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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 1999
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
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IVI Checkmate Corp.
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 58-2375201
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
1003 Mansell Road, Roswell, Georgia 30076
(Address of Principal Executive Offices)
(770) 594-6000
(Registrant's telephone number, including area code)
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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 approximately $67 million at March 21, 2000,
based on the closing sale price of $4.25 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 21, 2000 was 18,155,569.
Documents Incorporated by Reference
Specifically identified portions of the proxy statement for the 2000 annual
meeting of stockholders to be held on May 18, 2000 are incorporated by
reference in Part III.
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IVI CHECKMATE CORP.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1999
TABLE OF CONTENTS
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<CAPTION>
Item Page
Number Number
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PART I
<C> <S> <C>
1. Business...................................................... 1
2. Properties.................................................... 4
3. Legal Proceedings............................................. 4
4. Submission of Matters to a Vote of Security Holders........... 4
PART II
Market for the Registrant's Common Equity and Related
5. Stockholder Matters........................................... 5
6. Selected Financial Data....................................... 6
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations..................................... 8
7(A) Quantitative and Qualitative Disclosures about Market Risk.... 18
8. Financial Statements and Supplementary Data................... 20
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure...................................... 43
PART III
10. Directors and Executive Officers of the Registrant............ 43
11. Executive Compensation........................................ 44
Security Ownership of Certain Beneficial Owners and
12. Management.................................................... 44
13. Certain Relationships and Related Transactions................ 44
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
14. K............................................................. 44
Signatures.................................................... 49
</TABLE>
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PART I
Item 1. Business.
Special Cautionary Notice Regarding Forward-Looking Statements
We believe that it is important to communicate our future expectations to
our stockholders and to the public. This report contains forward-looking
statements, including in particular the statements about our plans,
objectives, expectations and prospects under the headings "Item 1. Business"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this report. Additionally, the "Letter to
Stockholders" in our 1999 Annual Report contains forward-looking statements.
You can identify these statements by forward-looking words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek" and
similar expressions. Although we believe that the plans, objectives,
expectations and prospects reflected in or suggested by our forward-looking
statements are reasonable, those statements involve uncertainties and risks,
and we can give no assurance that our plans, objectives, expectations and
prospects will be achieved. Important factors that could cause our actual
results to differ materially from the results anticipated by the forward-
looking statements are contained in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Factors Affecting
Future Performance" and elsewhere in this report. All written or oral forward-
looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements.
Overview
We are the third largest electronic transaction solutions provider in North
America, based on annual net revenues. We were 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. Since this combination, we have operated our business through our
wholly owned subsidiaries IVI Checkmate Ltd. (formerly IVI) and 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, as well as government benefits
disbursers. We employ approximately 348 persons in the U.S. and 92 persons in
Canada. These employees are located primarily in five facilities, including
development centers, manufacturing and distribution centers, customer service
centers, and sales and support offices.
Developments in 1999
Formation of Integrated Transaction Solutions Division. In February 1999, we
formed an Integrated Transaction Solutions ("ITS") division. ITS markets
electronic payment products and solutions to value-added resellers and
distributors serving the middle tier retail marketplace.
Acquisition of the Financial Systems Subsidiary of DataCard Corporation. In
April 1999, we acquired the assets of the Financial Systems subsidiary of
DataCard Corporation. The acquisition of this business unit provided us with
established relationships with more of the leading processors in the merchant
bankcard industry and accelerated our entry into the small retail business
market. It also furthered our recent entry into the travel, entertainment and
petroleum market segments.
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Announced Merger with National Transaction Network. In July 1999, we and our
majority owned subsidiary National Transaction Network, Inc. ("NTN") announced
an agreement that will result in our acquisition, through IVI Checkmate Inc.,
of all the shares of common stock of NTN that we do not presently own. Through
IVI Checkmate Inc., we currently own approximately 82.0% of the outstanding
common stock of NTN. The stockholders of NTN will vote upon the merger of the
two entities at a special meeting of NTN stockholders to be held in the second
quarter of 2000. We expect to complete the merger immediately following
stockholder approval.
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 allow users to 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 such as 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 flowthrough for merchants, and
potentially reduce processing costs and losses from fraud for financial
institutions.
In the 1990s, 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.
Business Objective and Strategies
Our primary objective is to continue to increase our sales and our 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. Rapid change and
new technologies characterize the electronic payment industry. 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 derived the
majority of their net revenues from direct sales of hardware products. In
recent years, we adopted a business strategy to transition IVI Checkmate from
a provider of hardware terminal products and peripherals to a provider of end-
to-end payment and transaction solutions. In the transition, we have expanded
our expertise and capabilities to provide software products and solutions to
support software applications within our hardware solutions and integration
within a retailer's point of sale system. We also provide professional
services such as hardware and software maintenance and other help desk
facilities to ensure that our customers receive optimal value for their
investments.
Leveraging Existing Business Relationships. IVI and Checkmate 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, to enable us to bring global technology and products to
our local markets. We also intend to leverage our customer relationships to
market and sell to them end-to-end solutions that are capable of handling
alternative forms of electronic payment transactions.
2
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Expanding Our Distribution Network Globally. Historically, IVI and Checkmate
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. We also intend
to expand our product distribution through new product markets such as banking
automation and hospitality, as well as internationally through our alliance
with Ingenico.
Products
With over 16 years of manufacturing and technology expertise through our
subsidiaries, we are 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, we have been successful at addressing
the technology and business requirements of our customers by providing
comprehensive product functionality and high quality customer service on a
cost-effective basis.
Product and Services Development
Product 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. Our gross product development expenditures (including
amounts capitalized) for 1999, 1998 and 1997 were $10.1 million, $9.1 million
and $9.8 million, respectively.
Senior management establishes development direction with guidance from the
marketing staff. The development team is responsible for design and design
verification, coding, quality assurance, documentation and products and
releases.
Strategic Acquisitions. We also developed products and services in 1999
through strategic acquisitions, including those summarized below.
In April 1999, we acquired the assets of the Financial Systems subsidiary of
DataCard Corporation. The addition of DataCard's electronic funds transfer
products has significantly enhanced our presence in the lower tier of the
retail business market while also accelerating our entry into the travel,
entertainment and petroleum market segments.
In July 1999, we announced an agreement with NTN that will result in our
acquisition of all of the shares of common stock of NTN that we do not
presently own. NTN designs, develops, integrates, markets and maintains
electronic payment systems for use in retail applications. NTN software
performs many of the tasks involved in electronic payment transactions,
including the collection of payment-related data at the point of sale, secure
transmission of data, authorization and collection of the completed
transaction and final reporting of the transaction. If the shareholders of NTN
approve the transaction, we expect to complete the transaction in the second
quarter of 2000.
Customers
Our 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 16 years of experience in
developing our products, and we 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 net revenues in 1999. 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."
3
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Marketing and Sales
Our marketing strategy focuses on positioning IVI Checkmate as a leading
provider of electronic payment solutions 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 various third party distribution arrangements such as
independent sales organizations, network distributors, value-added resellers
and strategic alliances with other companies.
Customer Support, Service and Maintenance
We believe 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
provide extended support services through our TotalCARE(TM) program.
Competition, Proprietary Rights, Technology, Outside 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, outside manufacturers and
suppliers.
Item 2. Properties.
Our principal administrative, marketing, product development and support
facilities are located in Roswell, Georgia, where we lease 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
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.
Our subsidiaries also operate in smaller leased facilities in Westborough,
Massachusetts; Dublin, California; Chattanooga, Tennessee; and Minnetonka,
Minnesota under various lease agreements.
Item 3. Legal Proceedings.
On April 30, 1999, we filed an action in the State Court of Fulton County,
Georgia against Samsung Display Devices, Inc. and Samsung Display Devices,
Ltd. alleging certain contract, warranty and tort claims for Samsung's alleged
failure to deliver in a timely manner working component parts for our eN-Touch
1000 product. That action seeks damages in excess of $5,000,000. Samsung
removed the case to the United States District Court for the Northern District
of Georgia on June 7, 1999. On August 6, 1999, Samsung answered the Complaint
and counterclaimed against us for alleged failure to pay on account and for
reimbursement of certain moneys. Samsung seeks approximately $500,000 on its
counterclaim. On February 22, 2000, based on information brought to light as a
result of discovery and as a result of our continuing investigation, we filed
with the court a Motion for Leave to amend our Complaint against Samsung to
state a claim for fraud. On March 22, 2000, the court granted us permission to
file the amended complaint. We dispute Samsung's claim, and we intend to
pursue our claims and defend Samsung's counterclaim vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during our fourth
quarter ended December 31, 1999.
4
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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.
<TABLE>
<CAPTION>
Checkmate
IVI Common Shares Common Stock
---------------------------- ---------------
Toronto
Stock Nasdaq National Nasdaq National
Exchange Market Market
------------ --------------- ---------------
High Low High Low High Low
------ ----- --------------- ---------------
(Cdn $) (US $) (US $)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
IVI
Exchangeable
IVI Checkmate Common Stock Shares
------------------------------ ------------
Toronto
Nasdaq National Toronto Stock Stock
Market Exchange Exchange
--------------- -------------- ------------
High Low High Low High Low
--------------- ------- ------ ------ -----
(US $) (Cdn $) (Cdn $)
<S> <C> <C> <C> <C> <C> <C>
1998
Quarter ended June 30, 1998 (from
June 26, 1998)................... 7.125 6.250 10.094 9.406 9.000 8.000
Quarter 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
1999
Quarter ended March 31, 1999...... 7.375 2.938 11.500 4.400 11.150 4.600
Quarter ended June 30, 1999....... 3.750 2.750 5.700 4.050 5.500 4.000
Quarter ended September 30, 1999.. 2.875 2.813 4.850 4.200 5.100 4.150
Quarter ended December 31, 1999... 4.250 2.250 6.000 3.453 5.797 4.094
</TABLE>
Holders
As of March 21, 2000, there were approximately 4,500 and 3,500 beneficial
record holders of the common stock and exchangeable shares, respectively.
5
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Dividend Policy
Neither IVI nor Checkmate declared or paid any cash dividends or
distributions on their common stock from the dates of their initial public
offerings in 1984 and 1993, respectively. IVI Checkmate has never paid any
cash dividends on its common stock. We currently intend to retain all future
earnings to fund future development and growth in the operation of our
business and therefore do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of our board of directors and will depend upon our results of
operations, financial condition, capital requirements and such other factors
as the board of directors deems relevant.
