<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22370
CHECKMATE ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 88-0117097
(State of incorporation) (I.R.S. Employer
Identification Number)
</TABLE>
1003 MANSELL ROAD, ROSWELL, GEORGIA 30076
(Address of principal executive offices, including zip code)
(770) 594-6000
(Registrant's telephone number, including area code)
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
------------------------
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. Yes /X/ No / /.
The aggregate market value of the Registrant's outstanding Common Stock held
by non-affiliates of the Registrant on March 17, 1998 was $49,459,216. There
were 5,420,188 shares of Common Stock outstanding as of March 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CHECKMATE ELECTRONICS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
- --------- -----------
<S> <C> <C>
PART I
1. Business...................................................................................... 1
2. Properties.................................................................................... 13
3. Legal Proceedings............................................................................. 13
4. Submission of Matters to a Vote of Security Holders........................................... 13
4(A) Executive Officers of the Registrant.......................................................... 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 14
6. Selected Financial Data....................................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 16
7(A) Quantitative and Qualitative Disclosures About Market Risk.................................... 25
8. Financial Statements and Supplementary Data................................................... 25
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 26
PART III
10. Directors and Executive Officers of the Registrant............................................ 27
11. Executive Compensation........................................................................ 28
12. Security Ownership of Certain Beneficial Owners and Management................................ 33
13. Certain Relationships and Related Transactions................................................ 34
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 36
SIGNATURES............................................................................................... 39
INDEX OF FINANCIAL STATEMENTS............................................................................ F-1
INDEX OF EXHIBITS........................................................................................ E-1
</TABLE>
<PAGE>
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document may constitute
forward-looking statements for purposes of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, and as such may
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of Checkmate Electronics, Inc.
("Checkmate" or the "Company") to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements. The Company's actual results may differ materially
from the results anticipated in these forward-looking statements due to a
variety of factors, including without limitation those discussed in "Factors
Affecting Future Performance" in Item 7 hereof. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
ITEM 1. BUSINESS
GENERAL
Checkmate develops, manufactures and markets payment automation solutions.
Checkmate's Payment System(2000TM) includes systems and terminals for check
reading and magnetic debit/credit card processing, signature capture and
verification, and magnetic ink character recognition ("MICR") quality analyzing.
The Company sells directly to large point-of-sale users and financial
institutions. Checkmate distributes products through resellers and OEM
relationships in the United States and worldwide. Headquartered in Roswell,
Georgia, Checkmate Electronics, Inc. has 185 employees. The Company's shares are
traded on the Nasdaq National Market under the symbol "CMEL."
The Company's MICR check readers, which accounted for approximately 39.4% of
the Company's net revenues in 1997, utilize patented technology to read magnetic
ink characters that are printed on checks, travelers checks and other documents.
The MICR check readers also measure the signal strength of magnetic characters
to ensure that the characters conform to MICR quality standards, thereby helping
eliminate fraud and detecting most counterfeit and visually altered documents.
The Company's payment authorization products provide for the processing of
credit, debit, electronic benefits transfer ("EBT") and check transactions
through "direct connect" peripherals to the merchant's Electronic Cash Register
or Point-of-Sale ("ECR/POS") terminal and through "dial-up" connections. The
patented signature capture technology licensed by the Company streamlines the
document retrieval process for credit card drafts by electronically capturing
signatures at the point of sale. This device incorporates a sophisticated
proprietary data compression algorithm to minimize storage requirements and can
also be used for signature verification applications. The Company's MICR
analyzer comprehensively tests the MICR characters on documents to allow check
printers, forms printers, banks and other producers of high volumes of printed
MICR documents to determine whether the MICR information conforms to applicable
American National Standards Institute ("ANSI") specifications.
The Company is the successor to a company that was incorporated in Nevada in
1961 and engaged in various activities, including the check guarantee business,
through 1979. In 1979, the Company developed and patented the technology used in
its MICR analyzers and in 1986 began producing and delivering this MICR
analyzer. In 1989, the Company introduced its first check reader product. In
June 1993, the Company changed its state of incorporation from Nevada to
Georgia. In September 1993, the Company completed a public offering of 2,415,000
shares of its Common Stock and the Common Stock began trading on the Nasdaq
National Market System.
1
<PAGE>
COMBINATION AGREEMENT
On January 16, 1998, the Company entered into a definitive agreement (the
"Combination Agreement") to combine with International Verifact Inc. ("IVI"), a
company engaged in a business similar to that of Checkmate. The parties intend
for the combination to be accounted for on a pooling of interest basis. Under
the terms of the Combination Agreement, IVI shareholders will receive, for each
IVI common share, either one share of common stock of the newly formed combined
company, IVI Checkmate Corp., or one exchangeable share of IVI which can be
exchanged for a share of IVI Checkmate Corp. common stock in the future.
Checkmate shareholders will receive 1.2775 shares of IVI Checkmate Corp. common
stock for each Checkmate common share. Closing of the transaction is expected to
occur in the second quarter of 1998, subject to shareholder approvals, Ontario
Court approval and customary closing conditions. The result will be that
shareholders of Checkmate will own approximately 43 percent of the common stock
of IVI Checkmate Corp. and IVI shareholders will own approximately 57 percent.
The formation of IVI Checkmate Corp., if completed as planned, will create
the third largest company in the electronic payment solutions industry in North
America. The Company believes that the combination of these two companies will
immediately broaden product offerings for both companies while providing
operational synergies which are expected to make the combined company a more
efficient, profitable entity. There can be no assurance that the transaction
will be completed or that such results will be realized.
MARKET APPLICATION OVERVIEW
As a result of losses from returned checks, many retail merchants have been
forced to implement costly check verification systems. These verification
systems typically compare the information gathered at the point of sale (such as
the customer's checking account number) to a database containing accounts with
known outstanding bad checks or closed accounts. Although beneficial, these
verification systems cannot perform to expected levels if the data input into
the system at the point of sale is not accurate. Customers of the Company have
indicated that between 10% and 30% (depending upon the amount of data entered
per transaction) of all records manually entered into their verification systems
at the point of sale are erroneous. The Company's check readers greatly improve
the accuracy of data entry, thereby increasing the probability that the merchant
will detect and decline potential bad checks at the point of sale. The Company's
check readers also offer a high level of fraud detection with respect to
counterfeit documents that could otherwise pass through the user's verification
system. This feature is attractive to retail banking operations, which have
begun to install the Company's check readers in order to identify and reduce
check losses at the teller window.
A paramount factor considered by the Company's customers is the ease with
which the customer can attain the benefits of an automated data entry system.
The Company's check readers are "plug and play" devices, meaning that if a
merchant currently enters MICR line information manually from a check into the
data processing system at the point of sale, the Company's check reader can be
connected directly to the merchant's ECR/POS terminal and the readers will input
the data in the precise form that the ECR/ POS terminal program would expect
from a manually keyed entry. Thus, the merchant can attain the benefits of
accurate data entry and fraud detection immediately without having to make any
costly programming changes.
The use of debit cards by consumers is growing at an accelerated annual
rate. Most usage of debit cards to date has been in supermarkets, convenience
stores and gas stations, although the use of debit cards is rapidly expanding to
include mass merchandisers, drug and specialty stores. The increase in the use
of debit cards is due primarily to (i) the lower cost of debit transactions
which causes retailers to encourage the use of debit cards, and (ii) the
convenience of debit transactions to consumers combined with consumers'
preference to pay for goods and services immediately with funds from their bank
accounts
2
<PAGE>
rather than purchasing on credit. Additionally, debit transactions are
increasingly replacing cash transactions. This trend further encourages the use
of debit cards by retailers since debit cards may provide a vehicle to increase
sales. The Company's payment authorization systems provide for the secure
processing of debit transactions as well as check and credit card transactions
within a single platform of devices.
EBT permits the distribution of food stamps, welfare benefits and other
government-assisted programs to recipients electronically rather than in paper
form. EBT is intended primarily to permit governments and governmental agencies
to reduce losses from food stamp and welfare fraud. To distribute benefits by
EBT, the government or governmental agency typically distributes a modified form
of magnetic card and assigns a Personal Identification Number ("PIN") to each
individual. When making a qualified purchase, the retailer swipes the
individual's EBT card through an EBT payment authorization device, the
individual enters his PIN on a PINpad and the amount of the qualified purchase
is automatically charged to funds available in the recipient's account. The
retailer is then reimbursed by the government or governmental agency by direct
credit to the retailer's bank account. EBT programs are currently used by the
states of Maryland, South Carolina, Ohio, Texas and Wyoming, among others, and
the Company anticipates that a majority of the states will implement EBT
programs within the next two years. In addition, the Company anticipates that
federally mandated EBT programs will be implemented by 1999.
Because both direct payment systems and EBT systems require the use of PINs,
the security requirements of an EBT system are similar to those of debit payment
systems in most installations. The similarity of the two types of systems in
most installations and the expected increased usage of EBT systems by
governments and government agencies is resulting in increased demand for payment
systems that can process both debit transactions and EBT transactions. The
Company believes that the market for debit/EBT systems in supermarkets, mass
merchandise stores and drug stores has not yet been penetrated to any
significant extent and that this market presents a significant potential
opportunity for the Company's payment authorization products.
Checkmate's card technology won significant acceptance during 1995, and
continued its successes in 1996 and 1997. The awarding of Canadian Certification
established the Checkmate CM 2001 as one of only a few terminals to be certified
to perform at what is considered to be one of the highest levels of PIN
security. The CM 2001 was certified with software produced by major players in
the supermarket and retail industries including International Business Machines
Corporation ("IBM"), Fujitsu-ICL Systems Inc., MidSouth Data Systems, National
Transaction Network, Inc., Plourde Computer Services, Inc., and others. IBM
selected the CM 2001 as a platform for its new retail software application IBM
APS (Advance Payment System).
Merchants that accept credit cards generally will retain a copy of the
signed transaction receipt for retrieval in response to customer inquiries or
disputes. Credit card processors have demanded quick response (generally five
business days) to consumer inquiries and are considering tightening this
requirement. The cost of storage and retrieval, coupled with chargebacks
incurred by merchants for failure to comply with required response times or
their inability to locate specific receipts, have forced merchants to find an
automated process to accomplish the storage and retrieval of receipts. The
Company's signature capture products provide for the electronic capture of a
digitized replica of an individual's signature, eliminating the need for
physical storage and facilitating the fast electronic retrieval of a transaction
record. The market for signature capture devices has expanded beyond retail
merchants, with a significant increase in form intensive businesses (i.e.
insurance, car rental and hospitality).
BUSINESS STRATEGY
CHECKMATE PAYMENT SYSTEM(2000). Payment automation currently consists of
three general platforms: check reading equipment, card processing equipment, and
electronic signature capture equipment. When combined with the cost of
electronic cash registers and transaction software, the investment in a complete
payment automation solution generally is too great for a retailer or financial
institution to implement all at
3
<PAGE>
one time. Instead, these companies generally will target one application at a
time and will begin with the solution which provides the greatest return.
Implementation of all three platforms may occur over a period of years.
Therefore, it is important for the purchaser of such equipment to buy products
which can work together to provide a complete payment automation solution.
Checkmate's Payment System(2000) is designed to afford the retailer the widest
array of connectivity options and the simplest and lowest cost implementation
choice for a complete payment automation system.
ENHANCED PRODUCTS AT COMPETITIVE PRICES. One element of the Company's
business strategy is to increase unit sales by providing successive generations
of products. Successive generations offer enhanced features at competitive
prices. The increased sales of the Company's check readers since the Company's
introduction of checkreaders in 1989 was a direct result of the Company's
strategy to develop production and sales efficiencies. These efficiencies
enabled the Company to provide lower cost check readers that are immediately
operational. Consistent with this strategy, the Company has been able to lower
the average sales price of its check readers. This philosophy is also carried
over into the Company's debit/credit card terminal, signature capture products
and dial terminal products. The Company believes that only a small portion of
the market for its products has been penetrated (primarily, penetration of check
readers in large retail users) and that the enhanced features and low average
sales prices of the Company's products will enable the Company to penetrate a
much larger portion of this potential market, thereby presenting a significant
opportunity for sales growth. The Company intends to continue its strategy of
offering successive generations of its products with enhanced features at
competitive prices. The Company anticipates achieving this strategy in part
through improved purchasing efficiencies and lower per unit production costs for
labor and overhead. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ENHANCED AND DIVERSIFIED PRODUCT LINES. A principal component of the
Company's growth strategy is to enhance and diversify the Company's product
lines through the development of new or enhanced products. The Company
recognizes that credit and debit cards will continue to represent alternative
forms of payment and has produced a family of compact payment terminals to
address this segment of the payment market. Each of these compact terminals
easily integrates into the merchant's ECR/POS platform. Each solution houses all
of the equipment needed to process and verify several types of non-cash payment
alternatives, including check, credit card, debit card and EBT card
transactions. Volume production of this family of products began in the fourth
quarter of 1994. The Company also continually seeks to enhance its existing
products, as reflected by the Company's introduction in April 1994 of a new
version of its check reader which universally attaches to ECR/POS terminals and
communicates with them in any of four communication protocols. This feature
enables retailers that have a mix of ECR/POS terminals to stock only one model
of check reader. In 1995, the Company announced a combination check reader,
credit and debit terminal that communicates via telephone lines to check
verification and credit processor companies. This product provides the Company
access to the small retail market segment, which consists of a large number of
merchants with only a few point-of-sale terminals per location. Additionally in
1995, the Company developed its debit and signature capture devices with
integrated smart card capabilities that it intends to market in response to
customer demands. The Company also introduced lower cost MICR analyzer products
targeted at the rapidly increasing market for laser printer generated checks.
