<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 0-29772
IVI CHECKMATE CORP.
(Exact name of Registrant as specified in its charter)
Delaware 58-2375201
(State of (I.R.S. Employer
Incorporation) Identification No.)
1003 Mansell Road, Roswell, Georgia 30076
(Address of principal executive offices, including zip code)
(770) 594-6000
(Registrant's telephone number, including area code)
______________
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 twelve 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at November 5, 1998
----- -------------------------------
Common Stock, $0.01 par value 16,801,538 shares
1
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IVI CHECKMATE CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
-------------
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets September 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations Three
and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows Nine
Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2 Change in Securities and Use of Proceeds 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX OF EXHIBITS 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
IVI CHECKMATE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- -------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,244 $12,944
Accounts receivable, net 31,821 19,515
Inventories 12,379 17,156
Deferred tax asset 3,773 2,916
Refundable income taxes - 809
Prepaid expenses 490 559
------------ ------------
Total current assets 58,707 53,899
Property and equipment, net 7,808 8,334
Investment in joint venture 167 -
Other assets 10,575 10,070
------------ ------------
Total assets $ 77,257 $72,303
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 20,629 $12,393
Deferred revenue 1,957 1,397
Current portion of capital lease obligations 15 38
Current portion of bank loan 20 -
Current portion of related party debt 81 162
------------ ------------
Total current liabilities 22,702 13,990
Long-term capital lease obligations 21 23
Long-term bank loan 53 -
Long-term debt to related party - 41
Deferred tax liability 1,872 1,872
Minority interest - 52
------------ ------------
Total liabilities 24,648 15,978
------------ ------------
Stockholders' Equity
Common stock, $0.01 par value 168 161
Additional paid-in capital 67,746 66,052
Retained deficit (13,184) (7,153)
Foreign currency translation adjustments (2,121) (576)
------------ ------------
52,609 58,484
Less: shares held in treasury - (2,159)
------------ ------------
Total stockholders' equity 52,609 56,325
------------ ------------
Total liabilities and stockholders' equity $ 77,257 $72,303
============ ============
See notes to condensed consolidated financial statements
</TABLE>
3
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IVI CHECKMATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues $28,066 $23,042 $ 74,402 $62,033
Cost of goods sold 17,362 14,832 45,887 39,765
----------- ---------- ----------- ----------
Gross profit 10,704 8,210 28,515 22,268
----------- ---------- ----------- ----------
Operating expenses:
Selling, general and
administrative 6,498 5,264 17,057 16,046
Research and development 874 1,249 3,218 3,454
Depreciation and amortization 1,053 691 3,152 2,056
----------- ---------- ----------- ----------
8,425 7,204 23,427 21,556
----------- ---------- ----------- ----------
Operating income before
merger costs 2,279 1,006 5,088 712
Merger costs (1,954) - (11,849) -
----------- ---------- ----------- ----------
Operating income (loss) 325 1,006 (6,761) 712
Interest and other income 11 241 57 725
----------- ---------- ----------- ----------
Income (loss) before income taxes 336 1,247 (6,704) 1,437
Income tax benefit (expense) (40) (81) 719 174
----------- ---------- ----------- ----------
Net income (loss) $ 296 $ 1,166 $ (5,985) $ 1,611
=========== ========== =========== ==========
Net income (loss) per share:
Basic $ 0.02 $ 0.08 $ (0.37) $ 0.11
=========== ========== =========== ==========
Diluted $ 0.02 $ 0.07 $ (0.37) $ 0.10
=========== ========== =========== ==========
Weighted average number
of shares outstanding:
Basic 16,790 15,419 16,284 15,453
Diluted 16,965 15,625 16,284 15,585
See notes to condensed consolidated financial statements
</TABLE>
4
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IVI CHECKMATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 1,605 $(1,695)
----------- -----------
Investing activities:
Purchases of property and equipment (2,743) (2,944)
Deferred development costs (3,350) (2,811)
Investment in joint venture (400) -
Other (30) (366)
----------- -----------
Net cash used in investing activities (6,523) (6,121)
----------- -----------
Financing activities:
Proceeds from issuance of common stock 3,493 2,305