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, 1999, 1998, 1997,
1996 and 1995. The selected financial data for the years ended December 31,
1999, 1998, 1997 and 1996 and as of December 31, 1999, 1998, 1997 and 1996
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 year ended December 31, 1995 and as of
December 31, 1995 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 results of
operations and 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 in 1998 and the subsequent mergers with Plourde Computer
Services, Inc. and Debitek Holdings, Ltd., 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."
6
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<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- -------- -------
(In thousands of dollars, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenue by segment:
Domestic....................... $ 73,197 $79,473 $62,647 $ 55,113 $48,822
International.................. 24,737 27,649 30,018 22,272 30,864
-------- ------- ------- -------- -------
97,934 107,122 92,665 77,385 79,686
Cost of sales(1)................ 73,450 68,442 58,015 48,280 50,568
Amortization of software
development costs.............. 3,168 2,075 1,041 780 574
-------- ------- ------- -------- -------
Gross profit.................... 21,316 36,605 33,609 28,325 28,544
-------- ------- ------- -------- -------
Operating expenses:
Selling, general and
administrative................ 32,076 25,118 24,769 20,327 16,216
Research and development....... 4,625 4,963 5,603 4,459 4,264
Depreciation and amortization.. 2,402 2,078 1,782 1,418 2,243
Unusual charges(2)............. -- 10,010 -- 7,121 --
-------- ------- ------- -------- -------
39,103 42,169 32,154 33,325 22,723
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Operating income (loss)......... (17,787) (5,564) 1,455 (5,000) 5,821
Other income (expense).......... (270) 13 926 385 346
-------- ------- ------- -------- -------
Income (loss) before income
taxes.......................... (18,057) (5,551) 2,381 (4,615) 6,167
Income tax benefit (expense).... (1,877) 580 855 (5,684) (2,687)
-------- ------- ------- -------- -------
Net income (loss)............... $(19,934) $(4,971) $ 3,236 $(10,299) $ 3,480
======== ======= ======= ======== =======
Net income (loss) per common
share
(basic and diluted)............ $ (1.13) $ (0.28) $ 0.19 $ (0.69) $ 0.24
======== ======= ======= ======== =======
<CAPTION>
As of December 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.................... $ 73,525 $82,829 $76,584 $ 69,787 $66,357
Long-term liabilities........... 1,504 787 2,085 1,124 1,598
Stockholders' equity............ 45,130 55,017 57,412 53,029 51,130
</TABLE>
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(1) Excludes amortization of deferred software capitalization costs.
(2) Amounts were previously included as part of 'Depreciation and
Amortization.'
(3) Unusual charges consist principally of merger costs in 1998 and writedown
of assets in each of 1998 and 1996. See also Note 11 of the Notes to
Consolidated Financial Statements.
Any trends that may be derived from the above table are not necessarily
indicative of our future operations.
7
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the following discussion and analysis in conjunction with
"Item 6. Selected Financial Data" and "Item 8. Financial Statements and
Supplementary Data." This discussion may contain forward-looking statements
relating to our future financial performance, business strategy, financing
plans and other future events that involve uncertainties and risks. Our actual
results could differ materially from the results anticipated by these forward-
looking statements as a result of many known and unknown factors, including
but not limited to those discussed below in "--Factors Affecting Future
Performance" and elsewhere in this report.
Overview
IVI Checkmate is a full-service solutions provider in the electronic payment
industry in the U.S., Canada and Latin 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, 1999,
1998 and 1997 should be read in conjunction with the IVI Checkmate
consolidated financial statements and accompanying notes. The financial
statements have been prepared based on accounting principles generally
accepted in the United States. As used herein, the terms "fiscal 1997",
"fiscal 1998" and "fiscal 1999" refer to our fiscal years ended December 31,
1997, 1998 and 1999, respectively.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Revenues. Net revenues declined to $97.9 million in fiscal 1999 compared to
$107.1 million in fiscal 1998. The change in net revenues was primarily
attributable to a product shift from traditional terminal units to our new eN-
Touch payment terminal. Furthermore, as a result of product issues discovered
in our eN-Touch terminal early in fiscal 1999, significant delays in
anticipated sales of the product resulted as the terminal had to be redesigned
and tested. This process was ongoing throughout the year and is nearing
completion.
Cost of Sales. Cost of sales increased 7% to $73.5 million in fiscal 1999
from $68.4 million in fiscal 1998. Included in cost of sales for fiscal 1999
and 1998 are significant inventory write-offs of $8.6 million and $2.6
million, respectively. Additional information on these write-offs is provided
in Note 11 to our Consolidated Financial Statements. Excluding these inventory
write-offs, cost of sales in fiscal 1999 declined 2% from fiscal 1998 despite
a 9% decline in net revenues over the same period. We did not experience an
equivalent percentage reduction in cost of sales in fiscal 1999 due to the
increasing proportion of our net revenues being derived from the resale of
Ingenico products. In fiscal 1999, lower margined Ingenico products accounted
for 14% of net revenues compared to 9% in fiscal 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $32.1 million or 32.8% of revenues in fiscal 1999 from
$25.1 million or 23.4% of revenues in fiscal 1998. The increase in expenses
was the result of the inclusion in fiscal 1999 of the operating expenses of
our Financial Systems division, which was acquired in April 1999, and unusual
charges of $2.8 million primarily incurred to streamline our U.S. operations.
Additional information on these unusual charges is provided in Note 11 to our
Consolidated Financial Statements.
8
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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 1999, research and development costs were
incurred for the development of our Mainsail software and for development of
new products that incorporate new technology such as wireless connectivity and
touch screen applications. We anticipate that these new products will be
marketable in 2000. 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 as part of merger costs in our statements of
operations. The table set forth below provides a summary of our product
development expenditures in the last three fiscal years.
<TABLE>
<CAPTION>
Year Ended December
31
-----------------------
1999 1998 1997
------- ------ ------
(In thousands of
dollars)
<S> <C> <C> <C>
Gross product development expenditures................ $10,134 $9,076 $9,789
Less: capitalized software development costs.......... 5,509 4,113 4,186
------- ------ ------
Net research and development expense.................. $ 4,625 $4,963 $5,603
======= ====== ======
Product development as a percentage of net revenues:
Gross expenditures................................... 10.3% 8.5% 10.6%
Net expense.......................................... 4.7% 4.6% 6.0%
</TABLE>
Amortization of Software Development Costs. Amortization of software
development costs increased to $3.2 million in fiscal 1999 from $2.1 million
in fiscal 1998, as we began to amortize previously capitalized software
development project costs that have reached commercial production stage in
1999.
Income Tax Benefit (Expense). Our federal statutory tax rate in the U.S. is
34%. However, our income taxes were affected in fiscal 1999 and 1998 by
utilization of 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 1999 and 1998 do not directly correlate to
the level of pre-tax earnings or losses in those years.
We recorded an income tax expense in fiscal 1999 of $1.9 million and an
income tax benefit in fiscal 1998 of $580,000. At December 31, 1999, we had
approximately $37 million of net operating loss carryforwards available to
offset future U.S. taxable income. 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. However, due
to recent losses in the current and prior years, we have increased our
valuation allowance to entirely offset the income tax benefit that would
otherwise be recognized on our U.S. loss carryforwards.
Fiscal 1998 Compared to Fiscal 1997
The following comparison of financial results between fiscal 1998 and fiscal
1997 reflects a prospective change in our investment in IVI Ingenico Inc., a
joint venture between IVI Checkmate and Ingenico S.A. to pursue market
opportunities in Latin America. For fiscal 1997, we consolidated the
operations of IVI Ingenico into our financial results due to our 51% ownership
and our effective control of the operations. Effective January 1, 1998, our
ownership in IVI Ingenico was reduced to 50% and effective control passed to
Ingenico. Consequently, we prospectively accounted for our investment on an
equity basis. As IVI Ingenico did not constitute a significant part of our
operations, the change in accounting did not have a significant impact on the
change in revenues and operating expenses in fiscal 1998 compared to fiscal
1997.
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Revenues. Net revenues increased 16% to $107.1 million in fiscal 1998 from
$92.7 million in fiscal 1997. The increase in net 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. Excluding $2.6 million in product redundancy costs related to
mergers in fiscal 1998, cost of sales increased 13% to $65.8 million in fiscal
1998 from $58.0 million in fiscal 1997 as a result of a 16% increase in net
revenues over the same period. As a percentage of net revenues, cost of sales
decreased to 61% in fiscal 1998 from 63% in fiscal 1997. 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.
Amortization of Software Development Costs. Amortization of software
development costs increased to $2.1 million in fiscal 1998 from $1.0 million
in fiscal 1997, as we began to amortize previously capitalized software
development project costs that have reached commercial production stage in
1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased 1% to $25.1 million in fiscal 1998 from $24.8 million in
fiscal 1997. These expenses represented 23% and 27% of net revenues in fiscal
1998 and 1997, 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.
Research and Development. 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.
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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, which
has been included as part of cost of sales;
. 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. As a result of adjustment to our valuation allowance in
fiscal 1998 and fiscal 1997, we recorded income tax benefits of $580,000 and
$855,000 for fiscal 1998 and fiscal 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. At December
31, 1998, we believe that future levels of taxable income will be sufficient
to realize the net deferred tax asset.
Liquidity and Capital Resources
We finance our operations primarily through cash flows from operations. Net
cash provided by (used in) operating activities was $5.4 million in fiscal
1999, $3.5 million in fiscal 1998 and $(1.0) million in fiscal 1997. The
fluctuations in each year were the result of the timing and magnitude of
sales, which affected the levels of accounts receivable, inventory and
accounts payable balances.
Net cash used in investing activities was $8.6 million in fiscal 1999, $5.1
million in fiscal 1998 and $7.1 million in fiscal 1997. Purchases of property
and equipment, capitalized software development costs and other non-current
assets were $8.6 million, $8.8 million and $8.4 million in fiscal 1999, fiscal
1998 and fiscal 1997, 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.
Net cash provided by financing activities was $1.2 million in fiscal 1999,
$2.7 million in fiscal 1998 and $5.1 million in fiscal 1997, and was primarily
the result of the issuance of common stock upon stock option exercises.
As of December 31, 1999, we had working capital of $23.1 million, including
$8.3 million in cash and cash equivalents. Furthermore, lines of credit have
been established with maximum borrowings totaling, in aggregate, approximately
$11.0 million. While these lines of credit expire during 2000, we are
currently in the process of renegotiating these lines. As of December 31,
1999, no borrowings under these lines of credit were outstanding.