These analyzers allow businesses which print their own checks to verify the
quality of the MICR printing in order to minimize charges for poor print quality
assessed by financial institutions. In 1996 and 1997, the Company introduced
many new software and POS interfaces into its existing products, allowing its
products to be installed in a broader spectrum of the installed POS hardware and
software systems.
While most of the Company's product enhancement and diversification efforts
to date have resulted from its internal research and development, the Company
from time to time enters into joint product development projects with other
companies. See "--Products--Security Management Products" below. Additionally,
the Company periodically considers the acquisition of businesses, products and
technologies that complement the Company's product lines. Checkmate also pursues
OEM and other licensing
4
<PAGE>
arrangements to incorporate Checkmate technologies in other supplier products,
such as electronic cash registers, computer keyboards, printers, gas pumps and
gambling or vending machines that could increase the marketing and distribution
of the Company's products. The Company has recently acquired a software
development and consulting organization, and also has entered into a Combination
Agreement with IVI, a competitor of Checkmate. See "--Combination Agreement"
above.
INCREASED MARKET PENETRATION. As noted, the Company believes that, in
general, only a small portion of the market for its products has been
penetrated, thereby presenting a significant opportunity for growth. The
majority of the Company's net revenues through 1997 were generated through sales
to large end users in the United States primarily through its own sales force.
The Company believes that the use of an internal sales force generally enables
it to more effectively control its sales activities and provide better service
and quality to its customers. The Company also markets its products through
indirect channels in the United States and internationally. In the United
States, Checkmate is establishing relationships with the major card transaction
processing companies (Novatek Corporation, Concord EFS, Inc., Equifax, Inc.,
National Data Corporation, National City Processing Company, and others). These
companies, through their large customer base and large sales networks, provide
the means for Checkmate to reach the small retailer ("mom-and-pop" stores). We
expect to see increasing sales of the check readers and the CM 2010 Combination
Unit during 1998 as such companies roll out these products. Checkmate also has
established alliances with major software developers and OEM relationships with
other major companies.
Internationally the Company markets through distributors and OEM
relationships. Checkmate is establishing strong partnering relationships with
strategic organizations in Europe, Latin America, India, South America, the Far
East and the Pacific Rim.
IMPROVED MANUFACTURING EFFICIENCIES. The Company manufactures its product
lines in-house utilizing pre-manufactured components purchased from third
parties. The process consists of purchasing component parts, bundling kits of
electronic components for assembly of the circuit boards by various third party
circuit board assemblers, burning in and testing these circuit boards,
assembling and testing the final product and programming the product to customer
specifications. The Company historically has purchased the component parts used
in its products directly from manufacturers or distributors, including the
components of the circuit boards utilized in each of its products, rather than
purchasing fully assembled products. By purchasing at the component level and
assembling its own products, except for circuit boards, the Company has been
able to exert control over the cost and supply of the components and eliminate
the mark-up normally charged by third party assemblers when assembly is
contracted on a "turn-key" basis. The Company believes that alternative sources
of component parts and circuit board assembly generally are available on short
notice and at reasonable terms. See "--Production and Supply--Manufacturing
Process" below. The Company contemplates continued research and development
programs designed to lower the overall cost of its products by assessing and
attempting to eliminate the need for certain components.
CUSTOMERS
The Company's primary market focus for its products is on department stores,
mass merchandisers, supermarkets, convenience stores, drug stores, food/fuel
marts, independent retailers, banks and other non-retail markets that deal with
a high volume of payment transaction stations. The Company believes that in the
United States alone there are more than two million point-of-sale stations at
major retailers, three and one-half million stations at small retailers, and an
additional half million bank teller and other application platforms that could
use the Company's products. The Company further believes that the international
market represents a large potential customer base.
The Company historically has relied upon a small number of retail customers,
each with a large number of point-of-sale stations, for a significant percentage
of the Company's revenues. The Company's three largest retail customers to date
are Wal-Mart Stores, Inc. (approximately 57,000 debit/credit card
5
<PAGE>
terminals), Kmart Corporation (approximately 59,000 readers) and JCPenney
Company (approximately 55,000 readers). To date, several major customers
purchased and simultaneously installed more than one of Checkmate's products, or
purchased a second product after installing another Checkmate product,
reinforcing the value of the Payment System(2000) strategy.
In 1997, the Company derived approximately 17% of its net revenues from
WaluMart Stores, Inc. and 10% from another customer. No other single customer
accounted for 10% or more of Checkmate's net revenues in 1997.
The Company derives most of its revenues from the initial customer
installation of its products, and realizes additional revenues from subsequent
installations as its existing customers expand their operations or install other
products in Checkmate's Payment System(2000) family of payment automation
solutions. Accordingly, the Company's future success will depend in part on its
continued ability to successfully market its various products to retail and
banking customers with a large number of point-of-service stations. The
Company's future success also will depend on its ability to increase sales of
its various products to value added resellers ("VARs") and OEMs to reach
additional customer markets.
SALES, MARKETING AND DISTRIBUTION
DIRECT MARKETING. The Company markets its products domestically through its
own direct sales force and through distributors, VARs, OEMs and "reseller
business partners." To date, most of the Company's domestic sales have resulted
from its own direct sales efforts. The Company's direct sales force markets
products to large end users, and the Company has developed a sales force to
market the Company's products to smaller end users through resellers.
The Company participates in regional, national and international trade
shows, including RISCON, The Food Marketing Institute MarkeTechnics show,
American Bankers Association National Bank Card show, Retail Delivery Systems,
Electronic Transaction Association, Banking Administration Institute, Electronic
Transaction Association and CEBIT (premiere European technology show). The
Company's marketing activities also include distribution of sales and product
literature, qualification of sales leads and direct mailings to prospective
customers. The Company also sponsors training and sales seminars for existing
and prospective resellers.
DOMESTIC DISTRIBUTION AND RESELLERS. The Company currently uses VARs to
accommodate distribution of quantities of less than 500 units of its products.
The Company also has arrangements with a number of resellers which distribute
the Company's products on a national basis. See "--Sales, Marketing and
Distribution--Reseller Business Partners" below. The Company routinely seeks to
expand its sales to quality resellers provided the sales would not be in
conflict with the Company's direct marketing efforts. All of the Company's
arrangements with distributors and resellers are on a non-exclusive basis.
INTERNATIONAL DISTRIBUTION. International marketing has been accomplished
primarily through the use of distributors and, to a lesser extent, OEMs. All of
the Company's distribution agreements are non-exclusive. The distribution
agreements preclude the distributors from selling competitive products with one
limited exception. The Company currently uses numerous international
distributors which provide distribution channels for the Company's products in
Europe, Latin America, India, South America, the Far East and the Pacific Rim.
The Company desires to increase its use of OEMs to market its products and the
Company continually seeks to establish relationships with appropriate new OEMs.
In 1995, 1996 and 1997, net revenues from international sales were approximately
$1,686,000, $2,641,000 and $2,620,000, respectively.
RESELLER BUSINESS PARTNERS. The Company distributes certain of its products
through agreements with "reseller business partners." As one of the Company's
reseller business partners, International Business Machines Corporation markets
the Company's signature capture device worldwide to IBM's customers. Similarly,
the Company's agreement with Fujitsu-ICL Systems, Inc. provides Checkmate with
access to the
6
<PAGE>
United States customers of Fujitsu-ICL Systems. Through an agreement with
Olivetti USA, the Company sells check readers to one of the Olivetti USA's
international customers. The Company seeks to enter similar arrangements with
other reseller business partners in 1998 to further expand its market
penetration both domestically and worldwide.
TECHNOLOGY
The Company relies on technologies that are protected by a combination of
patents, trade secrets, copyrights and employee nondisclosure agreements. All of
the Company's MICR readers and analyzers utilize patented and proprietary
technology that "reads" the analog wave form data generated by MICR characters
to precisely measure the width of MICR characters and their absolute location on
the MICR encoded document. The readers not only recognize all forms of MICR
characters and input the relevant information into the user's data processing
system but also measure the magnetic signal strength of the MICR characters to
determine whether or not they conform to applicable ANSI standards. The latter
function enables the user to detect many varieties of fraudulent and counterfeit
checks. Checkmate also has developed proprietary security technology that
provides the Company a competitive advantage in marketing its debit/credit card
terminal. This security technology has enabled Checkmate to obtain Canadian
approval for the terminal, thereby meeting what the Company considers to be the
highest level of required security in North America.
Each of the Company's MICR readers may be programmed so that it is
compatible with the user's existing ECR/POS system. As a result, the user can
simply attach the reader to its existing ECR/POS terminal without having to
incur additional expense to upgrade or reprogram the ECR/POS terminal. The
Company's products employ standard computing environments (C, C++) that create
"open" system solutions. By employing industry standards (as opposed to
proprietary systems), the Company's products can be developed and incorporated
into POS systems by many third-party developers and in-house information systems
staffs.
PATENTED TECHNOLOGY. The Company currently has three United States patents
and has pending two United States patent applications on certain other
technologies utilized in its products.
The Company's patent entitled "Hand Operated Low Cost Magnetic Character
Recognition System" (U.S. Patent No. 5,054,092) covers the technology employed
in the hand operated version of the Company's check readers. This patent was
issued to the Company in 1991 and expires on October 1, 2008.
The Company's patent entitled "Miniature MICR Document Reader With Power
Management and Motorized Conveyance" (U.S. Patent No. 5,488,676) covers the
technique employed to enable the Company's readers to use "parasitic" power from
low power sources on available ECR/POS terminal parts. In many applications this
technology allows the user to use the Company's check readers without the
requirement for an external power supply and the corresponding need for an
additional electric outlet. This patent was issued to the Company in 1996 and
expires on January 30, 2013.
The Company's patent entitled "Miniature MICR Document Reader with Power
Management and Motorized Conveyance" (U.S. Patent No. 5,566,256) extends the
protection provided by U.S. Patent No. 5,488,676 above to devices other than the
Company's readers, including, but not limited to, debit/credit card readers,
signature capture devices or bar code readers. This patent was issued to the
Company in 1996 and expires on September 26, 2015.
The Company has a patent pending on the technique employed to enable the
Company's systems (MICR, debit and signature capture) to "auto detect" the host
protocol type and set the unit's communication protocol accordingly. This auto
detect feature allows the Company's products to be "plug and play" in the mixed
POS environment.
The Company also has a patent pending on the systems and methods employed to
perform electronic signature capture and verification.
7
<PAGE>
PROPRIETARY TECHNOLOGY. The Company's connectivity technology provides a
high level of integration, meaning the Company's check readers will easily
attach to and interface with most personal computers and ECR/POS terminals. This
technology also enables the user to connect multiple devices to a single port on
the host device using small and inexpensive remote connector blocks manufactured
by the Company. The Company has incorporated this proprietary technology into
its debit/credit card terminals and signature capture devices.
The Company's flexible output technology enables the reader to reformat data
from the check document and transmit it from the check reader to the user's
system in any desired format. Only the transit and amount fields on checks are
fixed by standard as to location, length and identification. Several hundred
different check formats are used by banks with respect to the placement and
identification of account number and check sequence number. The Company's
copyrighted extraction algorithm accurately extracts the various data components
from the MICR line (bank number, account number and check number) and
compartmentalizes this data for output transmission to customer specifications.
PRODUCTS
CHECK READERS. The Company currently manufactures and markets its fourth
generation of competitively priced check readers. The fourth generation check
readers offer the following features:
- 'Plug and play" capabilities which allow direct connection to an ECR/POS
terminal of a merchant's current data processing/point-of-sale system and
allows the data to be input in the precise data format that the ECR/POS
terminal would expect from a manually keyed entry. As a result, the
merchant avoids costly programming expenses and obtains the benefits of
accurate data entry and fraud detection.
- Precise measurement of the width, location, and magnetic signal strength
of the MICR characters via the analog wave form data generated by the MICR
characters. This information allows the readers to warn the merchant of
potential fraudulent or counterfeit checks.