Received from minority stockholder - 175
Payment of debt and capital leases (522) (91)
----------- -----------
Net cash provided by financing activities 2,971 2,389
----------- -----------
Effect of exchange rate fluctuations on cash (753) (123)
----------- -----------
Net decrease in cash and cash equivalents (2,700) (5,550)
Cash and cash equivalents at beginning of period 12,944 19,719
----------- -----------
Cash and cash equivalents at end of period $10,244 $14,169
=========== ===========
See notes to condensed consolidated financial statements
</TABLE>
5
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IVI CHECKMATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
On June 25, 1998, IVI Checkmate Corp. (the "Company") was formed through the
combination of International Verifact Inc. ("IVI") and Checkmate Electronics,
Inc. ("Checkmate"), which was accounted for as a pooling-of-interests. Under the
terms of the Combination Agreement, IVI shareholders received, for each IVI
common share, either one share of common stock of the Company, or one
exchangeable share of IVI which can be exchanged at any time for a share of the
Company's common stock in the future. Checkmate shareholders received 1.2775
shares of the Company's common stock for each Checkmate common share. These
condensed consolidated financial statements have been restated to effect such
share conversions, and to reflect the historical results of both companies for
all periods presented.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These statements should be read in conjunction with the Company's
restated audited financial statements, which were filed with the United States
Securities and Exchange Commission on October 1, 1998. Operating results for the
three and nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998 or any
other interim period.
2. INVENTORIES
Inventories are summarized by class as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- ----------------
<S> <C> <C> <C>
Finished goods $ 4,180 $ 7,873
Work in process 649 830
Raw materials and supplies 11,688 10,287
----------------- ----------------
Gross inventories 16,517 18,990
Less obsolescence reserves (4,138) (1,834)
----------------- ----------------
Total $12,379 $17,156
================= ================
</TABLE>
6
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3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share on a basic and diluted basis as required by
Statement No. 128 is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 296 $ 1,166 $(5,985) $ 1,611
========== ========== =========== ==========
Calculation of weighted average shares
outstanding plus assumed conversions:
Weighted average basic shares outstanding 16,790 15,419 16,284 15,453
Effect of dilutive stock options 175 206 - 132
---------- ---------- ----------- ----------
Weighted average diluted shares outstanding 16,965 15,625 16,284 15,585
---------- ---------- ----------- ----------
Basic net income (loss) per share $ 0.02 $ 0.08 $ (0.37) $ 0.11
========== ========== =========== ==========
Diluted net income (loss) per share $ 0.02 $ 0.07 $ (0.37) $ 0.10
========== ========== =========== ==========
</TABLE>
4. ACQUISITION OF PLOURDE COMPUTER SERVICES, INC.
On September 29, 1998, the Company acquired all of the capital stock of Plourde
Computer Services, Inc. ("Plourde") in exchange for 538,232 shares of common
stock, par value $.01 per share, of the Company ("Company Common Stock") and
options to purchase an additional 370,065 shares of Company Common Stock. The
sale of Company Common Stock in this transaction was exempt from registration
under Section 5 of the Securities Act of 1933, as amended, pursuant to Rule 506
of Regulation D thereunder. This transaction involved the issuance of Company
Common Stock to less than 35 purchasers (as defined in Regulation D) and
otherwise met all of the requirements for the exemption provided under Rule 506
and Regulation D generally.
The acquisition of Plourde was accounted for as a pooling-of-interests.
Consequently, the Company included in its financial statements the financial
results of Plourde for the three months ended September 30, 1998. The Company,
however, has not restated its financial statements to include the financial
results of Plourde prior to July 1, 1998 as these results would not otherwise
have had a significant effect on the Company's consolidated statements.
5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("Statement 130") which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. Statement 130 is effective for fiscal years beginning
after December 15, 1997. The Company adopted Statement No. 130 in 1998. Amounts
in prior condensed consolidated financial statements have been reclassified to
conform to Statement 130.