As of December 31, 1999, we did not have any material commitments for
capital expenditures.
We believe that cash and cash equivalents on hand as of December 31, 1999,
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.
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Year 2000 Issue
In late 1999, we completed all of the necessary Year 2000 testing and
remediation of our products and internal systems. As a result of those
efforts, we did not experience any significant disruptions in our information
technology and non-information technology systems and believe our systems
successfully responded to the Year 2000 date change. Furthermore, we are not
aware of any material problems resulting from Year 2000 issues, either with
our products, our internal systems, or the products and services of third
parties. The total costs incurred by us to prepare for the Year 2000 date
change were not significant to our financial results. Although it remains
possible that Year 2000 related problems could still arise, we do not feel it
necessary to implement any additional procedures throughout the year 2000 to
monitor any latent Year 2000 problems that may arise.
Impact of Recent Accounting Standards
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
This bulletin summarizes certain views of the SEC's accounting staff on
applying generally accepted accounting principals to revenue recognition in
financial statements. The staff believes revenue is realized or realizable and
earned when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. We believe our current revenue recognition policy complies
with the SEC staff's guidelines. This bulletin is effective for the second
quarter ending June 30, 2000.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") which was issued in June 1998. SFAS 137 defers the effective date of
SFAS 133 to all fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their 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 have not
used derivative instruments and we do not expect the adoption of SFAS 133 to
have a material impact on our financial position or results of operations.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software
Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 amends SOP 97-2, "Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 97-2") to require recognition of revenue using the
"residual method" in circumstances outlined in SOP 98-9. Under the residual
method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections
of SOP 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related
to the delivered elements. SOP 98-9 is effective for transactions entered into
in fiscal years beginning after March 15, 1999. We do not expect the adoption
of SOP 98-9 in fiscal 2000 will have a significant impact on our financial
position or results of operations.
Inflation and Foreign Exchange Exposure
To date, we believe inflation has not had a material impact on our
operations. We are, however, exposed to certain foreign currency exchange
risks. Our exposure to foreign currency exchange risk at December 31, 1999
with regard to Canadian dollars was reflected in a cumulative currency
translation adjustment to stockholders' equity of approximately $956,000. In
fiscal 1999, the Canadian dollar strengthened relative to the U.S. dollar,
which affected, to a small degree, sales and expenses in fiscal 1999 that were
denominated in Canadian currency.
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FACTORS AFFECTING FUTURE PERFORMANCE
If we cannot keep up with changes in technology, we might be unable to
effectively compete and might lose customers.
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 introduction and enhancements.
To be successful, we must develop and use leading technologies effectively,
and continue to satisfy customer needs on a timely and cost-effective basis.
While we continue 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 a limited number of large customers for a significant percentage of
our revenues so the loss of one or more of these customers could produce a
material and adverse effect.
We rely on 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, they could materially and adversely affect our
business, financial condition and results of operations.
If competition in the electronic payment industry increases, it could limit
our ability to grow.
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, we 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. Many of our competitors have significantly greater
financial, marketing, service, support and technical resources than we. Some
of these competitors also have greater name recognition than we. Accordingly,
our competitors may be able to respond more quickly than we may 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 we may. 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 results of operations.
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 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 us, this could result
in price restrictions, the loss of current or prospective customers, fewer
customer orders and reduced net income.
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Our hardware and software may contain defects and undetected errors that could
affect its performance, causing us to lose customers, spend large amounts to
correct the problems or become subject to product liability claims.
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;
. significant product liability claims;
. 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 condition and results of
operations.
We may not achieve the increases in operating income that we expect to result
from the integration of NTN into IVI Checkmate.
We cannot guarantee that we will realize the increases in operating income
that we anticipate from integrating NTN's operations and our operations as
fully or as quickly as we expect. Successful integration of NTN's operations
will depend primarily on our ability to consolidate operations systems and
procedures and to eliminate redundancies and costs. We may be unable to
integrate our operations without encountering difficulties, including, without
limitation, the loss of key employees and customers, the disruption of our
businesses, or possible inconsistencies in standards, controls, procedures and
policies.
Our quarterly operating results are difficult to predict, and unexpected
results could harm our stock price.
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 our operating results, cash flows and liquidity to fluctuate
significantly from quarter to quarter in the future.
Factors which may cause our quarterly operating results, cash flows and
liquidity, and therefore our stock price, to fluctuate, include:
. the timing of the introduction of new or enhanced products and services
offered by us or our competitors;
. our customers' inventory levels of our products, which may affect the
time of future orders;
. competitive pricing pressures;
. the number, size and successful integration of acquired companies and
relationships with alliance partners; and
. foreign currency exposures.
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 our
expenses exceed our projections, operating results would likely be negatively
affected. Due to many
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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 did 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 ours.
Government and industry regulations may result in increased costs and a delay
in the introduction of new products.
We must 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 these products. If we have any delays in
obtaining necessary certifications with respect to future products, our
business, financial condition and results of operations could be negatively
affected.
We are subject to regulation by the Federal Communications Commission 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.
Because we have only limited protection of our proprietary technology and
intellectual property rights, others may copy them and harm our ability to
compete.
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 are 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 and could be required to pay judgments or licensing fees.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, we cannot 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
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, trade name or service mark. In these 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 results of
operations.
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Any failure of supply chain manufacturers and suppliers to timely provide
necessary components and services could cause production delays and a loss of
customers.
We currently depend on third-party manufacturers and suppliers for the
assembly of certain products and components. While there are many such
manufacturers and suppliers in the marketplace, we currently use only a
limited number of them and if any of the current manufacturers or suppliers
were to go out of business or be unable to meet our supply commitments or
demands, production of products and delivery of services could be delayed
until an alternative manufacturer or supplier is found.
The use of outside manufacturers and suppliers also subject us to the
following additional risks:
. 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.
While we maintain additional inventory of certain products and continually
evaluate alternative sources of supply, the delays and risks described above
could adversely affect our business, financial condition and results of
operations.
We are subject to risk of product liability claims, which could materially and
adversely affect our business and financial results.
Our products are generally used to manage data critical to large
organizations. As a result, our development, sale and support of products may
entail the risk of product liability claims. Our license agreements with our
customers typically contain provisions designed to limit our exposure to
potential product liability claims. However, these provisions may not be
effective under the laws of all jurisdictions. The insurance that we maintain
may not be sufficient in scope or amount to cover all personal injury,
property damage and other claims if the limitations on our liability contained
in our license agreements are ineffective. Therefore, a successful product
liability claim brought against us could materially and adversely affect our
business, financial condition and results of operations. In addition,
defending a product liability suit, regardless of its merits, could require us
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.
If we are unable to attract and retain key personnel, we may have to employ
less qualified personnel and may experience high turnover costs.
Our future performance depends upon the continued services 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.
Our future financial results also will depend upon our 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 our own. Significant
competition exists for qualified technical, managerial and marketing
personnel. At times, we have experienced and continue to experience difficulty
retaining and recruiting 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.
If we are unable to effectively manage our growth, our business could suffer.
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 results of
operations could be negatively affected.
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We are subject to risks associated with making acquisitions, which could
materially and adversely affect our business and financial results and
otherwise limit our ability to grow through acquisitions.
As part of our business strategy, we continually evaluate potential
acquisitions of, and cooperative ventures to acquire complementary
technologies, products and businesses in the electronic payment market. In our
pursuit of strategic alliances, partnerships and acquisitions, we 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
ours;
. obtain sufficient financing on acceptable terms to fund strategic
alliances, partnerships and acquisitions;
. complete strategic alliances, partnerships and acquisitions on terms
favorable to us;
. integrate acquired technologies, products and businesses into our
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;
. 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.
We cannot be sure that the Year 2000 problem will not affect our business.
Through March 21, 2000, we have had no significant problems related to Year
2000 issues associated with our products or the computer systems, software and
other equipment that we use. However, unanticipated Year 2000 problems could
still occur, and we cannot guarantee that the Year 2000 problem will not
adversely affect our business, financial condition or results of operations.
We have adopted measures that have anti-takeover effects, which may discourage
transactions that may be beneficial to stockholders.
Under our certificate of incorporation, the board of directors may issue
preferred stock, with any rights we may wish to assign, without stockholder
action. We have also adopted a stockholder rights plan under which we have
distributed rights to purchase shares of our Series C junior participating
preferred stock to our 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 portion of our revenues is denominated in Canadian dollars. Consequently,
fluctuations in exchange rates between the U.S. and Canadian dollar may have
an adverse effect on our business, financial condition and results of
operations and could also result in exchange losses. Foreign currency
transaction gains and losses are a result
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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 results of operations.
We have not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake transactions of this type in the future. Any
hedging techniques that we implement in the future may not be successful, and
hedging techniques that we use could exacerbate exchange rate losses.
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 our 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 us. As of December 31, 1999, we had approximately
18,147,569 shares of common stock outstanding, including approximately
5,356,000 exchangeable shares of IVI Checkmate Ltd. which are exchangeable by
the holders at any time for shares of our common stock on a one-for-one basis.
Most 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. As of December 31,
1999, all of the approximately 18,147,569 outstanding shares were eligible for
sale in the public market. However, the approximately 2,354,541 outstanding
shares owned as of December 31, 1999 by IVI Checkmate's directors and
executive officers and their affiliates are eligible for sale in the public
market at such times and in such amounts as are permitted under Rule 144 of
the SEC.
As of December 31, 1999, we had options outstanding under various stock
option plans to purchase a total of approximately 3,727,000 shares of common
stock at a weighted average exercise price of $6.07 per share. We have
reserved an additional 880,730 shares of common stock that we may issue upon
the exercise of options that may be granted in the future under these plans.
Substantially all of the shares that are issuable upon the exercise of these
options, as well as the shares that are issuable under our employee stock
purchase plan, have been registered under the Securities Act. All of these
shares will be freely tradable in the public market, except for shares held by
our affiliates which will be eligible for public sale in such amounts as are
permitted under Rule 144.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We do not engage in trading market risk sensitive instruments nor do we
purchase, whether for investment, hedging or purposes "other than trading,"
instruments that are likely to expose us to market risk, whether interest
rate, foreign currency exchange rate, commodity price risk or equity price
risk, except as discussed in the following paragraphs. We have not issued any
debt instruments, entered into any forward or futures contracts, purchased any
options or entered into any swaps, except as discussed in the following
paragraphs.