- Connectivity technology enables the check readers to integrate and
interface with most ECR/POS terminals. This technology also enables the
user to connect multiple devices to a single port on the ECR/POS terminal
using small and inexpensive remote connector blocks manufactured by the
Company.
- Externally programmable and reprogrammable.
- Ability to incorporate magnetic stripe readers for credit and EBT cards.
The CM 430 and CM 431 are the motorized versions of Checkmate's fourth
generation check reader. The user simply inserts the check into the scanner and
the reader automatically feeds the check through the read mechanism. The CM
430/431 features include universal connectivity to ECR/POS terminals, the
ability to communicate with ECR/POS terminals in any of four communication
protocols, hand operated backup capabilities in the event of motor or motor
control circuit failure and the ability to be powered from low current power
(.25 amperes minimum). The latter feature allows the reader to operate the CM
430/431 using the power supply of the user's existing terminal device (parasitic
power) without the need for an additional external power source.
The Company also produces a variety of custom components and assemblies for
OEMs that manufacture products that use MICR readers.
Larger volume quantities and custom products are sold on a negotiated price
basis. The Company offers no discount programs other than negotiated prices for
large volume orders and does not sell its products on a consignment basis.
8
<PAGE>
INTEGRATED PAYMENT PLATFORMS. The Company's Payment System(2000) family of
integrated payment platforms have check, debit, credit, EBT, signature capture
and "smart" card capabilities and allow a merchant to add both clerk and
customer activated devices as required. This flexibility allows merchants to
expand their payment automation strategies and implementations as new tender
types become accepted in the marketplace while protecting their investment in
equipment that has already been deployed. The Company's CM 2001 Debit/Credit
Card terminal is a "direct connect" peripheral which automates debit and credit
card transactions. The product is customer friendly, and its design, largely
influenced by input from consumers, allows the display of easy to read messages
prompted by the use of programmable keys to step a customer through a
transaction. The CM 2001 also has a built in PINpad to allow secure entry of
PINs. In addition, it facilitates easy implementation of EBT and frequent
shopper programs. In 1997, the Company introduced the CM 2100 debit terminal,
the next generation of its highly successful debit terminal. The CM 2100 debit
terminal offers some unique features, including portability with a docking
station, smart card upgrade option, ergonomic design and upgrade options for
future payment types.
The CM 2020 Signature Capture Peripheral streamlines the document retrieval
process for credit card drafts by electronically capturing signatures at the
point of sale. The CM 2020 employs a sophisticated proprietary data compression
algorithm to dramatically reduce the record size of captured signatures. The CM
2020 technology also is effective for signature verification in a variety of
other business applications requiring on-line personal identification. Based on
patented electromagnetic technology with no moving parts, the CM 2020 peripheral
can attach to the CM 2001, the CM 2100, the CM 2010, or directly to an ECR/POS
terminal. The CM 2020 is based on patented and proprietary signature capture and
verification technology which the Company owns.
The CM 2010 Combination Unit is an integrated check, credit and debit (with
external PINpad) terminal that can either be a "direct connect" peripheral or
can dial-up payment authorization company host systems via telephone lines
("stand-beside"). This stand-beside capability allows smaller merchants to have
the same capability and flexibility as large merchants to employ payment
automation at the point of sale.
SECURITY MANAGEMENT PRODUCTS. Through a strategic alliance with the
Racal-Guardata division of Racal Electronics PLC, the Company provides security
management products for debit card transactions. These security management
products consist of custom, tamper-resistant, key injection products and a
seamless interface for physical and logical security.
MICR ANALYZERS. The Company manufactures and markets a complete line of
MICR analyzers that test the MICR lines on various MICR encoded documents and
comprehensively analyze the wave form generated by the MICR characters to assure
total conformity with applicable standards. Each of the Company's MICR analyzers
is available in Plus (high speed with full capability) and Jr. (slower speed
with limited capability) versions. These products are used for quality assurance
by check printers, forms printers and the quality control departments of major
banks. In 1996, the Company introduced a new analyzer targeted at the rapidly
growing market for laser printed checks. The new TONRMate product provides cost
effective analyzers for entities printing checks for their own use.
RECENTLY INTRODUCED NEW PRODUCTS. In May 1997, the Company announced a new
generation of its debit/credit card terminals, the CM 2100. This terminal
features flexible configuration options such as portability and smart card
upgrade capability, within an ergonomic shell. Additionally, in 1997 the Company
announced its new GEN4TM terminal architecture, which includes a common
motherboard across all terminals, a common base for all portable options in the
family, and a common "snap-on" smart card unit. Checkmate also announced the
first of its software solutions for retail in 1997, the base application for the
Company's CM 2010 combination card and check reader. This new software allows
transaction processors to quickly develop modular and flexible versions of their
own applications on this platform.
9
<PAGE>
FUTURE PRODUCTS. The Company announced the acquisition in January 1998 of
Total Retail Solutions, Inc., a software development and consulting
organization. This acquisition will allow Checkmate to offer a full range of
integrated point-of-transaction solutions from payment capture to in-store
servers, as well as provide consulting services in the design and implementation
of LAN systems and network architectures for retailers. The Company also has
entered into a Combination Agreement with IVI to become the third largest
company in the electronic payment solutions industry in North America. This
transaction, if completed as planned, will provide Checkmate with many
additional hardware and software products. See "--Combination Agreement" above.
The Company is developing new products which are expected to combine its
different technologies, as well as provide portability, wireless communications,
and modularity features. Also, the Company continues to enhance, improve and
reduce costs on its existing products. As is the case with all electronic
equipment requiring embedded systems and applications software, there can be no
assurances regarding the timetable for the completion of development and the
commencement of volume production.
RESEARCH AND DEVELOPMENT
Constant and significant changes in technology in the Company's industry,
including ongoing developments in microprocessors, terminal hardware,
applications and communications protocols require the Company to be continually
engaged in a program of research and development. The Company believes that
product innovations and improvements are central to its success and therefore
maintains an active research and development program closely coordinated with
its customers and sales and marketing personnel to identify areas for product
enhancements and to define and develop new product concepts. Substantially all
of the Company's research and development is performed internally.
As a result of the Company's ongoing research and development, the Company's
products are continuously evolving and being upgraded. The rapid evolution of
the Company's product line is exemplified by the fact that the Company
introduced its first generation check reader in 1989 and currently is marketing
its fourth generation check reader. Additionally, the Company has introduced
several new versions or upgrades of its main printed circuit board since the
Company's introduction of its fourth generation check reader in the third
quarter of 1992. Similarly, new versions of the debit product printed circuit
boards have been developed and incorporated into the product, and a new
generation of the debit product was introduced in 1997. The new versions and
upgrades contain changes that are intended to improve the reliability and
enhance manufacturing efficiencies of the Company's products. To date, the
evolution of the Company's products has not rendered the prior versions
obsolete.
Currently, the most significant focus of the Company's research and
development efforts is on product enhancement, cost reduction and the
development of the next generation of the Company's products. See
"--Products--Future Products" above. It is contemplated that most of the
development of the next generation of products will continue to be done
internally rather than on a joint venture basis. However, the Company intends to
increase its focus on acquiring technology through merger and acquisition
activities. As noted in "Future Products" above, Checkmate has acquired a
software development and consulting organization and has agreed to combine with
a competitor. These activities, as well as anticipated future transactions, are
expected to provide Checkmate with a greater breadth of hardware and software
products and services, and enable it to become a full solutions provider in a
short period of time. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Performance."
Because the computer industry and the data entry market in which the Company
competes are characterized by rapid and significant technological change, the
Company's future sales and profitability will depend on the Company's ability to
continue to develop and market new and improved products that can achieve
significant market acceptance. Its current products, though adequate for the
specialized uses for which they are designed, might not be adequate to maintain
competitiveness with competitors who
10
<PAGE>
might develop improved technology. There can be no assurance that technological
developments will not render the Company's existing products either uneconomical
or obsolete, that the Company will be able to respond with new products or
improved technology, or that newly developed products will achieve market
acceptance.
TECHNICAL SUPPORT AND SERVICE
Technical support and service are important competitive factors in the
markets for the Company's products. The Company believes that it has earned a
strong reputation among its customers for the high level of support and service
it provides. In 1995, Checkmate increased its efforts to provide high quality
service by consolidating technical support and service into one organization
entitled The TotalCARE Center. This center includes Help Desk support, extended
maintenance agreements, service agreement offerings differentiated by response
time, express replacement utilizing customer-owned pool units, and deployment
services. Structured as a profit center, The TotalCARE Center sells new service
and support contracts to the current install base as the existing warranties
expire, and has been one of the fastest-growing segments of the Company for the
past two years.
Checkmate typically provides a one-year warranty against defects in
materials and workmanship on its products. The Company also offers extended
service contracts on certain of its products. Product returns are repaired or
replaced at the Company's discretion. The Company does not allow product returns
for any reason other than defects in materials or workmanship. The Company's
limited warranty excludes damage resulting from acts of God, liquid immersion,
misuse and certain other exclusions normally associated with products of similar
type.
PRODUCTION AND SUPPLY
MANUFACTURING PROCESS. The Company believes in maintaining control over the
manufacturing process of its products in order to assure quality and to respond
more efficiently to necessary changes in product design and features that become
evident during a product's life cycle. Accordingly, the Company assembles its
products in-house utilizing pre-manufactured components purchased from third
parties. The manufacturing process consists of purchasing the component parts,
bundling kits of electronic components for assembly of the circuit boards by
various third party circuit board assemblers, burning in and testing these
circuit boards, assembling and testing the final product and programming the
product to customer specifications. Checkmate's customers have not communicated
to the Company any significant problems from using the Company's products.
Generally, the Company's products use components which are available from
multiple sources. The Company typically has been able to obtain adequate
supplies of required components on a timely basis from its suppliers or, when
necessary, from alternative sources of supply. However, certain important
components are available or purchased from only a single source or from limited
sources due to price, quality or other considerations. The Company could
experience production delays and additional expenses if it became necessary to
develop alternative sources of supply for these components or to redesign its
products to accommodate other more readily available components. Additionally,
the prices of components that are purchased from sole or limited sources can
fluctuate significantly. The Company believes that integrated circuit production
capacity in the semiconductor industry may be insufficient to meet industry
demand for such components for the next year, and perhaps longer. However, the
Company has been aggressive in seeking allocations of available integrated
circuits from several sources. As a result, the Company believes that it will
continue to receive a sufficient supply of integrated circuits to enable it to
compete effectively, although no assurance in this regard can be given.
As a precautionary measure, the Company attempts to maintain a one to three
month supply of key components and continually evaluates alternative sources of
supply. However, the inability to develop
11
<PAGE>
alternative sources of components if and as required in the future, or to obtain
sufficient quantities of components supplied by sole sources, could adversely
affect the Company's operating results.
COMPETITION
The point-of-sale peripheral market is intensely competitive and
characterized by continued and rapid technological advances and cost reductions.
These advances may result in short product life cycles and frequent product
performance improvements. The market can be significantly affected by product
introductions and marketing activities of industry participants. The Company is
aware of at least six competitors that market check readers (five of which have
MICR reading capabilities), including Magtek and IVI. The Company has entered
into a Combination Agreement to merge with IVI. See "--Combination Agreement"
above. The Company believes that, assuming the merger is completed as planned,
significant competition will remain from competitors other than IVI. Payment
authorization systems are marketed by a number of competitors. The Company's
primary competitors in this market are VeriFone, Inc., Hypercom, Inc. and IVI.
Signature capture and verification products also are marketed by a number of
competitors. The Company's primary competitor in this market is NCR Corporation.
Specialized document readers also are marketed by several competitors. Some of
the Company's competitors are substantially larger than the Company and have
more extensive research and development, manufacturing, marketing and product
support capabilities together with greater financial, technological and other
resources than the Company. As a result, the Company's competitors may
independently develop technologies that are equivalent, alternative or superior
to the Company's technologies.
Competition in the markets for the Company's products is based on a number
of factors, including product quality and reliability, performance, price,
compatibility, ease of installation and use, marketing and distribution
capabilities, product delivery, service and support and name recognition. The
Company believes that its products have earned a strong reputation for their
performance, cost effectiveness and reliability and are competitive with those
of other manufacturers. The Company anticipates that it will continue its
efforts to lower the cost of its products through manufacturing efficiencies and
other cost saving measures in order to maintain a competitive price for its
products. The Company's continuing sales and marketing efforts will be critical
as the Company continues to face competition in the marketplace. There can be no
assurance that the Company will be able to develop or sustain a competitive
position for its products.