The components of comprehensive income for the three months and nine months
ended September 30, 1998 and 1997, respectively, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1998 1997 1998 1997
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 296 $1,166 $(5,985) $1,611
Foreign currency translation adjustments (962) (121) (1,545) (307)
--------------------------- -----------------------------
Comprehensive income (loss) $(666) $1,045 $(7,530) $1,304
=========================== =============================
</TABLE>
7
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In June 1997, the FASB also issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information ("Statement 131") which 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 shareholders. 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. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company will adopt Statement 131
in the fourth quarter of 1998 and does not expect the effect of adoption to be
material to its consolidated financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion contains forward-looking statements subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995. The
words "may," "would," "could," "will," "expect," "estimate," "anticipate,"
"believe," "intends," "plans" and similar expressions and variations thereof are
intended to identify forward-looking statements. Management cautions that these
statements represent projections and estimates of future performance and involve
certain risks and uncertainties. IVI Checkmate's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including, without limitation, dependence by IVI
Checkmate on limited suppliers and manufacturers of component parts of its
products; rapid and significant technological developments that could delay the
introduction of improvements in existing products or of new products; any
dependencies on any proprietary technologies (which may be independently
developed by competitors); dependence on a small number of large retail and bank
customers; potential fluctuation in financial results as a result of any
inability to make sales to large customers as well as the volume and timing of
bookings received during a quarter and variations in sales mix; competition from
existing companies as well as new market entrants; dependence on key personnel;
integration of IVI and Checkmate and any other acquired companies; and other
risk factors discussed from time to time in IVI Checkmate's SEC filings and
other announcements.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (tabular amounts in thousands
of U.S. dollars, except per share amounts)
The following table sets forth certain items derived from the Company's
statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1998 1997 1998 1997
------------------ ----------------- ----------------- --------------
Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
EFT $18,895 67 % $14,219 62 % $ 49,230 66 % $42,171 68 %
Check readers 6,295 23 6,958 30 18,801 25 15,244 25
Professional services 2,876 10 1,865 8 6,371 9 4,618 7
------------------ ----------------- ----------------- ---------------
28,066 100 23,042 100 74,402 100 62,033 100
Cost of goods sold 17,362 62 14,832 64 45,887 62 39,765 64
------------------ ----------------- ----------------- ---------------
Gross profit 10,704 38 8,210 36 28,515 38 22,268 36
------------------ ----------------- ----------------- ---------------
Operating expenses:
Selling, general and
administrative 6,498 23 5,264 23 17,057 23 16,046 26
Research and development 874 3 1,249 5 3,218 4 3,454 6
Depreciation and amortization 1,053 4 691 3 3,152 4 2,056 3
------------------ ----------------- ----------------- ---------------
8,425 30 7,204 31 23,427 31 21,556 35
------------------ ----------------- ----------------- ---------------
Operating income before
merger costs 2,279 8 1,006 5 5,088 7 712 1
Merger costs (1,954) (7) - - (11,849) (16) - -
------------------ ----------------- ----------------- ---------------
Operating income (loss) 325 1 1,006 5 (6,761) (9) 712 1
Interest and other income 11 - 241 - 57 - 725 1
------------------ ----------------- ----------------- ---------------
Income (loss) before income taxes 336 1 1,247 5 (6,704) (9) 1,437 2
Income tax benefit (expense) (40) - (81) - 719 1 174 -
------------------ ----------------- ----------------- ---------------
Net income (loss) $ 296 1 % $ 1,166 5 % $ (5,985) (8)% $ 1,611 2 %
================== ================= ================= ===============
</TABLE>
Any trends that may be derived from the above tables are not necessarily
indicative of the Company's future operations.
9
<PAGE>
Net revenues increased 22% and 20% in the three and nine months ended
September 30, 1998, respectively, as compared to the same periods in 1997. The
increase in net revenues was attributable to: (1) strong sales of check readers,
which are used to detect/prevent fraud and improve banking automation; (2)
significant sales of the recently introduced customer activated touch screen
terminal, the eN-Touch 1000; and (3) increasing revenues from professional
services division.