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 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 Canadian sales converted to U.S. dollars decreases. When the U.S.
dollar weakens, the value of Canadian sales converted to U.S. dollars
increases.
In the normal course of our business, we are exposed to certain foreign
currency exchange risks. Our exposure to foreign currency exchange rate risk
at December 31, 1999 with regard to Canadian dollars was
18
<PAGE>
reflected in a cumulative currency translation adjustment to stockholders'
equity of approximately $956,000. Any strengthening or weakening of the U.S.
dollar relative to the Canadian dollar may have a material effect on our
earnings or cash flow.
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 2000 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 effect 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 Future Performance--Exchange rate
fluctuations between the U.S. dollar and other currencies in which we do
business may result in currency transaction losses".
19
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors.......................................... 21
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 23
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997..................................................... 24
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 25
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... 26
Notes to Consolidated Financial Statements............................... 27
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
IVI Checkmate Corp.
We have audited the accompanying consolidated balance sheets of IVI Checkmate
Corp. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the 1997
financial statements of International Verifact Inc. which statements reflect
net revenues constituting approximately 50% of the related consolidated
totals. 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 auditing standards generally
accepted in the United States. 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, for 1997, 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, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
Also, in our opinion, based on our audits and the reports of the other
auditors, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
February 18, 2000, except for Note 14, as
to which the date is February 22, 2000
Atlanta, Georgia
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Directors of
International Verifact Inc.
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of International Verifact Inc. for the year ended
December 31, 1997. 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 consolidated results of its
operations and cash flows for year ended December 31, 1997 in accordance with
generally accepted accounting principles in the United States.
COOPERS & LYBRAND
February 12, 1998
Toronto, Ontario
22
<PAGE>
IVI CHECKMATE CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except for Share Amounts)
<TABLE>
<CAPTION>
December 31
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 8,279 $ 9,846
Accounts receivable, less allowance of $1,329 and $715
at December 31, 1999 and 1998, respectively.............. 20,050 31,820
Inventories............................................... 18,238 15,743
Deferred tax asset........................................ 848 4,060
Prepaid expenses and other assets......................... 2,542 1,581
-------- --------
Total current assets....................................... 49,957 63,050
Property and equipment, net................................ 9,654 8,224
Capitalized software development costs, net of accumulated
amortization
of $7,647 and $4,765 at December 31, 1999 and 1998,
respectively.............................................. 12,822 10,150
Intangible assets, net of accumulated amortization of
$1,620 and
$1,295 at December 31, 1999 and 1998, respectively........ 1,064 1,320
Other assets............................................... 28 85
-------- --------
$ 73,525 $ 82,829
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 12,255 $ 17,547
Accrued liabilities....................................... 11,273 6,622
Deferred revenue.......................................... 3,350 2,805
Other..................................................... 13 51
-------- --------
Total current liabilities.................................. 26,891 27,025
Deferred tax liability..................................... 1,500 769
Other long-term liabilities................................ 4 18
-------- --------
28,395 27,812
-------- --------
Stockholders' equity
Preferred stock, $0.01 par value
Authorized--1,000,000 shares
Issued and outstanding--803,353 and 0 at December 31,
1999 and 1998, respectively............................. 8 --
Common stock, $0.01 par value
Authorized--99,000,000 shares
Issued and outstanding--18,147,569 and 17,834,765 at
December 31, 1999 and 1998, respectively ............... 182 178
Additional paid-in capital................................ 88,962 80,109
Accumulated deficit....................................... (43,066) (23,132)
Accumulated comprehensive loss ........................... (956) (2,138)
-------- --------
Total stockholders' equity................................. 45,130 55,017
-------- --------
$ 73,525 $ 82,829
======== ========
</TABLE>
See accompanying notes.
23
<PAGE>
IVI CHECKMATE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, Except for Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net revenues....................................... $ 97,934 $107,122 $92,665
Cost of sales ..................................... 73,450 68,442 58,015
Amortization of software development costs 3,168 2,075 1,041
-------- -------- -------
Gross profit....................................... 21,316 36,605 33,609
-------- -------- -------
Operating expenses:
Selling, general and administrative............... 32,076 25,118 24,769
Research and development.......................... 4,625 4,963 5,603
Depreciation and amortization..................... 2,402 2,078 1,782
Merger and related costs.......................... -- 8,710 --
Write-off of long-lived assets.................... -- 1,300 --
-------- -------- -------
39,103 42,169 32,154
-------- -------- -------
Operating income (loss)............................ (17,787) (5,564) 1,455
Other:
Interest income................................... 192 423 588
Interest expense.................................. (253) (121) (110)
Share of equity investee loss..................... (209) (342) --
Minority interest................................. -- 53 448
-------- -------- -------
Income (loss) before income taxes.................. (18,057) (5,551) 2,381
Income tax benefit (expense)....................... (1,877) 580 855
-------- -------- -------
Net income (loss).................................. $(19,934) $ (4,971) $ 3,236
======== ======== =======
Net income (loss) per share:
Basic............................................. $ (1.13) $ (0.28) $ 0.19
Diluted........................................... $ (1.13) $ (0.28) $ 0.19
Weighted average shares outstanding (000's):
Basic............................................. 18,115 17,528 16,817
Diluted........................................... 18,115 17,528 17,318
</TABLE>
See accompanying notes.
24
<PAGE>
IVI CHECKMATE CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock
$0.01 Par $0.01 Par
Value Value Additional Accumulated Total
------------- ------------- Paid-In Accumulated Comprehensive Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit Income (Loss) Stock Equity
------ ------ ------ ------ ---------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... -- $-- 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
Comprehensive loss:
Net loss............... -- -- -- -- -- (19,934) -- -- (19,934)
Currency translation
adjustment............ -- -- -- -- -- -- 1,182 -- 1,182
--------
Comprehensive loss..... -- -- -- -- -- -- -- -- (18,752)
Exercise of stock
options............... -- -- 313 4 1,631 -- -- -- 1,635
Issuance of preferred
stock.................. 803 8 -- -- 7,222 -- -- -- 7,230
--- ---- ------ ---- ------- -------- ------- ------- --------
Balance at December 31,
1999................... 803 $ 8 18,148 $182 $88,962 $(43,066) $ (956) $ -- $ 45,130
=== ==== ====== ==== ======= ======== ======= ======= ========
</TABLE>
See accompanying notes.
25
<PAGE>
IVI CHECKMATE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................... $(19,934) $ (4,971) $ 3,236
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 6,488 6,174 3,682
Share of equity investee loss................. 209 342 --
Deferred income taxes......................... 1,971 (1,398) (554)
Write-off of goodwill......................... -- 630 --
Minority interest............................. -- (54) (448)
Accretion of marketable securities discount... -- 9 30
Changes in operating assets and liabilities
(net of effect of purchase business
combination):
Accounts receivable.......................... 15,677 (11,284) (4,931)
Inventories.................................. 334 2,181 (2,541)
Refundable income taxes...................... -- 809 (469)
Prepaid expenses and other assets............ (949) (423) 258
Accounts payable and accrued liabilities..... 714 10,267 1,301
Deferred revenue............................. 514 1,202 (568)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 5,024 3,484 (1,004)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property and equipment.............. (3,182) (3,559) (4,156)
Capitalized software development costs.......... (5,509) (4,113) (4,186)
Purchase of intangible assets................... -- (514) --
Purchases of investments........................ -- (10,656) (11,673)
Proceeds from sale of investments............... -- 14,390 12,882
Other........................................... 42 (600) (8)
-------- -------- --------
Net cash used in investing activities........... (8,649) (5,052) (7,141)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock.......... 1,635 3,987 4,282
Repayments of debt.............................. (5,593) (1,260) (141)
Borrowings of debt.............................. 5,542 -- 500
Received from minority stockholders............. -- 20 411
-------- -------- --------
Net cash provided by financing activities....... 1,584 2,747 5,052
-------- -------- --------
Effect of exchange rate fluctuations on cash.... 474 (723) (472)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (1,567) 456 (3,565)
Cash and cash equivalents at beginning of year.. 9,846 9,390 12,955
-------- -------- --------
Cash and cash equivalents at end of year........ $ 8,279 $ 9,846 $ 9,390
-------- -------- --------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest......................... $ 79 $ 121 $ 86
======== ======== ========
Cash paid for income taxes..................... $ 38 $ 439 $ 300
======== ======== ========
</TABLE>
See accompanying notes.
26
<PAGE>
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 and transaction 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, and serve 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
The consolidated financial statements include the accounts of IVI Checkmate
Corp. and its majority-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
In December 1999, we completed the renegotiation of our investment in IVI
Ingenico Inc., a 50%-owned business venture to market in South America the
products of IVI Checkmate and Ingenico, the other 50% owner. The
renegotiation, which became effective July 1, 1999, provided for the inclusion
in IVI Ingenico the Latin American point-of-sale and smart card operations of
Groupe Bull, S.A. In return, we agreed to reduce our ownership interest in IVI
Ingenico from 50% to 24%. In fiscal 1999 and 1998, our investment in IVI
Ingenico was accounted for using the equity method. In fiscal 1997, our
financial statements included the consolidation of IVI Ingenico as we had at
that time a 51% ownership and effective control. The change in accounting for
the investment in IVI Ingenico from consolidation to the equity method in 1998
was accounted for prospectively, and the effect of this change was not
material to our consolidated financial statements.
In April 1999, we acquired the assets of the Financial Systems division of
DataCard Corporation. See Note 10.
In 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 were restated to reflect the historical
results of both companies for all periods presented. Information concerning
common stock and per share data was 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"), which were accounted for
as pooling-of-interests, in which we issued 538,232 and 916,644 shares of our
common stock to the stockholders of Plourde and Debitek, respectively.
Accordingly, our consolidated financial statements were restated for all prior
periods to give effect for these mergers.
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. Significant estimates include amounts for allowance of
doubtful accounts, inventory obsolescence reserve and warranty reserve. Actual
results may differ from those estimates, and such differences could be
material to our consolidated financial statements.
27
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 consists 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.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment is stated at cost. As assets are retired or sold, the
related cost and accumulated depreciation are removed from the accounts and
any resulting gain or loss is included in the results of operations.
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.
Depreciation expense approximated $3.0 million, $3.8 million and $2.3 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Capitalized Software Development Costs
Costs related to internally developed software for new products and
subsequent enhancements are capitalized only after the establishment of
technological feasibility. Technological feasibility is considered established
upon completion of planning, designing, coding and testing activities
necessary to ensure a successful product development in accordance with
technical performance requirements. 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).