Although the Company believes that only a small portion of the market for
its check readers, debit/ credit card terminals, signature capture products and
combination units has been penetrated, there can be no assurance that the demand
for the products will continue at current levels or that its new products will
receive wide market acceptance. To remain competitive, the Company believes that
it will need to continue to incorporate new technological developments into its
existing products and to develop new products. See "--Business Strategy -Enhance
and Diversify Product Lines" above. The Company believes that its current
product line, coupled with its history of continued product enhancement and cost
reduction, will enable it to compete with its competitors.
EMPLOYEES
At December 31, 1997, the Company had 185 full-time employees. None of the
Company's employees is represented by a labor union nor has the Company
experienced any work stoppages. The Company considers its relations with its
employees to be good.
The Company's business requires that the Company continue to attract and
retain qualified personnel with a variety of technical and managerial skills,
including engineering, computer programming and sales expertise. Competition for
qualified employees in the Company's industry is intense. To date, the Company
has not experienced any material difficulty in recruiting or retaining qualified
personnel. However, the
12
<PAGE>
Company believes that its future success will depend in part on its continued
ability to recruit, motivate and retain qualified personnel.
ITEM 2. PROPERTIES
The Company's corporate headquarters, manufacturing, distribution and
research and development facilities are located in approximately 49,000 square
feet of leased space in Roswell, Georgia. The Company's lease of such space is
for a fixed term through September 30, 1999 and may be renewed for a one-year
term thereafter. The Company also leases approximately 13,000 square feet of
office space in close proximity to its current facilities in Roswell, Georgia.
The Company's lease of such space is for a fixed term through February 28, 2002.
The Company also leases approximately 1,500 square feet of office space in
Columbia, Maryland, where a product manager and a small staff of engineers are
engaged in software and hardware development activities. In 1998, the Company
entered into an agreement to lease approximately 1,200 square feet of office
space in Tampa, Florida, where a small staff of engineers are engaged primarily
in software development and consulting activities. Checkmate intends to lease an
additional 12,000 square feet of space in close proximity to its current
facilities in Roswell, Georgia in 1998. The Company believes that its current
facilities, including the additional space to be leased in 1998, are suitable
for and adequate to support its present operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of its shareholders during
the fourth quarter ended December 31, 1997.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
All executive officers of the Company are also directors of the Company, and
information regarding all directors of the Company is provided in "Item 10.
Directors and Executive Officers of the Company" below.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "CMEL" since the Company's public offering of Common Stock on
September 28, 1993. Prior to the public offering, there had been very limited
trading of the Company's Common Stock in the over-the-counter market. The
following table sets forth the quarterly high and low closing bid quotations for
the Common Stock from January 1, 1996 through December 31, 1997 as reported by
Nasdaq.
<TABLE>
<CAPTION>
1997 HIGH LOW
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................................... $ 13.875 $ 11.500
Second Quarter.............................................................................. 13.500 8.000
Third Quarter............................................................................... 9.125 6.875
Fourth Quarter.............................................................................. 9.000 6.250
</TABLE>
<TABLE>
<CAPTION>
1996 HIGH LOW
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................................... $ 15.250 $ 11.250
Second Quarter.............................................................................. 15.750 11.750
Third Quarter............................................................................... 16.500 11.750
Fourth Quarter.............................................................................. 15.250 9.250
</TABLE>
At March 17, 1998, there were approximately 363 shareholders of record of
the Company's Common Stock and an estimated 3,100 beneficial owners holding
Company Common Stock in nominee or "street" name.
The Company has paid no cash dividends on its Common Stock and currently
intends to retain all future earnings for use in the development of its
business.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The data should be read in conjunction with the financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues............................................... $ 33,526 $ 35,104 $ 29,160 $ 17,186 $ 17,217
Cost of goods sold......................................... 20,879 20,572 17,184 9,734 10,355
--------- --------- --------- --------- ---------
Gross profit............................................... 12,647 14,532 11,976 7,452 6,862
Operating expenses:
Selling, general and administrative........................ 11,306 9,325 7,310 4,758 3,421
Research and development................................... 1,129 991 499 503 182
Depreciation and amortization.............................. 722 579 496 324 327
--------- --------- --------- --------- ---------
Total operating expenses................................... 13,157 10,895 8,305 5,585 3,930
--------- --------- --------- --------- ---------
Operating income (loss).................................... (510) 3,637 3,671 1,867 2,932
Interest expense........................................... (46) (61) (84) (111) (236)
Interest income............................................ 358 432 513 594 119
--------- --------- --------- --------- ---------
Income (loss) before income taxes.......................... (198) 4,008 4,100 2,350 2,815
Provision for income tax expense (benefit)................. (69) 1,453 1,558 892 --
--------- --------- --------- --------- ---------
Net income (loss).......................................... $ (129) $ 2,555 $ 2,542 $ 1,458 $ 2,815
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share:
Basic...................................................... $ (0.02) $ 0.50 $ 0.50 $ 0.29 $ 0.89
--------- --------- --------- --------- ---------
Diluted.................................................... $ (0.02) $ 0.46 $ 0.47 $ 0.29 $ 0.81
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............................................... $ 37,251 $ 33,892 $ 28,557 $ 24,916 $ 22,213
Long-term obligations, including current portions.......... 41 203 362 523 712
Shareholders' equity....................................... 29,839 28,305 24,065 21,171 19,278
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS SUBJECT TO THE
SAFE HARBOR CREATED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE
WORDS "MAY," "WOULD," "COULD," "WILL," "EXPECT," "ESTIMATE," "ANTICIPATE,"
"BELIEVE," "INTENDS," "PLANS" AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. MANAGEMENT CAUTIONS THAT THESE
STATEMENTS REPRESENT PROJECTIONS AND ESTIMATES OF FUTURE PERFORMANCE AND INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. CHECKMATE'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS INCLUDING, WITHOUT LIMITATION, CHECKMATE'S HEAVY
RELIANCE ON CHECK READERS IN ITS PRODUCT MIX; DEPENDENCE BY CHECKMATE ON LIMITED
SUPPLIERS AND MANUFACTURERS OF COMPONENT PARTS OF ITS PRODUCTS; RAPID AND
SIGNIFICANT TECHNOLOGICAL DEVELOPMENTS THAT COULD DELAY THE INTRODUCTION OF
IMPROVEMENTS IN EXISTING PRODUCTS OR OF NEW PRODUCTS; ANY DEPENDENCIES ON ANY
PROPRIETARY TECHNOLOGIES (WHICH MAY BE INDEPENDENTLY
15
<PAGE>
DEVELOPED BY COMPETITORS); DEPENDENCE ON A SMALL NUMBER OF LARGE RETAIL AND BANK
CUSTOMERS; POTENTIAL FLUCTUATION IN FINANCIAL RESULTS AS A RESULT OF ANY
INABILITY TO MAKE SALES TO LARGE CUSTOMERS AS WELL AS THE VOLUME AND TIMING OF
BOOKINGS RECEIVED DURING A QUARTER AND VARIATIONS IN SALES MIX; COMPETITION FROM
EXISTING COMPANIES AS WELL AS NEW MARKET ENTRANTS; DEPENDENCE ON KEY PERSONNEL;
SUCCESSFUL INTEGRATION OF THE COMPANIES; AND THE OTHER FACTORS SET FORTH IN
"RISK FACTORS" ABOVE.
OVERVIEW
Checkmate supplies innovative electronic payment solutions for distributors,
retailers and financial service institutions. Checkmate's products include POS
software and terminals, comprising check readers, MICR analyzers, payment
authorization and point-of-transaction promotion/loyalty systems, signature
capture devices and electronic transaction processing equipment, all packaged
and integrated in cost justified solutions. As a full service provider,
Checkmate also offers professional services including application development,
consulting, project management, installation services and TotalCARE support and
maintenance.
Historically, Checkmate derived the majority of its net revenues from direct
sales of check readers to major retailers. Checkmate has focused its sales
efforts in the past three years on expanding its product offerings and sales
channels, while maintaining its strength in its existing areas. From 1995 to
1997, Checkmate increased its net revenues by 15.0%. This increase was the
result of increases in revenues from debit/credit card terminals and combination
units, which were partially offset by decreases in net revenues from check
readers and signature capture devices.
In 1995, 82.6% of net revenues were derived from direct sales to end users,
15.2% from sales to domestic and international resellers, and 2.2% from service
and other sources. In 1997, direct sales to end users declined to 67.6% of net
revenues, while sales to domestic and international resellers increased to
21.9%, service and other increased to 5.4%, and banking was added as a channel
and was 5.1% of net revenues.
The results reflected above demonstrate that Checkmate was successful in its
efforts to expand its product offerings and sales channels but was not effective
in maintaining its strength in existing areas. Management believes that this
ineffectiveness is due to a combination of factors, including limited market
saturation of its existing check reader in major retailers, the absence of a
"full solution" product in the signature capture market, and the absence of
sufficient new product offerings to sustain the high growth in net revenues that
Checkmate enjoyed through 1996.
In order to address the above factors, Checkmate has increased its efforts
in a number of areas. Checkmate has increased its internal research and
development efforts in order to improve existing products and develop new
products. In 1997, these efforts enabled Checkmate to announce three major
accomplishments. Checkmate introduced the new CM 2100 payment terminal, which
generated first year revenues in excess of any other product introduced by
Checkmate. In addition, Checkmate announced its new GEN4(TM) terminal
architecture and the base application for the CM 2010 combination unit, and is
developing additional new products for release in 1998.
In addition to the internal research and development efforts, Checkmate has
improved its product offerings through external media. In January 1998,
Checkmate completed its acquisition of Total Retail Solutions, a software
development and consulting organization specializing in electronic payments and
transaction handling solutions for supermarkets and retail businesses. Also in
January 1998, Checkmate and IVI entered into the Combination Agreement in order
to combine the two companies to become the third largest company in the
electronic payment solutions industry in North America. The Transaction is
expected to be completed during the second quarter of 1998, and should
immediately broaden product offerings for both companies while providing
operational synergies which are expected to make the combined company a more
efficient, profitable entity. There can be no assurance that the Transaction
will be completed or that such results will be realized.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items derived from Checkmate's
statements of operations from 1995 to 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Check readers................................... $ 13,189 39.4% $ 17,295 49.3% $ 20,194 69.3%
Debit/credit card terminals..................... 14,461 43.1 12,062 34.4 5,273 18.1
Combination units............................... 1,904 5.7 542 1.5 0 0.0
Signature capture devices....................... 1,046 3.1 2,749 7.8 2,567 8.8
Service and other............................... 2,926 8.7 2,456 7.0 1,126 3.8
--------- ----- --------- ----- --------- -----
33,526 100.0% 35,104 100.0% 29,160 100.0%
--------- ----- --------- ----- --------- -----
Cost of goods sold.............................. 20,879 62.3 20,572 58.6 17,184 58.9
--------- ----- --------- ----- --------- -----
Gross profit.................................... 12,647 37.7 14,532 41.4 11,976 41.1
Operating expenses:
Selling, general and administrative............. 11,306 33.7 9,325 26.6 7,310 25.1
Research and development........................ 1,129 3.4 991 2.8 499 1.7
Depreciation and amortization................... 722 2.1 579 1.6 496 1.7
--------- ----- --------- ----- --------- -----
Total operating expenses........................ 13,157 39.2 10,895 31.0 8,305 28.5
--------- ----- --------- ----- --------- -----
Operating income (loss)......................... (510) -1.5 3,637 10.4 3,671 12.6
--------- ----- --------- ----- --------- -----
Interest income, net............................ 312 0.9 371 1.0 429 1.4
--------- ----- --------- ----- --------- -----
Income (loss) before income taxes............... (198) -0.6 4,008 11.4 4,100 14.0
Provision for income tax expense (benefit)...... (69) -0.2 1,453 4.1 1,558 5.3
--------- ----- --------- ----- --------- -----
Net income (loss)............................... $ (129) -0.4% $ 2,555 7.3% $ 2,542 8.7%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
Any trends that may be derived from the above table are not necessarily
indicative of Checkmate's future operations.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1996
Net revenues decreased 4.5% in 1997. This decline primarily was due to
decreases of 23.7% and 62.0% in revenues from sales of check readers and
signature capture devices, respectively. These declines were partially offset by
an increase of 19.9% in sales of debit/credit card terminals, which contributed
43.1% of net revenues in 1997, up from 34.4% in 1996. By channel, net revenues
from sales to domestic and international resellers increased 31.6% in 1997,
while direct sales to end users decreased by 15.1% in the same period. The
decrease in sales of check readers and the decline in direct sales to end users
are related trends. Checkmate believes that the market for its existing check
readers in the top 100 retailers is becoming saturated, thereby decreasing the
available marketplace for Checkmate's existing products. However, management of
Checkmate believes that there is a demand for new product offerings planned to
be released in 1998, which are expected to reverse the trend of declining
revenues from check readers and from direct sales to end users. However, there
can be no assurance that planned new products will actually be released, that
the introduction of any new products will not be delayed, that any new products
will not contain errors or that any new products will be accepted by the market.