Cost of goods sold as a percentage of net revenues was 62% for both the
three and nine months ended September 30, 1998, compared to 64% for both the
three and nine months ended September 30, 1997. The reduction in this
percentage was the result of continued cost reduction programs and ongoing
business integration resulting from the combination of International Verifact
Inc. and Checkmate Electronics, Inc. In addition, in 1998 IVI Checkmate also
began selling its own proprietary point-of-sale ("POS") printers and was able to
realize higher margins, whereas in 1997, the Company was a reseller of POS
printers at low margins.
Selling, general and administrative ("SG&A") expenses, as a percentage of
net revenues, were 23% in the three and nine months ended September 30, 1998
compared to 23% and 26% in the three months and nine months ended September 30,
1997, respectively. The reduction in percentages for the first nine months was
the result of the Company's commitment to sell more effectively and to provide a
wider range of end-to-end solutions to its customers without a corresponding
increase in selling costs.
Product development expenditures include research and development expense
and capitalized software development costs and consist primarily of labor. A
summary of product development efforts is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1998 1997 1998 1997
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Gross product development expenditures $ 1,951 $2,211 $ 6,568 $ 6,265
Capitalized software development costs (1,077) (962) (3,350) (2,811)
-------- ---------- ---------- ---------
Net research and development expense 874 1,249 3,218 3,454
Amortization of previously capitalized costs 523 120 1,493 548
Total expense $ 1,397 $1,369 $ 4,711 $ 4,002
======== ========== ========== =========
Product development as a percent of net revenues:
Gross expenditures 7.0% 13.8% 8.8% 10.1%
Net research and development expense 3.1% 5.4% 4.3% 5.6%
Total expense 5.0% 5.9% 6.3% 6.5%
</TABLE>
Gross product development expenditures fluctuate from quarter to quarter
depending on timing of development projects. In 1998, IVI Checkmate announced
several new products including the eN-Touch 1000, its revolutionary customer
activated terminal. The Company also intends to introduce additional new
products later in the year and in early 1999.
10
<PAGE>
The Company recorded in the three months ended September 30, 1998 a one-
time charge to earnings in the amount of $2.0 million to reflect costs
associated with the acquisition of Plourde Computer Services, Inc. The costs
consisted of the write-off of a Windows/NT software platform that was being
developed by National Transaction Network, Inc. ("NTN"), which was made
redundant by the availability of Plourde's own commercially viable Windows/NT
platform; the write-off of the remaining unamortized goodwill that arose from
the Company's acquisition of NTN in September 1996; professional fees and other
transaction costs.
The effective tax rate was 12% and 13% for the three months ended September
30, 1998 and 1997, respectively. The effective tax rates for 1998 and 1997 were
lower than statutory rates as a result of recognition of IVI's tax losses of
previous years. It is anticipated that the effective tax rate for the remainder
of 1998 will remain at this level.
As a result of the above factors, in particular the acquisition costs of
the Plourde acquisition in the third quarter of 1998 and the pooling costs of
the IVI-Checkmate combination in the second quarter of 1998, the Company
recorded net earnings for the third quarter ended September 30, 1998 of $296,000
and a net loss for the first nine months of 1998 of $6.0 million. In comparison,
net earnings for the third quarter and nine months ended September 30, 1997 were
$1.2 million and $1.6 million, respectively. The weighted average shares
outstanding for the third quarter and first nine months of 1998 increased 8.9%
and 5.4%, respectively, from 1997 to 1998 due to exercises of stock options,
resale of treasury shares held at December 31, 1997, and shares issued in
connection with the acquisition of Plourde in the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $1.6 million for
the nine months ended September 30, 1998 and ($1.7) million for the same period
in 1997. The net cash provided by operating activities for the first nine months
of 1998 was the result of the net loss reported for the period, increased by
depreciation and amortization, by a $12.3 million (or 63.1%) increase in
accounts receivable, a $4.8 million (or 27.8%) decrease in inventory and a $8.2
million (or 66.5%) increase in accounts payable and accrued liabilities. The net
cash used in operating activities in 1997 was primarily the result of the net
loss reported for the period, which was increased by depreciation and
amortization, and changed by a $2.4 million increase in accounts receivable, a
$5.4 million reduction in inventory and a $2.9 million increase in accounts
payable. The Company experiences normal fluctuations in its accounts receivable
balance, including days outstanding, due to a variety of factors, including the
Company's overall sales performance when compared to prior periods, the timing
of shipments to its customers and individual customer negotiated terms of sale.