Recoverability of capitalized costs is assessed at each balance sheet date by
comparing the unamortized capitalized costs to its net realizable value.
Intangible Assets
Intangible assets consists of costs related to copyrights, patents,
trademarks, technology property rights, licensing rights, and non-compete
agreements. Such assets are amortized on a straight-line basis from five to
eleven years, with amortization expense of approximately $308,000, $292,000
and $216,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
28
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
IVI Checkmate generates revenue through sales of hardware terminals and
peripherals, and in providing professional services and licensing software.
Hardware revenue is normally recognized upon shipment when title and risk of
ownership have transferred. We provide a one-year warranty that our products
are free from defects. Estimated warranty costs are recorded when revenue is
recognized.
Professional services consists of software application projects requiring
significant customization, software licenses, maintenance contracts and other
services. Revenue from software application projects, which include software
licenses and professional services, is generally recognized using the
percentage-of-completion method over the implementation period. Percentage of
completion is determined using the number of hours incurred as compared to the
total estimated number of hours to complete the project. Maintenance revenue
is recognized ratably over the life of the maintenance contract. Other service
revenue is recognized as the related service is performed.
Deferred Income Taxes
Deferred income taxes reflects 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
We have elected to follow the 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 effect on the accompanying consolidated statements of operations of
reporting under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" is presented in Note 5.
Net Earnings Per Share of Common Stock
Basic earnings per share is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares
outstanding during the period. Net income (loss) available to common
stockholders is calculated as the net income (loss) for the period less any
preferred dividends accrued in that period. Diluted earnings per share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding and any dilutive effect
of stock options and convertible securities.
Impact of Recently Issued Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes the staff's views on applying generally
accepted accounting principals to revenue recognition in financial statements.
The staff believes revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to
the buyer is fixed or determinable; and collectibility is reasonably assured.
We believe our current revenue recognition policy complies with the SEC
staff's guidelines. This bulletin is effective beginning the second quarter
ending June 30, 2000.
29
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") which was issued in June 1998. SFAS 137 defers the effective date of
SFAS 133 to all fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their 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 have not
used derivative instruments and we do not expect the adoption of SFAS 133 to
have a material impact on our financial position or results of operations.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software
Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 amends SOP 97-2, "Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 97-2") to require recognition of revenue using the
"residual method" in circumstances outlined in SOP 98-9. Under the residual
method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections
of SOP 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related
to the delivered elements. SOP 98-9 is effective for transactions entered into
in fiscal years beginning after March 15, 1999. We do not expect the adoption
of SOP 98-9 in fiscal 2000 will have a significant impact on our financial
position or results of operations.
Reclassifications and Restatements
Certain previously reported amounts have been reclassified to conform to the
current presentation format with no impact on net income or loss. In fiscal
1998 and 1997, we have reclassified our amortization of software development
costs from "Depreciation and amortization" to a separate item in the
calculation of gross profit. We have also reclassified in fiscal 1998 $2.6
million in inventory write-off from unusual charges to cost of sales.
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 1999, 1998 and 1997, no one customer
accounted for more than 10% of total revenues.
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 in the past have been within our expectations.
Only one customer, a Canadian financial institution, accounted for more than
10% of total trade receivables at December 31, 1999, which was paid in January
2000.
The carrying amounts reported in the balance sheets for cash and cash
equivalents, investments, accounts receivable and accounts payable approximate
their estimated fair values based on discounted cash flow analyses using
current market rates.
30
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LINES OF CREDIT
We have available with financial institutions lines of credit totaling $11
million. One of these lines expires on March 28, 2000, and we are currently in
the process of renegotiations. This same line has a commitment fee of 0.25%
per annum on that portion not borrowed. There were no borrowings outstanding
under any of our credit lines at December 31, 1999 and 1998.
4. BALANCE SHEET INFORMATION
Inventories
<TABLE>
<CAPTION>
December 31
------------------
1999 1998
-------- --------
(In thousands of
dollars)
<S> <C> <C>
Finished goods........................................... $ 12,578 $ 6,222
Work in process.......................................... 2,798 1,320
Raw materials and supplies............................... 9,873 11,944
-------- --------
25,249 19,486
Less: obsolescence reserve............................... (7,011) (3,743)
-------- --------
$ 18,238 $ 15,743
======== ========
Property and Equipment
<CAPTION>
December 31
------------------
1999 1998
-------- --------
(In thousands of
dollars)
<S> <C> <C>
Equipment................................................ $ 19,503 $ 17,444
Furniture and fixtures................................... 2,647 2,465
-------- --------
22,150 19,909
Less: accumulated depreciation........................... (12,496) (11,685)
-------- --------
$ 9,654 $ 8,224
======== ========
</TABLE>
5. EQUITY
Exchangeable Shares
In the pooling-of-interest in June 1998 between IVI and Checkmate, IVI
stockholders received, for each IVI common share, either one share of common
stock of IVI Checkmate or one IVI exchangeable share. Accordingly, 5,996,761
exchangeable shares were issued. Each exchangeable share has 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. The 5,355,532
exchangeable shares that remained outstanding at December 31, 1999 have been
included as part of the "Issued and outstanding' on the consolidated balance
sheets, and have been reflected in all per share calculations.
Preferred Stock
Our board of directors 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.
In April 1999, we issued 803,353 shares of Redeemable Convertible Series D
Preferred Stock to DataCard Corporation in consideration for the assets of its
Financial System division. Terms of the preferred stock include
31
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. EQUITY (continued)
dividends, which will accrue annually at a rate of nine percent (9%) per
annum, and a convertability clause that would provide for the conversion of
preferred stock into common stock on a one-for-one basis beginning on the
third anniversary of April 1, 1999 and continuing until the fifth anniversary
of April 1, 1999. If the holder of the Series D preferred stock does not elect
to convert to common stock by the fifth anniversary of April 1, 1999, then,
beginning on the first day after the fifth anniversary of April 1, 1999 and
continuing sixty days thereafter, we must, at our option, either: (a) convert
the Series D preferred stock to common stock, on the basis of one (1) share of
common stock for one (1) share of Series D preferred stock and one (1) share
of common stock for each nine dollars ($9.00) of dividends accrued and unpaid
through the date of conversion; or (b) redeem the principal amount of the
Series D preferred stock ($9.00 per share) and all dividends accrued and
unpaid through the date of payment, in cash. Terms of the preferred stock also
give the holder a graduated right to request an early redemption, prior to the
third anniversary of April 1, 1999, but at a discounted principal value. An
early redemption of preferred stock will be settled, at our option, in common
stock or cash. Therefore, since the redemption or conversion of preferred
stock may result in the issuance of common stock, we have appropriately
included as part of equity the value of preferred stock outstanding.
In September 1998, our board of directors designated 100,000 shares of
Series C Junior Participating Preferred Stock. See "Stockholders' Rights Plan"
below for a further description of these shares.
Warrants
We issued 200,000 warrants in April 1999 as part consideration for our
acquisition of the assets of Financial Systems division of DataCard
Corporation. The holder of these warrants will be able to purchase shares of
common stock at an exercise price of $6.00 per share beginning April 1, 2002
and ending June 30, 2002, at which time the warrants expire (See Note 10--
Business Combinations).
Stockholders' Rights Plan
On September 16, 1998, our 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 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, 1999, options totaling
approximately 1,869,000 were issued and outstanding under these Plans.
In addition, in connection with various poolings-of-interests in 1998,
options that were previously granted and outstanding under former option plans
of IVI, Checkmate and Plourde were assumed by us. At December 31, 1999, stock
option obligations totaling approximately 1,858,000 remained under these
former plans. These options will continue to be administered under their
former plans, and any portions that expire or become unexerciseable for any
reason shall cancel and be unavailable for future issuance.
32
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. EQUITY (continued)
The following table summarizes stock option plan activities.
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Options Price
------- --------
(000's)
<S> <C> <C>
Outstanding at January 1, 1997............................. 3,055 $6.58
Granted................................................... 1,875 $5.93
Exercised................................................. (739) $5.24
Forfeited or expired...................................... (1,504) $7.73
------
Outstanding at December 31, 1997........................... 2,687 $5.81
Granted................................................... 1,152 $6.80
Exercised................................................. (363) $4.00
Forfeited or expired...................................... (302) $6.69
------
Outstanding at December 31, 1998........................... 3,174 $6.29
Granted................................................... 1,120 $4.79
Exercised................................................. (313) $3.95
Forfeited or expired...................................... (254) $6.16
------
Outstanding at December 31, 1999........................... 3,727 $6.07
======
Options Exercisable:
At December 31, 1997...................................... 1,519 $5.60
At December 31, 1998...................................... 2,489 $6.16
At December 31, 1999...................................... 2,636 $6.40
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
$1.35--$ 3.44 792 5.05 $3.05 272 $2.66
$5.05--$ 7.05 2,705 5.41 $6.62 2,134 $6.56
$8.03--$11.55 230 5.78 $9.33 230 $9.33
----- -----
3,727 2,636
===== =====
</TABLE>
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 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 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
33
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. EQUITY (continued)
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1999, 1998 and 1997: 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%-68%; and a
weighted-average expected life of the options of 1-7 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. The weighted average
estimated fair values of options granted in 1999, 1998 and 1997 were $2.40,
$2.69 and $3.83, respectively.
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:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1999 1998 1997
-------- ------- ------
(In thousands of
dollars,
except per share
amounts)
<S> <C> <C> <C>
Pro forma net income (loss).................... $(21,759) $(6,104) $1,409
Pro forma net income (loss) per share
(basic and diluted)........................... $ (1.23) $ (0.35) $ 0.08
</TABLE>
6. OPERATING LEASES
We lease certain property and equipment under non-cancelable lease
agreements. Rental expense under operating leases was approximately $1.5
million, $1.4 million and $1.1 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Future minimum payments under non-cancelable operating leases with terms of
one year or more consisted of the following at December 31, 1999:
<TABLE>
<S> <C>
2000.............................................................. $1,447
2001.............................................................. 1,219
2002.............................................................. 608
2003.............................................................. 354
2004.............................................................. 112
------
Total future minimum lease payments............................... $3,740
======
</TABLE>
34
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. INCOME TAXES
For U.S. federal income tax purposes, at December 31, 1999 we had
approximately $36.8 million of net operating loss carryforwards available to
offset future taxable income. These loss carryforwards began expiring in 1999,
and will continue to expire through 2019. Utilization of these net operating
loss carryforwards for income tax purposes is subject to certain limitations.