17
<PAGE>
Cost of goods sold as a percentage of net revenues was 62.3% in 1997 and
58.6% in 1996. The primary reason for the increase in this percentage was
selling price pressure from major retailers, as reflected in the decrease in net
revenues, and inefficiencies associated with start-up production of the new
CM2100 terminal. Additionally, depreciation and amortization included in cost of
goods sold increased by 70.8% as a percentage of net revenues from 1996 to 1997.
This increase is due to higher capitalized costs being depreciated without a
corresponding increase in net revenues. Checkmate anticipates that cost of goods
sold will be affected in the future by changes in product mix as well as by
selling price and unit cost changes, among other factors.
Selling, general and administrative expenses increased 21.2% in 1997. As a
percentage of net revenues, selling, general and administrative expenses
increased to 33.7% in 1997 from 26.6% in 1996. The increases were due primarily
to an increase in personnel and related costs required to support Checkmate's
anticipated growth in new products and net revenues. In addition, of the 21.2%
increase in dollar amount, 4.0% was due to costs incurred in connection with
severance arrangements for Checkmate's former president and chief executive
officer.
Gross product development expenditures include research and development
expense and capitalized and purchased software development costs and consist
primarily of labor costs. A summary of product development expenses and costs is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Gross product development expenditures.................................. $ 2,828 $ 1,634 $ 1,246
Less capitalized software development costs............................. 1,699 643 747
------------ ------------ ------------
Net research and development expense.................................... 1,129 991 499
Amortization of previously capitalized cost............................. 556 356 272
------------ ------------ ------------
Total expense........................................................... $ 1,685 $ 1,347 $ 771
------------ ------------ ------------
------------ ------------ ------------
Product development as a percent of net revenues:
Gross expenditures...................................................... 8.4% 4.7% 4.3%
Net expense............................................................. 3.4% 2.8% 1.7%
Total expense........................................................... 5.0% 3.8% 2.6%
</TABLE>
Gross product development expenditures increased by 73.1% and net research
and development expense increased by 13.9% in 1997 as a result of Checkmate's
continuing efforts to remain at the forefront of payment automation technology
by developing new products and enhancing its existing products. As noted in "--
Overview" above, Checkmate increased its efforts in the product development area
and announced several new product introductions during 1997. Checkmate focused
the increase in product development efforts on improving software solutions,
resulting in higher capitalized software development costs.
Depreciation and amortization expenses increased 24.7% in 1997 due primarily
to capital expenditures associated with the expansion of facilities in April
1997, upgrades of computer software and equipment, purchases of molds and
deferred development costs.
Interest expense decreased 24.3% in 1997 due to lower average principal
balance of long-term liabilities. Interest income decreased 16.9% in 1997 due to
lower average investments outstanding.
The effective tax rate was 34.9% in 1997 and 36.3% in 1996. The primary
reason for the decrease in the effective tax rate in 1997 was a lower effective
state tax rate.
As a result of the above factors, Checkmate incurred a loss of $129,000 in
1997 as compared to net income of $2.6 million in 1996. Basic earnings per share
(loss per share) was a loss of $0.02 in 1997 as compared to income of $0.50 in
1996. Diluted earnings per share (loss per share) was a loss of $0.02 in
18
<PAGE>
1997 as compared to income of $0.50 in 1996. The weighted average diluted shares
outstanding decreased 4.2% in 1997 due to the exclusion of common stock
equivalents from the computation of weighted average shares in 1997 resulting
from the net loss position for the year.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
Net revenues increased 20.4% in 1996. Growth in net revenues in 1996
primarily was generated by the newer debit/credit card terminals, which
contributed 34.4% of net revenues. Sales of signature capture devices and
service and other net revenues also increased in 1996 as compared to 1995. Net
revenues from check readers decreased 14.4% from 1995 to 1996. The decrease in
1996 is due primarily to the completion in 1995 of a large sale to a single
significant customer. By channel, net revenues from sales to domestic and
international resellers increased 55.1% in 1996, while direct sales to end users
decreased by 11.0% in the same period. These results are consistent with
Checkmate's efforts to transition itself from essentially a one product company
with one sales channel into a multi-product, multi-channel organization.
Cost of goods sold as a percentage of net revenues was 58.6% in 1996 and
58.9% in 1995. Various factors combined to result in the slight improvement from
1995 to 1996, none of which individually was significant.
Selling, general and administrative expenses increased 27.6% in 1996. These
expenses stated as a percentage of net revenues were 26.6% in 1996 and 25.1% in
1995. The increases in the dollar amounts were due primarily to an increase in
personnel and related costs required to support Checkmate's growth in net
revenues and new products.
Product development expenditures include research and development expense
and capitalized and purchased software development costs and consist primarily
of labor costs. A summary of product development efforts is included in the
comparison of 1997 and 1996 results of operations above. Gross product
development expenditures increased by 31.1% in 1996 and net research and
development expense increased by 98.6% in 1996 as a result of Checkmate's
continuing efforts to remain at the forefront of payment automation technology.
The increase in net research and development expense exceeded the increase in
gross expenditures due to an increase in hardware development efforts, which are
not capitalized as software development costs.
Depreciation and amortization expenses increased 16.6% in 1996 but decreased
as a percentage of net revenues to 1.6% in 1996 from 1.7% in 1995. The increase
in the dollar amount in 1996 primarily resulted from capital expenditures
associated with the expansion of Checkmate's headquarters during 1995. The
decrease as a percentage of net revenues is a result of the larger net revenue
base.
Interest expense decreased 27.8% in 1996 due to lower average principal
balance of long-term liabilities. Interest income decreased 15.8% in 1996 due to
lower average investments outstanding.
The effective tax rate was 36.3% in 1996 and 38.0% in 1995. The primary
reason for the decrease in the effective tax rate in 1996 was a lower effective
state tax rate.
Net income increased 0.5% in 1996. Basic earnings per share was $0.50 in
1996 and 1995. Diluted earnings per share was $0.46 in 1996 and $0.47 in 1995.
The weighted average diluted shares outstanding increased 3.0% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(1.8) million in
1997, $2.9 million in 1996 and $(345,000) in 1995. The net cash used in
operating activities in 1997 was primarily due to a 30.7% increase in accounts
receivable and a 43.2% increase in inventories. These increases were partially
offset by a 46.2% increase in depreciation and amortization, and a 42.9%
increase in accounts payable and accrued liabilities. Net cash provided by
operating activities in 1996 was primarily due to a 39.9% increase in
19
<PAGE>
depreciation and amortization, a 15.4% increase in accounts receivable and a
5.1% increase in inventories, and was partially offset by a 408.9% increase in
prepaid expenses. The decrease in the use of net cash during 1995 was primarily
due to a 74.3% increase in net income, a 47.1% increase in depreciation and
amortization and a 31.5% increase in inventories in 1995. Checkmate experiences
normal fluctuations in its accounts receivable balance, including days
outstanding, due to a variety of factors, including Checkmate's overall sales
performance when compared to prior periods, the timing of shipments to its
customers and individual customer negotiated terms of sale. The rate of
inventory turnover experienced by Checkmate also depends upon a variety of
factors, including anticipated inventory requirements to fulfill current and
future customer orders in a timely manner, individual customer negotiated
contracts of sale and the availability of key components used in the
manufacturing process. Increases in accounts receivable and inventories during
1997, 1996 and 1995 were caused by successively higher sales volumes in the
fourth quarter of each year and by new product introductions. Checkmate
anticipates that fluctuations in these accounts will continue in the future.
Net cash provided by (used in) investing activities was $(1.4) million in
1997, $(2.7) million in 1996 and $308,000 in 1995. Purchases of property and
equipment and additions to capitalized software and other noncurrent assets were
$4.8 million in 1997, $2.5 million in 1996 and $2.7 million in 1995. The
increase in these purchases in 1997 was due to expansion into an additional
facility, upgrades of computer hardware and software, increased software
development efforts, and purchases of molds for new products. These uses of net
cash were partially offset by the receipt of net proceeds from the sale of
investments of $3.4 million in 1997 and $3.0 million in 1995, and were increased
by the net purchase of investments of $190,000 in 1996.
Net cash provided by financing activities was $1.3 million in 1997, $1.1
million in 1996 and $169,000 in 1995. The increases in net cash provided by
financing activities in 1997 and 1996 were due to an increase in proceeds from
the exercise of stock options, primarily by the estate of a former employee.
Checkmate's working capital position was $22.7 million at December 31, 1997.
Checkmate had no material commitments for capital expenditures as of December
31, 1997. During 1998, Checkmate anticipates that it will spend approximately
$5.0 million for capital expenditures, including additions to capitalized
software, although no assurance can be given that Checkmate actually will make
any such capital expenditures or that the actual amount of such expenditures
will not be substantially more or less than $5.0 million. Checkmate believes
that its strong working capital position at December 31, 1997, together with
anticipated future cash flows from operations and the borrowings available under
its revolving credit agreement, are sufficient to meet Checkmate's operating
needs, including possible increases in accounts receivable and inventories,
along with planned capital expenditures for at least the next twelve to eighteen
months.
Checkmate's operating results have fluctuated on a quarterly basis in the
past and may vary significantly in future periods due to a variety of factors.
These factors include, but are not limited to, the timing of orders from and
shipments to major customers, the timing of new product introductions by
Checkmate and its competitors, variations in Checkmate's product mix and
component costs, and competitive pricing pressures. Due primarily to the above
factors, the results of any particular quarter may not be indicative of the
results for the full year.
IMPACT OF YEAR 2000
Checkmate's business and relationships with its customers depend
significantly on a number of computer software programs, internal operating
systems and connections to other networks, and the failure of any of these
programs, systems or networks to successfully address the Year 2000 data
rollover problem could have a material adverse effect on Checkmate's business,
financial condition and results of operations. Many installed computer software
and network processing systems currently accept only two-digit entries in the
date code field and may need to be upgraded or replaced in order to accurately
record
20
<PAGE>
and process information and transactions on and after January 1, 2000. Checkmate
believes that it has completed substantially all modifications of its affected
software programs and has minimal additional work required to finalize these
modifications. However, Checkmate is not certain as to whether the computer
software and business systems of its customers and suppliers are Year 2000
compliant. There can be no assurance that the failure or delay of Checkmate's
customers and suppliers in successfully addressing the Year 2000 issue or the
costs involved in such process will not have a material adverse effect on
Checkmate's business, financial condition and results of operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME ("Statement 130") which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt Statement 130 in 1998
and does not expect the effect of such adoption to be material to its financial
statements.
In June 1997 the FASB also issued Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("Statement 131") which
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company will adopt Statement 131
in 1998 and does not expect the effect of adoption to be material to its
financial statements.
FACTORS AFFECTING FUTURE PERFORMANCE
The following discussion addresses certain factors which may affect the
future performance of Checkmate, in most instances, without giving effect to the
proposed transaction with IVI.
RISKS ASSOCIATED WITH THE PROPOSED COMBINATION WITH INTERNATIONAL VERIFACT INC.
The Company and IVI entered into a definitive agreement to combine their
business operations on January 16, 1998. The consummation of this transaction is
subject to various conditions precedent, including approval by the shareholders
of both IVI and Checkmate, regulatory approval by the Securities and Exchange
Commission and certain Canadian agencies, as well as other traditional closing
conditions. There can be no assurance that these conditions will be met and that
the transaction will be consummated. The Company has devoted considerable time
and expense to the proposed transaction and will continue such efforts until
consummation. If the transaction is not consummated, there may be disputes
between IVI and Checkmate relating to the termination of the definitive
agreement which may result in litigation against the Company. In addition, the
definitive agreement provides that, if the agreement is terminated by a party
for certain reasons, the other party may be entitled to receive from the
terminating party a fee of $3,000,000. There can be no assurance that diversion
of management resources and expenses related to litigation or other contractual
obligations arising from a termination of the agreement will not have a material
adverse effect on the business, financial condition and results of operations of
the Company.
The proposed transaction will result in the integration of IVI and
Checkmate, which have previously operated independently. The consolidation of
functions, the integration of departments, systems and procedures, and the
relocation of staff present significant management challenges. There can be no
assurance that such actions will be successfully accomplished as rapidly as
currently expected. Moreover, although one of the primary purposes of the
transaction is to realize direct cost savings and other operating
21
<PAGE>
efficiencies, there can be no assurance of the extent to which any such cost
savings and efficiencies will be achieved. Failure to successfully integrate the
operations of IVI and Checkmate in a timely manner and to realize cost savings
and other operating efficiencies could have a material adverse effect on the
financial condition and results of operations of the combined company. In
addition, such integration may require the licensing or other transfer of
proprietary or currently licensed rights as well as the assumption of certain
obligations by and between the various parties. While management does not
believe that, in the circumstances, these requirements will give rise to tax
consequences, it is possible that they may give rise to tax consequences both
immediately and on an ongoing basis.