Inventory levels held by the Company are also dependent upon a variety of
factors, including anticipated inventory requirements to fulfill current and
future customer orders in a timely manner, individual customer negotiated
contracts of sale and the availability of key components used in the
manufacturing process. Increases in these accounts during 1998 and 1997 have
been caused by anticipated increases in sales volumes and by new product
introductions. The Company anticipates that fluctuations in these accounts will
continue in the future.
Net cash used in investing activities for the nine months ended September
30, 1998 and 1997 were $6.5 million and $6.1 million, respectively. Purchases of
property and equipment and additions to deferred development costs were
primarily the reasons for the use in cash in each year.
Net cash provided by financing activities was $3.0 million in the nine
months ended September 30, 1998 and $2.4 million in the nine months ended
September 30, 1997. Cash continues to be provided through the issuance of
capital stock for stock option exercises in 1998 and 1997, and resale of
treasury shares in March 1998. Cash was also provided in 1997 as the Company's
Latin American joint venture received funding from Ingenico S.A., the other
joint venture partner.
11
<PAGE>
In 1998, there was an additional effect on cash of $753,000, which
represented a translation loss as a result of cash held by the Company's
Canadian operations during periods of a weakening Canadian dollar relative to
the U.S. dollar.
The Company's working capital position at September 30, 1998 was $36.0
million, as compared to the $40.0 million at December 31, 1997. The Company had
no commitments for material capital expenditures as of September 30, 1998. The
primary reason for the decline in working capital is attributable to the costs
of the combination incurred by the Company in the second quarter of 1998.
However, the Company believes that its working capital position at September 30,
1998, together with anticipated future cash flows from operations and the
borrowing available under its revolving credit agreement, are sufficient to meet
the Company's operating needs, including possible increases in accounts
receivable and inventories, along with planned capital expenditures and research
and development activities for at least the next twelve to eighteen months.
The Company's operating results have fluctuated on a quarterly basis in the
past and may vary significantly in future periods due to a variety of factors.
These factors include, but are not limited to, the timing of orders from and
shipments to major customers, the timing of new product introductions by the
Company and its competitors, variations in the Company's product mix and
component costs and competitive pricing pressures. Due primarily to the above
factors, the results of any particular quarter may not be indicative of the
results for the full year.
IMPACT OF YEAR 2000
To address the year 2000 issues with its internal information technology
and other systems, the Company has initiated a comprehensive program which is
designed to deal with the most critical systems first. Assessment and
remediation are proceeding in tandem, and the Company currently plans to have
changes to all of its systems completed and tested prior to year 2000. The
Company has implemented its compliance program primarily through the use of
internal resources, and has relied or will be relying to a lesser extent on the
assistance of certain of its suppliers. These activities are intended to
encompass all major categories of systems in use by the Company, including
manufacturing, sales, finance and human resources. IVI Checkmate has also just
begun the process of seeking written assurances from its critical suppliers of
products and services to ensure that the products and services they provide are
year 2000 capable. It is expected that assessment and remediation activities
will be on-going throughout 1998 and 1999 with the goal of appropriately
resolving all material internal systems and third party issues.
In the normal course of business, the Company provides to its customers
payment solutions for electronic payment transactions. These solutions include
hardware terminal products and peripherals that use software for connectivity to
the host computer. Consequently, IVI Checkmate's business and relationships with
its customers depend on a number of computer software programs, internal
operating systems and connections to other networks. If these systems, programs
and networks do not correctly recognize and process date information beyond the
year 1999, there could be an adverse impact on the Company's business, financial
condition and results of operations. In recognition of a potential year 2000
problem and the effect that it may have on the Company, the Company has assessed
its own software solutions to identify whether there is a year 2000 problem, and
believes that it has completed substantially all modifications of its affected
software programs and has minimal additional work required to finalize these
modifications. However, over the next year, the Company will begin an assessment
to ensure that other external third party technology used in combination with
the Company's products properly exchanges date data with these products.