Also, 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, at December 31, 1999, we had approximately $2.6
million of Federal Canadian undepreciated capital and scientific research and
development costs available for deduction in future years with no time limits,
and unutilized Canadian investment tax credit carryforwards of approximately
$538,000. The utilization of these Canadian tax credits are subject to a ten
year limitation from the date of original claim. Furthermore, we had a
Canadian capital loss carryforward of $354,000 at December 31, 1999 available
to offset Federal capital gains in future years with no time limits on its
expiration. We also had $538,000 and $404,000 of Canadian Federal and
Provincial non-capital loss carryforwards, respectively, available to offset
future Canadian Federal and Provincial taxable income. All Canadian amounts
stated above have been translated to reflect balances in U.S. dollars.
The valuation allowance relates primarily to 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. In fiscal 1999,
due to recent losses in the current and prior years, we have increased our
valuation allowance to entirely offset the income tax benefit that would
otherwise be recognized on our U.S. loss carryforwards, including tax benefits
recorded in the first nine months of 2000.
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1999 1998 1997
-------- ------- -------
(In thousands of
dollars)
<S> <C> <C> <C>
Income (loss) before taxes:
Domestic........................................ $(20,357) $(6,772) $(2,144)
International................................... 2,300 1,221 4,525
-------- ------- -------
Total income (loss) before taxes................. $(18,057) $(5,551) $ 2,381
-------- ------- -------
Current income tax benefit (expense):
Federal......................................... $ 2,067 $ (703) $ 256
State........................................... 230 (115) 45
Foreign......................................... (231) 0 0
-------- ------- -------
Total current income tax benefit (expense)....... 2,066 (818) 301
-------- ------- -------
Deferred income tax benefit (expense):
Federal......................................... (2,613) 863 (243)
State........................................... (290) 140 (43)
Foreign......................................... (1,040) 395 840
-------- ------- -------
Total deferred income tax benefit (expense)...... (3,943) 1,398 554
-------- ------- -------
Provision for income tax benefit (expense)....... $ (1,877) $ 580 $ 855
======== ======= =======
</TABLE>
35
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. INCOME TAXES (continued)
A reconciliation of the provision of income taxes to the U.S. Federal
statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1999 1998 1997
------- ------ -------
(In thousands of
dollars)
<S> <C> <C> <C>
Tax benefit (expense) at statutory rate.......... $ 6,139 $1,887 $ (810)
State taxes, net of Federal tax benefit
(expense)....................................... 722 237 (95)
Research and development tax credits ............ 150 -- --
Foreign tax rate differential.................... (152) -- --
Change in valuation allowance.................... (9,882) -- 2,898
Tax carryforward items........................... -- -- (1,139)
Permanent differences:
Adjusting Canadian deduction pool............... 1,233 -- --
Merger costs.................................... -- (950) --
Goodwill write-off.............................. -- (239) --
Other........................................... (87) (355) 1
------- ------ -------
Provision for income tax benefit (expense)....... $(1,877) $ 580 $ 855
======= ====== =======
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets (liabilities) consist of the
following:
<TABLE>
<CAPTION>
December 31
---------------------------
1999 1998
------------- ------------
(In thousands of dollars)
<S> <C> <C>
Deferred tax assets:
Asset valuation reserves....................... $ 2,584 $ 1,396
Deferred revenue............................... 584 780
Accrued liabilities............................ 2,531 94
Net operating loss carryforwards............... 12,542 7,678
Other.......................................... 382 590
------------- ------------
18,623 10,538
Deferred tax liabilities:
Depreciation................................... (1,035) (537)
Amortization................................... (168) (388)
------------- ------------
17,420 9,613
Valuation allowances............................ (18,072) (6,322)
------------- ------------
Net deferred tax assets (liabilities)........... $ (652) $ 3,291
============= ============
</TABLE>
36
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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 $335,000, $214,000 and $177,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
9. NET INCOME (LOSS) PER SHARE
Net income (loss) per share on a basic and diluted basis as required by SFAS
128 is calculated as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1999 1998 1997
-------- ------- ------
(In thousands of
dollars)
<S> <C> <C> <C>
Net income (loss)................................ $(19,934) $(4,971) $3,236
Less: Preferred dividends........................ (489) -- --
-------- ------- ------
Net income (loss) available to common
stockholders.................................... $(20,423) $(4,971) $3,236
======== ======= ======
Calculation of weighted average shares
outstanding plus assumed conversions:
Weighted average basic shares outstanding...... 18,115 17,528 16,817
Effect of dilutive securities.................. -- -- 501
-------- ------- ------
Weighted average diluted shares outstanding.... 18,115 17,528 17,318
======== ======= ======
Basic net income (loss) per share................ $ (1.13) $ (0.28) $ 0.19
======== ======= ======
Diluted net income (loss) per share.............. $ (1.13) $ (0.28) $ 0.19
======== ======= ======
</TABLE>
The effect of dilutive securities excludes those stock options and
convertible preferred shares for which the impact would have been anti-
dilutive. All of the options outstanding were anti-dilutive at December 31,
1999 and 1998, and approximately 288,000 options at December 31, 1997 were
anti-dilutive. All of the preferred shares outstanding at December 31, 1999
were anti-dilutive.
10. BUSINESS COMBINATIONS
Year Ended December 31, 1999
In April 1999, we acquired the net assets of the Financial Systems point-of-
sale business of DataCard Corporation in a non-cash transaction. We acquired
assets valued at approximately $7.2 million, consisting of $3.5 million in
trade receivables, $2.6 million in inventory and $1.1 million in property and
equipment. The purchase price was satisfied through the issuance of (i)
803,353 shares of Series D Preferred Stock of IVI Checkmate Corp., par value
$0.01 per share with 9% cumulative dividends, and (ii) a warrant to purchase
200,000 shares of Common Stock of IVI Checkmate Corp. at $6.00 per share on
the third anniversary date of the acquisition. The value of the Series D
Preferred Stock and warrant issued as consideration was based on a combination
of management's estimate of the fair value of the assets acquired and the
entity instruments issued.
37
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. BUSINESS COMBINATIONS (continued)
Year Ended December 31, 1998
During 1998, IVI, Checkmate, Plourde and Debitek were merged together in
separate transactions that were accounted for as poolings-of-interest.
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
year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Revenues:
IVI........................................ $13,238 $51,419
Checkmate.................................. 9,641 33,526
Debitek.................................... 1,399 5,040
Plourde.................................... 711 2,680
------- -------
$24,989 $92,665
======= =======
Net income (loss)
IVI........................................ $ 584 $ 3,507
Checkmate.................................. 416 (129)
Debitek.................................... 159 (202)
Plourde.................................... (115) 60
------- -------
$ 1,044 $ 3,236
======= =======
</TABLE>
There were no significant intercompany transactions between the four
companies and no significant conforming accounting adjustments.
11. UNUSUAL CHARGES
Year Ended December 31, 1999
In 1999, we incurred costs approximately $11.4 million related to
initiatives that we began to implement during the year. These initiatives
primarily consisted of completing the redesign and alteration of the
manufacturing process for one of our products and the streamlining of other
operations. Approximately $8.6 million was charged to cost of sales and $2.8
million to selling, general and administrative expenses related to these
initiatives. Following are descriptions of major initiatives that were
undertaken in the year:
Terminal redesign and manufacturing process. As a result of product flaws
discovered early in the year for our eN-Touch terminal, costs of approximately
$7.3 million were incurred through an ongoing process to modify, redesign and
re-work the terminal, including the alteration of the manufacturing process
and the write-off of inventory used for the original version.
Streamline operations. We continue to streamline our operations in the U.S.,
a process which started in 1998. In 1999, we began the implementation of two
major initiatives, which were to outsource our internal manufacturing
operations and to combine the operations of our NTN and Plourde subsidiaries.
Costs incurred were to write-off inventory raw materials of $1.7 million that
were not usable by our outsource manufacturer, severances of $1.0 million
related to termination notification in 1999, and $625,000 for other additional
costs incurred in 1999.
38
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. UNUSUAL CHARGES (continued)
Year Ended December 31, 1998
In 1998, we incurred costs aggregating approximately $12.6 million that
pertained to the combination of IVI and Checkmate and the subsequent mergers
of Plourde and Debitek. Of this amount, $10.0 million was charged to selling,
general and administrative expenses and $2.6 million to cost of sales. The
description of and the amount of the costs incurred in each of these
transactions were as follows:
<TABLE>
<CAPTION>
Combination
of IVI and Plourde Debitek
Checkmate Merger Merger Total
----------- ------- ------- -------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Merger and related costs:
Professional fees..................... $4,007 $ 380 $381 $ 4,768
Closure of facilities in Boulder,
Colorado............................. 1,565 -- -- 1,565
Other expenses........................ 1,699 274 404 2,377
------ ------ ---- -------
7,271 654 785 8,710
Write-down of long-lived assets........ -- 1,300 -- 1,300
------ ------ ---- -------
7,271 1,954 785 10,010
Inventory reserve for product
redundancy............................ 2,624 -- -- 2,624
------ ------ ---- -------
Total.................................. $9,895 $1,954 $785 $12,634
====== ====== ==== =======
</TABLE>
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 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. We did
not incur any additional closure costs in 1999 and the accrued liability that
existed at December 31, 1998 was used up in its entirety.
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.
Write-down of Long-Lived Assets. National Transaction Network, Inc. ("NTN")
was in development of a Windows/NT software platform in an attempt 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 the
remaining unamortized goodwill of $630,000 related to the acquisition of NTN
in 1996.
39
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. UNUSUAL CHARGES (continued)
Inventory Reserve for Product Redundancy. While IVI and Checkmate sold
different payment solutions, in certain areas there was 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.
12. DEPENDENCE ON OUTSIDE SUPPLIERS AND CONTRACT ASSEMBLY MANUFACTURERS
In a marketing and distribution agreement we entered into in December 1996
with Groupe Ingenico S.A. of Paris, France, who holds two seats on our board
of directors, we became the exclusive distributor of their products in the
Americas. Consequently, during 1999, 1998 and 1997, we purchased products from
Ingenico totaling $11.4 million, $6.8 million and $1.7 million, respectively,
to satisfy customer demands. At December 31, 1999 and 1998, approximately $1.7
million and $2.1 million, respectively, of these purchases were still payable.