TECHNOLOGICAL CHANGE AND PRODUCT OBSOLESCENCE; DEPENDENCE ON NEW PRODUCT
DEVELOPMENT
The EFT/POS and transaction automation markets in which Checkmate competes
have been characterized by rapid and significant technological change, frequent
new product introductions and relatively short product life cycles. There can be
no assurance that technological developments will not render Checkmate's
existing products either uneconomical or obsolete, or that the Company will be
able to respond to the market's demand for new products or improved technology.
The Company's future sales and profitability will depend on its ability to
continue to develop and market new and improved products that can achieve
significant market acceptance. Current competitors or new market entrants could
introduce new or enhanced products with features which render the Company's
products obsolete or less marketable. Checkmate continually seeks to enhance and
improve its products and develop new products, particularly in the area of
software. Substantial start-up costs are associated with the introduction of new
products, which could cause the Company to incur operating losses or experience
a reduced level of profitability in periods following their introduction.
Further, unanticipated technical or other development problems could result in
material delays in new product commercialization or significantly increased
costs. There can be no assurance that any new product will receive market
acceptance or that the product can be sold at a profit. The ability of the
Company to compete successfully will depend on its ability to maintain a
technically competent research and development staff and to adapt to
technological changes and advances in the industry. While Checkmate believes
that its products are currently competitive, future demand for its products will
depend on its ability to enhance and improve existing products and successfully
develop and market new products. There can be no assurance that the Company will
be able to successfully enhance its existing products or develop new products or
that any such enhanced or new products will be commercially acceptable.
RELIANCE ON LARGE CUSTOMERS
Checkmate has historically relied upon a small number of large retail
customers, each with a large number of POS stations, for a significant
percentage of its revenues. Checkmate's two largest customers are Wal-Mart
Stores, Inc. and Kmart Corporation, sales to which accounted for 17% and 10% of
Checkmate's total net revenues in 1997, respectively. During 1996, sales to two
of Checkmate's customers accounted for 28% of Checkmate's total net revenues.
Checkmate derives most of its revenues from the initial installation of
products. Checkmate does, however, derive additional revenues as its customers
expand their operations to new locations or install other products. Accordingly,
the Company's future success will depend on its continued ability to
successfully market its products to retail customers with a large number of POS
stations and to large financial institutions. There can be no assurance that the
Company will continue to secure the business of a significant number of new
customers or that demand for the Company's products win be sufficient to ensure
a broad and sustainable source of revenue. In addition, the timing of orders
from large customers, and shipments against those orders, can result in
significant quarter to quarter variations in revenue and profit.
22
<PAGE>
COMPETITION
The business in which Checkmate operates is highly competitive. The
Company's sales and potential profitability will be affected by competition from
other businesses, including established firms with greater financial resources
and more experience, as well as by competition from other forms of data entry.
Checkmate faces significant competition from VeriFone, Inc. and is aware of at
least six other competitors which market check readers, including five with MICR
reading capabilities. In addition, payment authorization systems, signature
capture and verification products and specialized document readers are marketed
by a number of competitors and additional competitors may enter the market as
the demand for these types of products expands. Some of these existing and
potential competitors have significantly larger financial, technical and
marketing resources than the Company, even after the consummation of the
proposed transaction, and there can be no assurance that the Company will be
able to compete successfully with them in the future.
Checkmate anticipates that it will continue its efforts to lower the cost of
its products through manufacturing efficiencies and other cost saving measures
to maintain competitive prices for its products. The Company's continuing sales
and marketing efforts will be critical as it faces competition in the
marketplace. There can be no assurance that the Company will be able to develop
or sustain a competitive position for its products. Although Checkmate has no
specific information regarding the plans of its competitors, it assumes that its
competitors are continuously working on product enhancements, improved
technologies and alternative products. There can be no assurance that a
competitor will not develop improved or alternative products in the future which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY, LIMITED PROTECTION OF PROPRIETARY
TECHNOLOGY AND RISK OF
INFRINGEMENT
Checkmate relies on technologies that are protected by a combination of
patents, trademarks, trade secrets, copyrights and employee nondisclosure
agreements. Checkmate's hand readers incorporate technology covered by a U.S.
patent that expires in 2008. The technique employed to enable Checkmate's
readers to use "parasitic" power from lower power sources incorporates
technology covered by a U.S. patent that expires in 2013. Upon the expiration of
these patents, the Company's competitors may be able to incorporate the
technology covered by these patents into their products which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate. The Company does not believe that any of its products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products, and Checkmate has agreed to indemnify many of its customers
against such claims. The Company anticipates that the number of infringement
claims will increase as the number of electronic commerce products and services
increase and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming to
address, result in costly litigation, and may not be resolved on terms
acceptable to the Company, or at all, which could have a material adverse effect
on the Company's business, financial condition or results of operations.
DEPENDENCE ON SUPPLIERS AND MANUFACTURERS
Checkmate currently assembles most of its products at its manufacturing
facility in Roswell, Georgia. However, certain components used in these products
are manufactured by and are available from only a limited number of sources. In
addition, some of Checkmate's products are manufactured by third parties.
23
<PAGE>
Certain of these products are currently purchased from single suppliers, and the
failure of any such supplier to meet its commitment on schedule could adversely
affect the Company. Although Checkmate has been able to obtain an adequate
supply of such products, there can be no assurance that it will be able to
continue to do so at reasonable prices in the future. If a sole source supplier
were to go out of business or otherwise become unable to meet its supply
commitments to the Company, the process of locating and qualifying alternate
sources could require up to several months during which time the Company's
production could be delayed. Such delays could adversely affect the Company's
business, financial condition or results of operations. Use of outside
manufacturers and suppliers subjects the Company to additional risks, including
potential quality assurance problems, availability of suitable competitive and
cost effective manufacturers and suppliers, and potential loss of product
margin. Additionally, the Company's systems rely upon certain memory products
(static random access memory), the prices and availability of which have
fluctuated significantly in the past.
POTENTIAL FLUCTUATION IN FINANCIAL RESULTS
Many customers of Checkmate order products for immediate delivery and,
therefore, a substantial amount of the Company's net revenues in each quarter
will result from orders booked in that quarter. In addition, certain of the
products offered by Checkmate carry lower gross margins than other products, and
any unanticipated shift in the product mix to lower margin products as a
percentage of total revenues could adversely affect the Company's profitability.
Accordingly, the Company's quarterly net sales and operating results may vary
significantly as a result of, among other things, the ability of the Company to
make sales to large customers, the volume and timing of bookings received during
a quarter and variations in sales mix, as well as increased competition,
announcements or introductions of new products by the Company or its
competitors, changes in the costs of components, delays in production schedules
and changes in economic or other conditions affecting customers or end users of
its products. Furthermore, because Checkmate's systems historically have been
used primarily by U.S. retail merchants, Checkmate has experienced strong demand
for its products in the second, third and fourth quarters as retailers purchase
transaction automation systems for installation prior to and during the fourth
quarter holiday season. In past years, demand from retail customers for
Checkmate's products has tended to flatten in the succeeding first calendar
quarter. Accordingly, the historical financial performance of the Company is not
necessarily a meaningful indicator of future results of the Company and, in
general, management expects that the Company's financial results may vary from
period to period.
POTENTIAL "YEAR 2000" PROBLEMS
It is possible that Checkmate's currently installed computer systems,
software products or other business systems, or those of Checkmate's suppliers
or customers, will not always accept input of, store, manipulate and output
dates in the years 1999, 2000 or thereafter without error or interruption.
Checkmate has conducted a review of its business systems, including its computer
systems, to attempt to identify ways in which its systems could be affected by
problems in correctly processing date information, and Checkmate currently
believes that its systems and products will correctly process date information
in such years. There can be no assurance that Checkmate will identify all
date-handling problems in its systems and products, or that its customers and
suppliers will do so, in advance of their occurrence or that Checkmate or its
customers and suppliers will be able to successfully remedy problems that are
discovered. The expenses of Checkmate's efforts to identify and address such
problems, or the expenses or liabilities to which it may become subject as a
result of such problems, could have a material adverse effect on the Company's
results of operations and financial condition.
PRODUCT DEFECTS
Products as complex as those offered by Checkmate may contain undetected
design defects or software or hardware errors that could be difficult to detect
and correct when first introduced or as new
24
<PAGE>
versions are released. Such errors have occurred in the past, and there can be
no assurance that, despite testing by the Company and its customers, errors will
not be found in new or enhanced products after commencement of commercial
shipments. Moreover, there can be no assurance that once detected, such errors
can be corrected in a timely manner, if at all. Software errors may take several
months to correct, if they can be corrected at all, and hardware errors may take
even longer to rectify. The occurrence of any such software or hardware errors,
as well as any delay in correcting them, could result in delays in the shipment
of products, loss of market acceptance of the Company's products, additional
warranty expense, diversion of engineering and other resources from the
Company's product development efforts or the loss of credibility with the
Company's distributors and customers, any of which could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company's POS payment systems products are used to process payment
transactions and, as a result, the security features of such products are
important. In general, the Company's POS payment systems products are designed
to comply with industry practices relating to security in payment transactions.
Any failure of the security features of the Company's products could adversely
affect the marketing of such products and any violation of its product
warranties resulting from security breaches could result in claims against the
Company which could have a material adverse effect on the Company's business,
financial condition or results of operations.
GOVERNMENT AND INDUSTRY REGULATION
Government regulatory policies affect charges and terms for both
private-line and public network automated transaction processing services.
Therefore, changes in such policies which make it more costly to communicate on
such networks could adversely affect the demand for transaction automation
systems, increase the costs of development or increase the opportunity for
additional competition. Checkmate must also obtain product certification on the
applicable acquiror's systems in the U.S., Canada and other countries. Any
delays in obtaining necessary certifications with respect to future products
could delay their introduction or result in their cancellation, which could have
a material adverse effect on the Company. In addition, the United States Federal
Communications Commission requires that Checkmate's products which are sold in
the United States comply with certain rules and regulations governing their
performance. Compliance with future regulations or changes in the interpretation
of existing regulations could result in the need to modify products or systems
which may involve substantial costs or delays in sales and could have a material
adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent on the skills and efforts of
its senior management. Consequently, the loss of one or more members of senior
management could have a material adverse effect on the Company. Further, the
Company's business requires that it continue to attract and retain additional
personnel with a variety of technical and managerial skills, including
engineering, computer programming and sales expertise. Significant competition
exists for such personnel, and there can be no assurance that the Company will
be able to attract and retain personnel with the skills and experience needed to
achieve and manage growth.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company and the report of
independent auditors thereon are set forth following the Index of Financial
Statements on page F-1 of this report:
Balance Sheets at December 31, 1997 and 1996
25
<PAGE>
Statements of Operations for each of the three years in the period ended
December 31, 1997
Statements of Shareholders' Equity for each of the three years in the period
ended December 31, 1997
Statements of Cash Flows for each of the three years in the period ended
December 31, 1997
Notes to Financial Statements
The supplementary financial information required to be included in this
report is set forth in Note 10 of Notes to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
JAMES W. CROWLEY, AGE 77, has been a director of the Company at various
times since 1976 and was most recently elected as a director in 1992. He has
been retired for more than six years. Prior to his retirement he was Chairman of
the Board of A.M.I., Inc., a technical school in Daytona Beach, Florida. He also
was a founder of Repadco Industries, Inc., an outdoor advertising company in
Daytona Beach, Florida.
GREGORY A. LEWIS, AGE 52, has been the President and Chief Operating Officer
and a director of the Company since September 4, 1997. Prior to joining
Checkmate, Lewis was employed by VeriFone, Inc. Lewis began his career at
VeriFone in 1984 as one of the founding executives and served in various
executive positions during his employment. His most recent assignment was vice
president and general manager of the Emerging Markets Division. Prior to 1984,
Lewis held various executive positions during his fourteen-year career at
National Data Corporation, as well as serving as executive vice president of
Business Development with Buy Pass Corporation.
JOHN J. NEUBERT, AGE 59, has been the Senior Vice President-Finance and
Administration and Chief Financial Officer of the Company since 1990 and a
director of the Company since May 1994. Mr. Neubert also was the Chief Operating
Officer of the Company from May 1994 until September 1997. Mr. Neubert was
Executive Vice President and Chief Financial Officer of Technology Research
Group, Inc., a software development and systems 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.
FRANK C. PETERS, AGE 50, has been a director of the Company since 1993. Mr.
Peters has been a Senior Vice President and Chief Financial Officer of
TelephoNET Corp., an internet and telephone provider, since April 1997. From
August 1995 to April 1997, Mr. Peters was the President and Chief Executive
Officer of MICR-Net International, Inc., an authenticity verification systems
company. Mr. Peters served as Vice President and Controller of Merry-Go-Round
Enterprises, Inc., a publicly traded specialty retailer of men's and women's
apparel from 1974 until his retirement in January 1995. In that capacity, Mr.
