 $3,353.35/month $40,240.20/year 1003 Mansell Road, Suite D (4,800 square feet): ----------------------------------------------- May 1, 1998 - September 30,1998 $3,000.00/month $36,000.00/year October 1, 1998 - September 30,1999 $3,120.00/month $37,440.00/year -2- which payments shall be due and payable on or before the first day of each calendar month during the applicable term, together with any other additional rental as set forth hereunder or as set forth in the Agreement. 3. As consideration for Tenant's performance of all obligations to be performed by Tenant under the Agreement, Landlord shall contribute $2.00 per square foot contained in the Additional Space, which is the sum of Forty-three Thousand Five Hundred Forty and no/100 Dollars ($43,540.00) (the "Allowance") towards the cost of tenant improvements to the Additional Space. The Allowance shall be used for alterations, improvements, fixtures and equipment which become part of or are attached or affixed to the Additional Space, including walls, wall coverings and floor coverings, but excluding trade fixtures, furniture and furnishings or other personal property. In the event the cost of tenant improvements exceeds the cost of tenant improvement Allowance, the excess shall be paid by Tenant within thirty (30) days of Tenant's receipt of Landlord's notice. 4. Tenant shall take delivery of the Existing Space from Landlord in an AS-IS condition. 5. Except as expressly modified by this Tenth Amendment, all provisions, terms and conditions of the Agreement shall remain in full force and effect. 6. In the event a provision of this Tenth Amendment conflicts with a provision of the Agreement, the Tenth Amendment shall supersede and control. 7. All terms and phrases used herein shall have the same meaning as assigned to them in the Agreement. 8. This Tenth Amendment shall not be of any legal effect or consequence unless signed by Landlord and Tenant, and once signed by Landlord and Tenant it shall be binding upon and inure to the benefit of Landlord, Tenant, and their respective legal representatives, successors and assigns. 9. This Tenth Amendment has been executed and shall be construed under the laws of the State of Georgia. [SIGNATURES CONTAINED ON THE FOLLOWING PAGE] -3- IN WITNESS WHEREOF, the undersigned have caused this Tenth Amendment to be executed under seal and delivered as of the day and year first above written. LANDLORD: Signed, sealed and delivered WEEKS REALTY, L.P., in the presence of: a Georgia limited partnership /s/ Kelly A. Kinnery By: Weeks GP Holdings, Inc., - -------------------- a Georgia corporation, Witness its sole general partner /s/ Patrick L. Adams - -------------------- Notary Public By: /s/ Forrest W. Robinson -------------------------- Name: Forrest W. Robinson ------------------- Its: President/C.O.O. ------------------- TENANT: Signed, sealed and delivered CHECKMATE ELECTRONICS, INC., in the presence of: /s/ Tanya K. Meiss By: /s/ John J. Neubert - ------------------ -------------------- Witness Name: John J. Neubert -------------------- Its: CFO/Exec. V.P. -------------------- /s/ Valerie J. David - -------------------- Notary Public ATTEST: By: /s/ M. L. Burkett -------------------- Name: Margaret Burkett -------------------- Its: Corp. Sec/Accty Mgr. -------------------- (Corporate Seal) -4- EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 State or Jurisdiction Names Under Which Subsidiaries of Incorporation It Does Business - -------------------- --------------------- --------------------------- IVI Checkmate Ltd. Georgia Checkmate; IVI Checkmate IVI Checkmate Inc. Canada IVI; IVI Checkmate; International Verifact Inc. EX-23.1 9 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-65749) pertaining to the Plourde Computer Services, Inc. 1991 Stock Option Plan; Form S-8 (No. 333-65259) pertaining to the IVI Checkmate Corp. 1998 Long-Term Incentive Plan and the IVI Checkmate Corp. Amended and Restated 1998 Directors Stock Option Plan; the Post-Effective Amendment No. 2 to the Form S-4 Registration Statement on Form S-8 (No. 333-53629) pertaining to the Checkmate Electronics, Inc. 1988 Employee Incentive Stock Option Plan, Checkmate Electronics, Inc. 1993 Stock Option Plan, Checkmate Electronics, Inc. 1994 Director's Stock Option Plan, International Verifact Inc. 1997 Stock Option Plan and Checkmate Electronics, Inc. Non-Incentive Stock Option Agreement; and the Post-Effective Amendment No. 5 to the Form S-4 Registration Statement on Form S-3 (No. 333-53629), pertaining to the registration of shares of common stock for issuance upon the exchange of exchangeable shares, of our report dated February 12, 1999, with respect to the consolidated financial statements of IVI Checkmate Corp. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 24, 1999 EX-23.2 10 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-65749) pertaining to the Plourde Computer Services, Inc. 1991 Stock Option Plan; Form S-8 (No. 333-65259) pertaining to the IVI Checkmate Corp. 1998 Long-Term Incentive Plan and the IVI Checkmate Corp. Amended and Restated 1998 Directors Stock Option Plan; the Post- Effective Amendment No. 2 to the Form S-4 Registration Statement on Form S-8 (No. 333-53629) pertaining to the Checkmate Electronics, Inc. 1988 Employee Incentive Stock Option Plan, Checkmate Electronics, Inc. 1993 Stock Option Plan, Checkmate Electronics, Inc. 1994 Director's Stock Option Plan, International Verifact Inc. 1997 Stock Option Plan and Checkmate Electronics, Inc. Non-Incentive Stock Option Agreement; and the Post-Effective Amendment No. 5 to the Form S-4 Registration Statement on Form S-3 (No. 333-53629), pertaining to the registration of shares of common stock for issuance upon the exchange of exchangeable shares, of our report dated February 12, 1998, with respect to the consolidated financial statements of IVI Checkmate Corp. included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ PRICEWATERHOUSECOOPERS Toronto, Ontario March 24, 1999 EX-24.1 11 POWERS OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints L. Barry Thomson, Gregory A. Lewis and John J. Neubert and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of IVI Checkmate Corp. for the fiscal year ended December 31, 1998, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This 16th day of March, 1999. /s/ George Whitton ---------------------------------- George Whitton POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints L. Barry Thomson, Gregory A. Lewis and John J. Neubert and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of IVI Checkmate Corp. for the fiscal year ended December 31, 1998, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This 16th day of March, 1999. /s/ Gerard Compain ---------------------------------- Gerard Compain POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints L. Barry Thomson, Gregory A. Lewis and John J. Neubert and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of IVI Checkmate Corp. for the fiscal year ended December 31, 1998, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This 16th day of March, 1999. /s/ Paul W. Noblett ---------------------------------- Paul W. Noblett POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints L. Barry Thomson, Gregory A. Lewis and John J. Neubert and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of IVI Checkmate Corp. for the fiscal year ended December 31, 1998, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This day of March, 1999. /s/ Gareth Owen ---------------------------------- Gareth Owen POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints L. Barry Thomson, Gregory A. Lewis and John J. Neubert and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of IVI Checkmate Corp. for the fiscal year ended December 31, 1998, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This 15th day of March, 1999. /s/ Peter E. Roode ---------------------------------- Peter E. Roode EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 9,846 0 32,535 715 15,743 63,050 19,909 11,685 82,829 27,025 0 0 0 178 54,839 82,829 96,570 107,122 65,818 65,818 12,634 0 (544) (5,551) (580) (4,971) 0 0 0 (4,971) (0.28) (0.28)
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