We currently rely primarily on three contract manufacturers to assemble our
hardware products. Although a number of such contract manufacturers exist, the
interruption or termination of our current manufacturing relationships could
have a short-term adverse effect on our business.
13. SEGMENT DISCLOSURES
IVI Checkmate's principal business is to design, develop and market point-
of-sale terminals and peripherals, which represent in excess of 90% of our
revenues. Our business is conducted through two separately managed business
units, which are divided on a geographic basis between domestic and
international. The domestic segment principally markets point-of-sale
terminals and peripherals to financial institutions and retail establishments
to enable automated payment transactions. The domestic segment consists of one
dominant entity and its three smaller subsidiaries, offering similar products
and services within the same business and operating environment. In accordance
with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," these entities have been aggregated into one reportable segment.
The products sold by the international segment is similar to the domestic
segment, but is considered by management a separate reporting unit due to the
different business environment and marketing strategies employed by the
Company in Canada, the principal market for the international segment.
40
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. SEGMENT DISCLOSURES (continued)
The table below presents information about segment revenues, operating
profit and assets. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. IVI
Checkmate's Chief Executive Officer and his staff evaluate performance based
on profit or loss from operations, including charges that are one-time in
nature. Non-segment items include goodwill charges, interest, minority
interest and provisions for income taxes, and are not allocated to the
business units. The segment assets are comprised of the working assets of the
segments and investments accounted for under the equity method, excluding
intercompany balances and corporate tax adjustments.
<TABLE>
<CAPTION>
Operating Depreciation/
Revenues Income (loss) Amortization Assets
-------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Fiscal 1999
-----------
Domestic..................... $ 73,987 $(19,807) $4,580 $50,238
International................ 24,737 2,020 1,908 24,306
-------- -------- ------ -------
Segment total............... 98,724 (17,787) 6,488 74,544
Intersegment sales........... (790) -- -- --
Tax adjustment and other..... -- -- -- (1,019)
-------- -------- ------ -------
Consolidated total........... $ 97,934 $(17,787) $6,488 $73,525
======== ======== ====== =======
Fiscal 1998
-----------
Domestic..................... $ 79,473 $ (5,638) $4,565 $57,089
International................ 27,649 743 1,570 22,488
-------- -------- ------ -------
Segment total............... 107,122 (4,895) 6,135 79,577
Goodwill..................... -- (669) 39 --
Tax adjustment and other..... -- -- -- 3,252
-------- -------- ------ -------
Consolidated total........... $107,122 $ (5,564) $6,174 $82,829
======== ======== ====== =======
Fiscal 1997
-----------
Domestic..................... $ 62,435 $ (2,002) $2,576 $51,885
International................ 30,230 3,533 1,030 23,526
-------- -------- ------ -------
Segment total............... 92,665 1,531 3,606 75,411
Goodwill..................... -- (76) 76 642
Tax adjustment and other..... -- -- -- 531
-------- -------- ------ -------
Consolidated total........... $ 92,665 $ 1,455 $3,682 $76,584
======== ======== ====== =======
</TABLE>
14. LITIGATION
On April 30, 1999, we filed an action in the State Court of Fulton County,
Georgia against Samsung Display Devices, Inc. and Samsung Display Devices,
Ltd. alleging certain contract, warranty and tort claims for Samsung's alleged
failure to deliver in a timely manner working component parts for our eN-Touch
1000 product. That action seeks damages in excess of $5,000,000. Samsung moved
the case to the United States District Court for the Northern District of
Georgia on June 7, 1999. On August 6, 1999, Samsung answered the complaint and
counterclaimed against us for alleged failure to pay on account and for
reimbursement of certain moneys. Samsung seeks approximately $500,000 on its
counterclaim. On February 22, 2000, based on information brought to light as a
result of discovery and as a result of our continuing investigation, we filed
with the
41
<PAGE>
IVI CHECKMATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. LITIGATION (continued)
court a Motion for Leave to amend our Complaint against Samsung to state a
claim for fraud. The court has yet not ruled on the motion. We dispute these
claims and intend to pursue our claims and defend Samsung's counterclaims
vigorously.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Our quarterly consolidated financial data have fluctuated significantly in
fiscal 1999 and fiscal 1998 due in part to the timing of unusual charges of
$11.4 million and $12.6 million, respectively, recorded in each of these
years. These charges, which affected gross profit and net earnings, have been
described previously in Note 11. The quarterly financial results were also
affected: (1) in the fourth quarter of fiscal 1999 by an increase in our
valuation allowance to entirely offset the income tax benefit that would
otherwise be recognized on our U.S. loss carryforwards, including the tax
benefits recorded in the first nine months of 2000; and (ii) in the second
quarter of fiscal 1998 by a $2.0 million reclassification of inventory write-
off from operating expenses to cost of sales.
The summarized quarterly consolidated financial data for 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Quarter
----------------------------------
First Second Third Fourth
------- ------- ------- --------
(In thousands of dollars, except
per share amounts)
<S> <C> <C> <C> <C>
1999:
Net revenues.......................... $15,110 $28,633 $32,543 $ 21,648
Gross profit.......................... 5,091 5,650 9,880 695
Net income (loss)..................... (2,296) (3,242) 619 (15,015)
Basic and diluted net income (loss)
per share............................ $ (0.13) $ (0.19) $ 0.03 $ (0.84)
1998:
Net revenues.......................... $24,989 $25,748 $29,928 $ 26,457
Gross profit.......................... 9,127 7,024 11,008 9,446
Net income (loss)..................... 1,044 (7,209) 465 729
Basic and diluted net income (loss)
per share............................ $ 0.06 $ (0.41) $ 0.03 $ 0.04
</TABLE>
42
<PAGE>
IVI CHECKMATE CORP.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additions End of
of Year (Note 1) Deductions Year
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1997........ $ 575 $ 178 $ (306) $ 447
Year ended December 31, 1998........ $ 447 $ 226 $ 42 $ 715
Year ended December 31, 1999........ $ 715 $ 800 $ (186) $1,329
INVENTORY OBSOLESCENCE RESERVES:
Year ended December 31, 1997........ $3,019 $ 393 $(1,449) $1,963
Year ended December 31, 1998........ $1,963 $2,800 $(1,020) $3,743
Year ended December 31, 1999........ $3,743 $5,628 $(2,360) $7,011
</TABLE>
Note 1: Addition to obsolescence reserve in 1999 includes an increase of $2.4
million related to the acquired assets of the Financial Systems division
of DataCard Corporation.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
We will provide information relating to our directors under the captions
"Proposal 1--Election of Directors--Nominees" and "--Information Regarding
Nominees" in our proxy statement for our 2000 annual meeting of stockholders
to be held on May 18, 2000. We will provide information regarding compliance
with Section 16(a) of the Securities Exchange Act of 1934 by our directors and
executive officers and beneficial owners of more than 10% of our common stock
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the proxy statement. All of that information is incorporated in this Item 10
by reference. We will file the proxy statement for our 2000 annual meeting of
stockholders with the SEC within 120 days after December 31, 1999.
The following information about our executive officers is as of March 22,
2000.
L. Barry Thomson, age 58, has been our President, Chief Executive Officer
and a director 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. Mr. Thomson also
is Chief Executive Officer and a director of our majority owned subsidiary
National Transaction Network. Formerly President and CEO of Aluma Systems
Corporation, a construction technology company in Toronto, 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
LLP).
43
<PAGE>
John J. Neubert, age 61, has been our Executive Vice President--Finance and
Administration, Chief Financial Officer, Secretary and Treasurer since June
1998. Mr. Neubert has been the Chief Financial Officer of Checkmate since
1990, a director of Checkmate since 1994 and Executive Vice President of
Checkmate since May 1998. Mr. Neubert was the Senior Vice President-Finance
and Administration of Checkmate from 1990 until May 1998. Mr. Neubert also was
the Chief Operating Officer of Checkmate from May 1994 until September 1997.
Before joining Checkmate, 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.
Item 11. Executive Compensation.
We will provide information relating to executive compensation under the
captions "Proposal 1--Election of Directors--Director Compensation,"
"Executive Compensation" in the proxy statement for our 2000 annual meeting of
stockholders. That information is incorporated in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
We will provide information regarding ownership of our common stock by
specified persons under the caption "Stock Ownership" in the proxy statement
for our 2000 annual meeting of stockholders. That information is incorporated
in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions.
We will provide information regarding certain relationships and transactions
between us and some of our affiliates under the caption "Certain Transactions"
in the proxy statement for our 2000 annual meeting of stockholders. That
information is incorporated in this Item 13 by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
Our consolidated financial statements listed below are set forth in Item 8
of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors........................................ 25
Consolidated Balance Sheets as of December 31, 1999 and 1998........... 27
Consolidated Statements of Operations for the years ended December 31,
1999, 1998
and 1997.............................................................. 28
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999,
1998 and 1997......................................................... 29
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998
and 1997.............................................................. 30
Notes to Consolidated Financial Statements............................. 31
</TABLE>
(a) 2. Financial Statement Schedules
Schedule 2, Valuation and Qualifying Accounts, is set forth on page 47 of
Item 8 in this report. All other schedules to our consolidated financial
statements have been omitted because they are not required under the related
instructions or are inapplicable, or because we have included the required
information in our consolidated financial statements or related notes.
44
<PAGE>
(a) 3. Exhibits
The following exhibits either (i) are filed with this report or (ii) have
previously been filed with the SEC and are incorporated in this Item 14 by
reference to those prior filings. Previously filed registration statements and
reports which are incorporated by reference are identified in the column
captioned "SEC Document Reference." We will furnish any exhibit upon request
to John J. Neubert, our Executive Vice President--Finance and Administration,
1003 Mansell Road, Roswell, Georgia 30076. We charge $.50 per page to cover
expenses of copying and mailing.
<TABLE>
<CAPTION>
Exhibit
No. Description SEC Document Reference
------- ----------- ----------------------
<C> <S> <C>
2.1 Agreement and Plan of Merger among Exhibit 99.2 to IVI Checkmate's
National Transaction Network, Inc., Current Report on Form 8-K filed on
IVI Checkmate Corp., IVI Checkmate July 21, 1999.
Inc., and NTN Merger Corp.