Peters has served as the principal accounting officer.
J. STANFORD SPENCE, age 68, has been Chief Executive Officer of the Company
since July 1997, and is the founder and, except for two brief periods, has been
Chairman of the Board of the Company and its predecessors since 1973. Mr. Spence
also served as interim Chief Executive Officer of the Company from May 1994
until August 1994. Mr. Spence has been Chairman of the Board of Directors, Chief
Executive Officer and owner of Stanford Technologies, Inc., a financial software
development company in Austin, Texas, since 1985.
HOWARD W. YENKE, AGE 61, has been a director of the Company since 1993.
Since December 1997, Mr. Yenke has been the president and chief executive
officer of Silent Systems, Inc., a private company providing thermal and
acoustical products to the PC industry. From July 1996 to November 1997, Mr.
Yenke was the president and chief executive officer of LANart Corp., a private
local area network company. From November 1995 to June 1997, Mr. Yenke was the
President of The Yenke Group, a business consulting firm. From November 1994 to
October 1995, Mr. Yenke was the president and chief executive officer of
Enterprise Development Corporation of Palm Beach County, an economic development
consulting firm. From June 1994 to October 1994, Mr. Yenke was president and
chief executive officer of Arco Computer Products. From May 1989 to March 1994,
Mr. Yenke was employed by Boca Research, Inc. in several capacities, including
its president and chief executive officer from September 1991 through March
1994. Prior thereto, Mr. Yenke was employed by IBM Corporation in various
executive
27
<PAGE>
management positions. Mr. Yenke is a Director of Communications Systems
International, Inc., Access Solutions International, Inc., and several private
companies.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation earned by (a) each person
who served as the Chief Executive Officer of the Company during any part of the
fiscal year ended December 31, 1997, (b) up to four other executive officers of
the Company who served as such at December 31, 1997 and whose annual
compensation and bonus was $100,000 or more and (c) any person for whom
disclosure would have been provided pursuant to clause (b) but for the fact that
the person did not serve as an executive officer at December 31, 1997
(collectively, the "Named Executive Officers"). For information regarding the
various factors considered by the Compensation and Stock Option Committee of the
Board of Directors in establishing the compensation of such persons for 1997,
see "Compensation and Stock Option Committee Report on Executive Compensation"
below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND ----------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION(1) YEAR SALARY($)(1) BONUS($) OPTIONS(#) ($)(2)
- -------------------------------------------------- --------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
J. Stanford Spence................................ 1997 -- -- 10,000 $ 14,000
CHAIRMAN OF THE BOARD AND 1996 -- -- 10,000 9,000
CHIEF EXECUTIVE OFFICER 1995 -- -- 10,000 11,500
Jerry P. Malec.................................... 1997 $ 112,000(3) -- -- 232,958
FORMER PRESIDENT AND CHIEF 1996 216,000 $ 67,500 -- *
EXECUTIVE OFFICER 1995 200,000 125,000 100,000 *
John J. Neubert................................... 1997 129,600 -- -- *
SENIOR VICE PRESIDENT FINANCE 1996 129,600 43,500 -- *
AND ADMINISTRATION AND CHIEF 1995 120,000 80,000 50,000 *
FINANCIAL OFFICER
</TABLE>
- ------------------------
(1) Includes amounts deferred at the election of the officers pursuant to the
Company's Section 401(k) retirement plan.
(2) Reflects (a) directors fees paid to Mr. Spence in his capacity as a
non-employee director of the Company in each of 1997, 1996 and 1995; (b)
amounts of premiums paid by the Company for term life insurance policies on
the lives of the Named Executive Officers, the proceeds of which are payable
to the respective beneficiaries designated by them ($1,013 for Mr. Malec in
1997); (c) amounts contributed by the Company on behalf of the Named
Executive Officers pursuant to the Company's Section 401(k) retirement plan
($3,445 for Mr. Malec in 1997); (d) consulting fees of $1,000 paid to Mr.
Spence in 1997; and (e) severance payments for Mr. Malec of $228,500 in
1997. Amounts denoted by an asterisk are below 10% of the total annual
salary and bonus reported for the Named Executive Officer for the respective
year.
(3) The 1997 salary paid to Mr. Malec is for the period from January 1, 1997
through July 7, 1997 (effective date of termination).
28
<PAGE>
STOCK OPTIONS
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
INDIVIDUAL GRANTS OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------------------------------------- ------------- ----------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Stanford Spence............................. 10,000 1.4% $ 12.375 5/19/07 $ 75,565 $ 194,361
Jerry P. Malec................................. -- -- -- -- -- --
John J. Neubert................................ -- -- -- -- -- --
</TABLE>
The following table sets forth information regarding (i) all exercises of
stock options by the named executive officers in 1997 and (ii) the number of
shares underlying stock options held by the Named Executive Officers as of
December 31, 1997, and the respective values of these unexercised options at
December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
-------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL AT FISCAL YEAR
SHARES YEAREND(#) END($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------------- --------------- ------------------- -----------------------
J. Stanford Spence........................... -- -- 130,000/10,000 -/ -
Jerry P. Malec............................... -- -- -/ - - / -
John J. Neubert.............................. -- -- 233,334/16,666 -/ -
</TABLE>
- ------------------------
(1) Such value is computed by subtracting the option exercise price from the
market price of the Common Stock on (a) the date of exercise or (b) December
31, 1997, in the case of unexercised options, and multiplying the resulting
figure by the total number of shares underlying the options in question.
Based on a closing price of $6.875 as of December 31, 1997, none of the
options held by Named Executive Officers are in-the-money.
29
<PAGE>
COMPENSATION AND STOCK OPTION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
This report by the Compensation and Stock Option Committee of the Board of
Directors (the "Committee") discusses the Committee's compensation objectives
and policies applicable to the Company's executive officers. The report reviews
the Committee's policy generally with respect to the compensation of all
executive officers as a group for 1996 and specifically reviews the compensation
established for each person who served as the Chief Executive Officer of the
Company during 1997 as reported in the Summary Compensation Table. The Committee
was composed entirely of non-employee directors of the Company during 1997.
COMPENSATION POLICY FOR EXECUTIVE OFFICERS
The Company's compensation policies for its executive officers are intended
to create a direct relationship between the level of compensation paid to
executives and the Company's current and long-term level of performance. The
Committee believes that this relationship is best implemented by providing a
compensation package consisting of separate components, all of which are
designed to enhance the Company's overall performance. These components are base
salary, short-term bonus compensation and long-term incentive compensation in
the form of stock options.
The base salaries for the Company's executive officers are established by
the Committee at the beginning of each year based on the Committee's subjective
evaluation of how well the executive officers fulfilled their respective
responsibilities in the prior year. In making this determination, the Committee
takes into consideration the individual performance of the executive officers in
the prior year in relation to the financial goals established for the Company by
the Board of Directors and the Company's financial performance for the prior
year. In determining the base salaries of the executive officers for 1997, the
Committee considered in particular the fact that although the Company's net
revenues increased from $29.2 million in 1995 to $35.1 million in 1996, net
income remained essentially unchanged at $2.5 million in both 1995 and 1996. In
view of the Company's performance in 1996, and based upon the Committee's
general understanding of the salary levels paid to executive officers performing
equivalent functions at similar companies in the same or related industries, the
Committee made no changes in the base salaries of the Company's executive
officers for 1997.
Bonuses established for the executive officers are intended to provide an
incentive for improved performance in the coming year. Target bonus levels for
the executive officers are established by the Committee at the beginning of each
year, based on targeted levels of pre-tax income for such year. In view of the
Company's financial performance in 1997, no bonuses were paid to any of the
executive officers for 1997.
The Company's long-term incentive compensation plan for its executive
officers is based on the Company's 1993 Stock Option Plan. This plan promotes
ownership of the Company's Common Stock, which in turn provides a common
interest between the shareholders of the Company and the executive officers of
the Company and establishes a direct link between any compensation received
under the Plan (through the exercise of stock options) and the performance of
the Company (as reflected by increases in the price of its Common Stock) and the
contribution of the individual thereto. Options, usually granted annually, have
an exercise price equal to the fair market value of the shares on the date of
grant and, to encourage a long-term perspective, have an exercise period of ten
years. The number of options granted to executive officers is determined by the
Committee, which is charged with administering the 1993 Stock Option Plan. All
of the Company's executive officers have been granted stock options in prior
years, but no options were granted in 1997 to any executive officers under the
1993 Stock Option Plan, except for options to purchase 300,000 shares that were
granted at fair market value to the Company's new President and Chief Operating
Officer when he was hired in September 1997.
30
<PAGE>
The compensation established for the Company's executive officers for 1997
was based, in part, on the Committee's understanding of compensation amounts and
forms paid to persons in comparable roles performing at comparable levels at
other companies in the same or related industries. Such amounts, however, mainly
reflect the subjective discretion of the members of the Committee based on their
evaluation of the Company's current and anticipated future financial
performance, the contribution of the individual executive officers to such
financial performance, the contribution of the individual executive officers to
the Company in areas not necessarily reflected by the Company's financial
performance and the most appropriate incentive to link the performance and
compensation of the executive officers to shareholder returns on the Company's
Common Stock.
CHIEF EXECUTIVE OFFICER COMPENSATION
In structuring the 1997 compensation plan for Mr. Malec, the Committee
considered the alignment of his compensation with the financial performance of
the Company to be essential. Accordingly, the Committee implemented a
compensation structure that tied high levels of compensation for Mr. Malec to a
substantial improvement in corporate performance, including new product and
service developments, that would correspondingly enhance shareholder value. As
described above, the Committee, in its subjective discretion, elected not to
increase Mr. Malec's base salary for 1997 in view of the Company's financial
performance in 1996. Accordingly, Mr. Malec's based 1997 salary remained at
$216,000 per year, unchanged from his 1996 base salary. Because Mr. Malec
resigned from the Company on July 7, 1997, he received no bonus for 1997. No
stock options were granted to Mr. Malec in 1997.
Mr. Jerry P. Malec resigned from the positions of President, Chief Executive
Officer and director of the Company effective as of July 7, 1997. In connection
with his resignation, Mr. Malec entered into a severance agreement with the
Company which provided that, in consideration for the termination of Mr. Malec's
employment agreement, Mr. Malec's release of the Company for any claims which he
may have against the Company and certain other agreements, the Company would pay
Mr. Malec a sum equal to three times his current monthly base salary and would
allow Mr. Malec to receive all vested benefits under the Company's employee
benefit plans, including payment for accrued and unused vacation. In addition,
Mr. Malec and the Company agreed that the Company would cancel approximately
318,000 stock options held by Mr. Malec in consideration for the Company's
payment on behalf of Mr. Malec of the $8.25 per option exercise price of 30,750
options held by Mr. Malec which resulted in Mr. Malec owning 30,750 shares of
the Company's Common Stock.
On July 7, 1997, following Mr. Malec's resignation as President and Chief
Executive Officer of the Company, the Board of Directors elected J. Stanford
Spence, who was serving as the Chairman of the Board of the Company in a
non-employee capacity, to the additional position of President and Chief
Executive Officer to succeed Mr. Malec. Mr. Spence resigned as a member of the
Committee as of that date. Mr. Spence served as Chairman of the Board, President
and Chief Executive Officer without compensation until September 1997 when the
Company hired a new President and Chief Operating Officer, and Mr. Spence has
continued to serve as Chairman of the Board and Chief Executive Officer without
compensation, other than options granted to him at fair market value under the
1994 Directors Stock Option Plan. See "-Director Compensation" below.
SECTION 162(M) OF THE INTERNAL REVENUE CODE
It is the responsibility of the Committee to address the issues raised by
Section 162(m) of the Internal Revenue Code, which made certain
non-performance-based compensation in excess of $1,000,000 to executives of
public companies non-deductible to these companies. The Committee has reviewed
the issues applicable to the Company and has determined that it is not necessary
for the Company to take any action at this time with regard to this new limit.
31
<PAGE>
COMPENSATION AND STOCK OPTION COMMITTEE
James W. Crowley
Frank C. Peters
Howard W. Yenke
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Compensation and Stock Option Committee consisted of James
W. Crowley, Frank C. Peters, Howard W. Yenke and, until July 7, 1997, J.
Stanford Spence. Messrs. Crowley, Peters and Yenke were non-employee directors
of the Company throughout the year, and Mr. Spence served in a non-employee
capacity as Chairman of the Board of the Company until July 7, 1997, when he was
elected to the additional position of President and Chief Executive Officer of
the Company and resigned from the Committee. See "Item 13. Certain Relationships
and Related Transactions."