Although the Company's internal systems and software products are Year 2000
compliant, the Company is vulnerable to the risk that government agencies,
significant suppliers and other third parties will not be able to remedy their
own year 2000 issues. The Company relies, both domestically and internationally,
upon government agencies, utility companies, telecommunication service companies
and other service providers outside of the Company's control. There is no
assurance that such suppliers, governmental agencies, or other third parties
12
<PAGE>
will not suffer a year 2000 business disruption. Such failures could have an
adverse affect on the Company's operations.
The Company is currently assessing its most reasonably likely worst case
Year 2000 scenario and the possible effects thereof. The Company's most
reasonably likely worst case Year 2000 scenario will involve business
disruptions suffered by significant suppliers, government agencies or third
parties. During the last quarter of 1998 and through the first half of 1999, the
Company intends to develop a contingency plan based on the results of its
analysis of the most reasonably likely worst case Year 2000 scenarios. Because
the Company's internal systems are Year 2000 compliant, the Company's
contingency plan will focus on addressing the possible issues that might arise
as a result of Year 2000 business disruptions suffered by third parties.
However, due to the general uncertainty inherent in the Year 2000 problem, in
the Company's case resulting primarily from the uncertainty of the Year 2000
readiness of third parties, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's operations.
Implementation of these programs to date was through the use of internal
resources. As a result, costs incurred to date related to these programs were
not significant to the Company's financial results as the costs have consisted
primarily of time that was diverted from other projects involving those persons.
The Company cannot yet estimate the total cost of the program, because such
costs will depend on the results of the Company's assessments of current and
future projects, as well as assessment of potential costs related to any
customer or other claims or the cost of internal software and hardware replaced
in the normal course of business. Management, however, does not believe that the
total costs will have a material adverse effect on the Company's business,
financial condition and results of operations.
Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems or products
and services sold to customers will have a material adverse impact on the
Company's financial condition or overall trends in results of operations.
However, there can be no assurance that the failure or delay of IVI Checkmate's
customers and suppliers in successfully addressing the Year 2000 issue or the
costs involved in such process will not have a material adverse effect on IVI
Checkmate's business, financial condition and results of operations.
13
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
(c) Information required by this section c of Item 2 is incorporated by
reference from Item 1 of Part I hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. The following exhibits are filed as part of this report:
---------
EXHIBIT NO. DESCRIPTION
- ---------- -----------
* 3.1 Certificate of Incorporation of the Company
* 3.2 Bylaws of the Company
27 Financial Data Schedule
- --------------
* Incorporated by reference to Exhibits 3.1 and 3.2 of the Company's
Registration Statement on Form S-4 (Reg. No. 333-53629) filed May 26, 1998.
(b) Reports on Form 8-K.
--------------------
A Form 8-K was filed by the Company on July 9, 1998 to report the
consummation of the combination of International Verifact Inc. and Checkmate
Electronics, Inc.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IVI CHECKMATE CORP.
(Registrant)
Date: November 11, 1998 /s/ L. Barry Thomson
--------------------
L. Barry Thomson
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 11, 1998 /s/ John J. Neubert
-------------------
John J. Neubert
Chief Financial Officer and
Senior Vice President
(Principal Financial Officer)
15
<PAGE>
INDEX OF EXHIBITS
Exhibit
No. Description
- --------- -----------
27 Financial Data Schedule
16
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,244
<SECURITIES> 0
<RECEIVABLES> 31,821
<ALLOWANCES> 0
<INVENTORY> 12,379
<CURRENT-ASSETS> 58,707
<PP&E> 7,808
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,257
<CURRENT-LIABILITIES> 22,702
<BONDS> 0
0
0
<COMMON> 168
<OTHER-SE> 52,441
<TOTAL-LIABILITY-AND-EQUITY> 52,609
<SALES> 74,402
<TOTAL-REVENUES> 74,402
<CGS> 45,887
<TOTAL-COSTS> 45,887
<OTHER-EXPENSES> 11,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,704)
<INCOME-TAX> (719)
<INCOME-CONTINUING> (5,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,985)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