3.1 Certificate of Incorporation Exhibit 3.1 to IVI Checkmate's
Registration Statement on Form S-4
(No. 333-53629)
3.2 Bylaws 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 Exhibit 99.1 to IVI Checkmate's
Agreement, dated as of September 16, Current Report on Form 8-K filed on
1998, between IVI Checkmate Corp. and October 15, 1998
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 Voting and Exchange Trust Agreement Exhibit 9.1 to IVI Checkmate's
among IVI Checkmate Corp., Registration Statement on Form S-4
International Verifact Inc. and (No. 333-53629)
Montreal Trust Company of Canada
10.1 Combination Agreement dated January Exhibit 10.1(a) to Checkmate's Annual
16, 1998, by and among IVI Checkmate Report on Form 10-K for the year ended
Corp., International Verifact Inc., December 31, 1997
Checkmate Electronics, Inc. and Future
Merger Corporation
10.2 International Verifact Inc. Plan of Exhibit 2.2 to IVI Checkmate's
Arrangement and Exchangeable Share Registration Statement on Form S-4
Provisions (No. 333-53629)
10.3 Master Alliance Agreement dated Exhibit 10.6 to IVI Checkmate's
December 5, 1996, between Ingenico, Registration Statement on Form S-4
S.A. and International Verifact Inc. (No. 333-53629)
10.4 Investment Agreement dated December 5, Exhibit 10.10 to IVI Checkmate's
1996, between Ingenico, S.A. and Registration Statement on Form S-4
International Verifact Inc., as (No. 333-53629)
amended by the Amendment to Investment
Agreement, dated December 17, 1996,
between Ingenico, S.A. and
International Verifact Inc.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description SEC Document Reference
------- ----------- ----------------------
<C> <S> <C>
10.5 Marketing and Distribution Agreement Exhibit 10.11 to IVI Checkmate's
dated December 17, 1996, between Registration Statement on Form S-4
Ingenico, S.A., International Verifact (No. 333-53629)
Inc. and IVI Ingenico Inc.
10.6 Assignment, Assumption and Consent Exhibit 10.12 to IVI Checkmate's
Agreement dated as of January 16, 1998 Registration Statement on Form S-4
among International Verifact Inc., (No. 333-53629)
Ingenico S.A., and IVI Checkmate Corp.
10.9* IVI Checkmate Corp. 1998 Long-Term Exhibit 10.5.1 to IVI Checkmate's
Incentive Plan Registration Statement on Form S-4
(No. 333-53629)
10.10* IVI Checkmate Corp. 1998 Directors Exhibit 10.5.2 to IVI Checkmate's
Stock Option Plan Registration Statement on Form S-4
(No. 333-53629)
10.11 Latin America Unanimous Shareholders' Exhibit 10.7 to IVI Checkmate's
Agreement dated December 17, 1996, Registration Statement on Form S-4
between Ingenico, S.A., International (No. 333-53629)
Verifact Inc. and IVI Ingenico Inc.
10.12 Technology License Agreement dated Exhibit 10.8 to IVI Checkmate's
December 17, 1996, between Ingenico, Registration Statement on Form S-4
S.A. and International Verifact Inc. (No. 333-53629)
10.13 Joint Development and Procurement Exhibit 10.9 to IVI Checkmate's
Agreement dated December 17, 1996, Registration Statement on Form S-4
between Ingenico, S.A. and (No. 333-53629)
International Verifact Inc.
10.14* Amendment No. 1 to Agreement filed as Exhibit 10.14 to IVI Checkmate's
Exhibit 10.15 Annual Report on Form 10-K for the
year ended December 31, 1998.
10.15* Agreement dated June 25, 1998, between Exhibit 10.15 to IVI Checkmate's
J. Stanford Spence and IVI Checkmate Annual Report on Form 10-K for the
Corp. year ended December 31, 1998.
10.16* Management Services Agreement between Exhibit 10.16 to IVI Checkmate's
IVI Checkmate, IVI, Checkmate, LBT Annual Report on Form 10-K for the
Investments, Inc. and L. Barry Thomson year ended December 31, 1998.
dated as of June 25, 1998
10.17* Employment Agreement dated as of June Exhibit 10.17 to IVI Checkmate's
25, 1998 between International Annual Report on Form 10-K for the
Verifact, Inc. and George Whitton year ended December 31, 1998.
10.18* Employment Agreement dated as of Exhibit 10.4(f) to Checkmate's Annual
January 1, 1998, between Checkmate Report on Form 10-K for the year ended
Electronics, Inc. and John J. Neubert December 31, 1997
10.19* Employment Agreement dated as of Exhibit 10.4(g) to Checkmate's Annual
January 1, 1998, between Checkmate Report on Form 10-K for the year ended
Electronics, Inc. and Gregory A. Lewis December 31, 1997
10.20 Eleventh Amendment, dated July 16, Exhibit 10.20 to IVI Checkmate's
1998, to the Lease Agreement filed as Annual Report on Form 10-K for the
Exhibit 10.28 year ended December 31, 1998.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description SEC Document Reference
------- ----------- ----------------------
<C> <S> <C>
10.21 Tenth Amendment, dated May 20, 1998, Exhibit 10.21 to IVI Checkmate's
to the Lease Agreement filed as Annual Report on Form 10-K for the
Exhibit 10.27 year ended December 31, 1998.
10.22 Ninth Amendment, dated August 18, Exhibit 10.1(e) to Checkmate's Annual
1997, to the Lease Agreement filed as Report on Form 10-K for the year ended
Exhibit 10.27 December 31, 1997
10.23 Eighth Amendment, dated April 1, 1996, Exhibit 10.1(d) to Checkmate's Annual
to the Lease Agreement filed as Report on Form 10-K for the year ended
Exhibit 10.27 December 31, 1996
10.24 Seventh Amendment, dated January 18, Exhibit 10.1(c) to Checkmate's Annual
1996, to the Lease Agreement filed as Report on Form 10-K for the year ended
Exhibit 10.27 December 31, 1995
10.25 Sixth Amendment, dated February 10, Exhibit 10.1(b) to Checkmate's Annual
1995, to the Lease Agreement filed as Report on Form 10-K for the year ended
Exhibit 10.27 December 31, 1994
10.26 Fifth Amendment, dated August 16, Exhibit 10.20 to Checkmate's Annual
1994, to the Lease Agreement filed as Report on Form 10-K for the year ended
Exhibit 10.27 December 31, 1994
10.27 Lease Agreement dated July 17, 1990, Exhibit 10.1 to Checkmate's
as amended, by and between Checkmate Registration Statement on Form S-1
Electronics. Inc. and ASE North Fulton (No. 33-67048)
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 Exhibit 10.1 to IVI's Registration
May 1986 between Markborough Statement on Form F-4 (No. 33-84926)
Properties Limited and International
Verifact Inc.
10.29 Amending Agreement dated as of the 1st Exhibit 10.2 to IVI's Registration
day of July 1991 between Morgan Mae Statement on Form F-4 (No. 33-84926)
Enterprises Limited and International
Verifact Inc.
10.30 Assignment, Assumption and Consent Exhibit 10.12 to IVI Checkmate's
Agreement dated as of January 16, 1998 Registration Statement on Form S-4
among International Verifact Inc., (No. 333-53629)
Ingenico, S.A., and IVI Checkmate
Corp.
21.1*** Subsidiaries of Registrant
23.1*** Consent of Ernst & Young LLP
23.2*** Consent of Coopers & Lybrand
27*** Financial Data Schedule (for SEC use
only)
</TABLE>
- --------
* 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 SEC
*** Filed with this report
47
<PAGE>
(b) Reports on Form 8-K
We filed no Current Reports on Form 8-K during the fourth quarter ended
December 31, 1999:
(c) Exhibits.
See Item 14(a)3 above.
(d) Financial Statement Schedules.
See Item 14(a)2 above.
48
<PAGE>
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 22, 2000.
IVI CHECKMATE CORP.
/s/ L. Barry Thomson
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
22, 2000.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ L. Barry Thomson President, Chief Executive
_________________________________ Officer and Director
L. Barry Thomson
J. Stanford Spence Chairman of the Board
_________________________________
J. Stanford Spence
George Whitton Vice Chairman of the Board
_________________________________
George Whitton
Gerard Compain Director
_________________________________
Gerard Compain
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,
John J. Neubert Chief Financial and
Accounting Officer,
Treasurer and Secretary
</TABLE>
49
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
State or Jurisdiction
Subsidiaries of Incorporation
- -------------------- ---------------------
IVI Checkmate Inc. Georgia
IVI Checkmate Ltd. Canada
National Transaction Delaware
Network, Inc.
Plourde Computer California
Services, Inc.
Debitek Holdings Ltd. England/Wales
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-83763) pertaining to the Employee Stock Options held by
Michael P. Wallis; Form S-8 (No. 333-83829) pertaining to the IVI Checkmate
Electronics, Inc. 401(K) Plan; Form S-8 (No. 333-32366) pertaining to the
Plourde Computer Services, Inc. 1996 Key Management Stock Option Plan; Form S-8
(No. 333-32382) pertaining to the Employee Stock Options held by R. Lee Paulson;
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 18, 2000, except for Note 14, as to which the date is February 22,
2000, 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 27, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-83763) pertaining to the Employee Stock Options held by
Michael P. Wallis; Form S-8 (No. 333-83829) pertaining to the IVI Checkmate
Electronics, Inc. 401(K) Plan; Form S-8 No. 333-32366 pertaining to the Plourde
Computer Services, Inc. 1996 Key Management Stock Option Plan; Form S-8 (No.333-
32382) pertaining to the Employee Stock Options held by R. Lee Paulson; 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. in its Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ COOPERS & LYBRAND
Toronto, Ontario
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,279
<SECURITIES> 0
<RECEIVABLES> 21,379
<ALLOWANCES> 1,329
<INVENTORY> 18,238
<CURRENT-ASSETS> 49,957
<PP&E> 22,150
<DEPRECIATION> 12,496
<TOTAL-ASSETS> 73,525
<CURRENT-LIABILITIES> 26,891
<BONDS> 0
0
8
<COMMON> 182
<OTHER-SE> 44,940
<TOTAL-LIABILITY-AND-EQUITY> 73,525
<SALES> 97,934
<TOTAL-REVENUES> 97,934
<CGS> 76,618
<TOTAL-COSTS> 76,618
<OTHER-EXPENSES> 39,103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253
<INCOME-PRETAX> (18,057)
<INCOME-TAX> 1,877
<INCOME-CONTINUING> (19,934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,934)
<EPS-BASIC> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