EMPLOYMENT AGREEMENTS
On January 1, 1998, Checkmate and Mr. John J. Neubert entered into a three
year employment agreement. The agreement provides for Mr. Neubert's employment
as Executive Vice President and Chief Financial Officer of Checkmate at a base
salary of $160,000, $175,000 and $190,000 per year, respectively. The employment
agreement provides that in the event of termination: (i) by Mr. Neubert for good
reason, by Checkmate other than for cause, death or disability or upon the
expiration of the term thereof, Mr. Neubert will receive a lump sum payment
equal to (a) his unpaid compensation up to the date of termination, (b) the
product of his annual bonus for the year of the date of termination and a
fraction, the numerator of which is the number of days in the current fiscal
year up to the date of termination and the denominator of which is 365, (c) a
severance payment equal to the present value of the income stream represented by
a continuation of his base salary and target annual bonus, unless the date of
termination occurs within two years of a change in control, in which case the
severance payment is equal to two times the appropriate base salary and annual
bonus for Mr. Neubert in effect for that year; (ii) by Mr. Neubert's death, his
estate or beneficiary will be entitled to receive his unpaid compensation up to
the date of his death and any other benefits accrued up to the date of his
death; and (iii) by Mr. Neubert's disability, retirement or voluntary
termination without good reason or by Checkmate for cause, he will be entitled
to receive is unpaid compensation up to the date of termination.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive a fee of $4,000 per
year, payable on a quarterly basis, a fee of $1,250 for each regularly scheduled
meeting attended and a fee of $250 for each scheduled telephone meeting
attended. Members of the Audit and the Compensation and Stock Option Committees
receive an annual fee of $2,000 for service on one or both of these committees.
Additionally, each non-employee member of the Board of Directors is granted
options to purchase 10,000 shares of the Company's Common Stock per year
pursuant to the Company's 1994 Directors Stock Option Plan. On May 19, 1997,
options to purchase 10,000 shares of Common Stock were granted to each of the
non-employee directors of the Company -- James W. Crowley, Frank C. Peters, J.
Stanford Spence and Howard W. Yenke -- pursuant to the 1994 Directors Stock
Option Plan. The exercise price of these options was $12.375 per share, which
was the closing sale price of the Company's Common Stock on the Nasdaq National
Market on the date of grant. The options vest on May 19, 1998, or sooner upon
the death or disability of the optionee or the occurrence of certain events
constituting a "change of control" of the Company, as such term is defined in
the 1994 Directors Stock Option Plan. The options expire on May 19, 2007.
32
<PAGE>
STOCK PERFORMANCE GRAPH
The Company's Common Stock began trading on the Nasdaq National Market
System on September 28, 1993. The price information reflected for the Company's
Common Stock in the following performance graph and accompanying table
represents the closing sales prices of the Common Stock for the period from
September 28, 1993 through December 31, 1997, on an annual basis. The graph and
the accompanying table compare the cumulative total shareholders' return on the
Company's Common Stock during such period with the cumulative total return of
the Nasdaq Stock Market (U.S. Companies) Index and the Nasdaq Computer
Manufacturing Companies Index for such period. The calculations in the graph and
table assume that $100 was invested on September 28, 1993, in each of the
Company's Common Stock and each index and also assume dividend reinvestment.
[GRAPH]
<TABLE>
<CAPTION>
9/28/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Composite Index................................ 100.00 104.01 101.67 143.78 176.86 217.12
Nasdaq Computer Index................................. 100.00 114.54 125.80 198.16 266.09 321.89
Checkmate Electronics, Inc............................ 100.00 111.76 85.29 173.53 152.94 80.88
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, and
regulations of the Securities and Exchange Commission thereunder require the
Company's directors and executive officers and persons who own more than 10% of
the Company's Common Stock, as well as certain affiliates of such persons, to
file initial reports of their ownership of the Company's Common Stock and
subsequent reports of changes in such ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. Directors,
executive officers and persons owning more than 10% of the Company's Common
Stock are required by Securities and Exchange Commission regulations to furnish
the Company with copies of all Section 16(a) reports they file. Based solely on
its review of the copies of such reports received by it and written
representations that no other reports were required for those persons, the
Company believes that during the year ended December 31, 1997, all filing
requirements applicable to its directors, executive officers and owners of more
than 10% of its Common Stock were complied with in a timely manner.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of shares of the Company's Common Stock as of December 31, 1997, by
(i) each shareholder known by the Company to beneficially own five percent or
more of the outstanding shares of such Common Stock, (ii) each director
33
<PAGE>
of the Company; (iii) each of the Named Executive Officers; and (iv) all
directors and executive officers of the Company as a group.
Stock ownership information has been furnished to the Company by the named
person. Beneficial ownership as reported in this section was determined in
accordance with Securities and Exchange Commission regulations and includes
shares of Common Stock as to which a person possesses sole or shared voting
and/or investment power and shares which may be acquired on or before March 1,
1998 upon the exercise of stock options. Except as otherwise noted in the
footnotes below, the named persons have sole voting and investment power with
regard to the shares shown as beneficially owned by such persons. Unless
otherwise indicated, the business address of each person is the Company's
corporate address.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OWNED(1)
- --------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
5% Owners:
Dudley L. Moore, Jr.................................................................... 494,788(3) 9.13%
Directors:
J. Stanford Spence..................................................................... 636,055(2) 11.73%
John J. Neubert........................................................................ 268,112(4) 4.95%
James W. Crowley....................................................................... 167,028(4) 3.08%
Gregory A. Lewis....................................................................... 60,000(4) 1.11%
Frank C. Peters........................................................................ 33,000(4) *
Howard W. Yenke........................................................................ 30,000(4) *
Other Named Executive Officer:
Jerry P. Malec......................................................................... 31,962 *
All directors and executive officers as a group (6 persons)............................ 1,194,195(5) 22.03%
</TABLE>
- ------------------------
(1) The percentages are based upon the 5,420,188 shares of the Company's Common
Stock issued and outstanding as of March 17, 1998. Percentages less than one
percent are denoted by an asterisk.
(2) The shares shown include 26,397 shares owned by Stanford Technologies, Inc.,
a corporation of which Mr. Spence and his wife are the sole shareholders,
and 130,000 shares that may be acquired upon exercise of stock options
granted to Mr. Spence. Mr. Spence's address is 7209 Valburn Drive, Austin,
Texas 78731. See "Item 11. Executive Compensation--Stock Options."
(3) The shares shown include 466,994 shares owned by Moore family partnerships,
over which shares Mr. Moore, as the general partner of each of the
partnerships, has voting and investment control. Mr. Moore's address is 1000
Parkwood Circle, #1000, Atlanta, Georgia 30339.
(4) Includes all shares which may be acquired within 60 days after December 31,
1997 by the exercise of stock options under the Company's stock option plan
as follows: 233,334 shares by Mr. Neubert, 30,000 shares by Mr. Crowley,
60,000 shares by Mr. Lewis, 30,000 shares by Mr. Peters, and 28,750 shares
by Mr. Yenke.
(5) The shares shown include 452,084 shares that may be acquired upon exercise
of stock options granted to the directors and executive officers of the
Company.
34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1984, the Company entered into an agreement that gave Mr. Spence,
exclusive rights to sell and market the Company's MICR reader products.
Subsequently, after determining that the Company should market its own products,
the Company entered into a settlement agreement with Mr. Spence and Stanford
Technologies, Inc. ("STI"), which is owned by Mr. Spence and his wife (the "STI
Agreement"). Pursuant to the STI Agreement, Mr. Spence and STI transferred and
assigned to the Company all of their rights to market the Company's MICR
analyzers. Also pursuant to the STI Agreement, Mr. Spence and STI agreed to
refrain from competing against the Company for a period of eleven years
following his resignation or removal from the Company's Board of Directors. In
exchange for such benefits, the STI Agreement provides that the Company shall
make minimum monthly payments aggregating no less than $15,000 per month (of
which $10,000 is adjusted semi-annually for inflation) or, at the Company's
option in order to accelerate full payments (as described in the preceding
sentence), 5% of sales if this amount exceeds the minimum aggregate amount due.
Payments under the terms of the STI Agreement terminate upon the first to occur
of (j) June 30, 2000; or (ii) that time at which payments pursuant to the STI
Agreement equal $1,758,321 (plus adjustments for inflation). The Company paid
$216,000 to STI in 1997 pursuant to the STI Agreement, and as of December 31,
1997, a total of $1,613,000 (including $203,000 of inflation adjustments) had
been paid by the Company to STI pursuant to the STI Agreement.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The following financial statements of the Company and the related report of
independent auditors thereon are set forth immediately following the Index of
Financial Statements which appears on page F-1 of this report:
Report of Independent Auditors
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for each of the three years in the period ended
December 31, 1997
Statements of Shareholders' Equity for each of the three years in the period
ended December 31, 1997
Statements of Cash Flows for each of the three years in the period ended
December 31, 1997
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
such schedules are not required under the related instructions or are
inapplicable or because the information required is included in the financial
statements or notes thereto.
3. EXHIBITS
The following exhibits are filed with or incorporated by reference in this
report. Where such filing is made by incorporation by reference to a previously
filed registration statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any exhibit upon request to
Valerie J. David, Investor Relations Department, Checkmate Electronics, Inc.,
1003 Mansell Road, Roswell, Georgia 30076; telephone (770) 594-6000. There is a
charge of $.50 per page to cover expenses for copying and mailing. See the Index
of Exhibits included with the Exhibits filed as part of this report.
<TABLE>
<C> <S>
2 Combination Agreement dated January 16, 1998 by and among IVI Checkmate Corp.,
International Verifact Inc., Checkmate Electronics, Inc. and Future Merger Corporation
-- filed herewith.
3(i) Articles of Incorporation of the Company (Exhibit 3(i) to the Company's Registration
Statement on Form S-1, No. 33-67048).
3(ii) Bylaws of the Company (Exhibit 3(ii) to the Company's Registration Statement on Form
S-1, No. 33-67048).
4. Specimen Common Stock certificate (Exhibit 4 to the Company's Registration Statement
on Form S-1, No. 33-67048).
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
10.1 Lease Agreement dated July 17, 1990, as amended, by and between the Company and ASE
North Fulton Associates Joint Venture, for the Company's premises located at 1011
Mansell Road, Suite C, Roswell, Georgia 30076 (Exhibit 10.1 to the Company's
Registration Statement on Form S-1, No. 33-67048).
(a) Fifth Amendment, dated August 16, 1994, to the Lease Agreement filed as Exhibit 10.1
(Exhibit 10.1(a) to the Company's Annual Report on Form 10-K for the period ending
December 31, 1994).
(b) Sixth Amendment, dated February 10, 1995, to the Lease Agreement filed as Exhibit 10.1
and related Termination Agreement dated February 20, 1995 (Exhibit 10.1(b) to the
Company's Annual Report on Form 10-K for the period ending December 31, 1994).
(c) Seventh Amendment, dated January 18, 1996, to the Lease Agreement filed as Exhibit
10.1 and related Termination Agreement dated February 20, 1995 (Exhibit 10.1(c) to the
Company's Annual Report on Form 10-K for the period ending December 31, 1995).
(d) Eighth Amendment, dated April 1, 1996, to the Lease Agreement filed as Exhibit 10.1
(Exhibit 10.1(d) to the Company's Annual Report on Form 10-K for the period ending
December 31, 1996).
(e) Ninth Amendment, dated August 18, 1997, to the Lease Agreement filed as Exhibit
10.1--filed herewith.
10.2 Settlement Agreement dated June 15, 1989, by and among the Company, J. Stanford
Spence, Diane M. Spence, Stanford Technologies, Inc., and Dudley L. Moore (Exhibit
10.2 to the Company's Registration Statement on Form S-1, No. 33-67048).
10.3 Bill of Sale and Assumption Agreement dated November 23, 1993 by and between the
Company and Electronic Signatures Inc. (Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1993).
10.4 Executive Compensation Plans and Arrangements:
(a) 1988 Employee Incentive Stock Option Plan (Exhibit 10.8 to the Company's Registration
Statement on Form S-1, No. 33-67048).
(b) 1993 Stock Option Plan (Exhibit 10.9 to the Company's Registration Statement on Form
S-1, No. 33-67048).
(c) 1994 Directors' Stock Option Plan (Exhibit 10.19(c) to the Company's Annual Report on
Form 10-K for the period ended December 31, 1993).
(d) Consulting Agreement dated as of February 1, 1995 between the Company and James W.
Crowley (Exhibit 10.19(e) to the Company's Annual Report on Form 10-K for the period
ended December 31, 1994).
(e) Consulting Agreement for the period of February 1, 1996 to January 31, 1997 between
the Company and James W. Crowley (Exhibit 10.4(f) to the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
(f) Employment Agreement dated January 1, 1998 by and between the Company and John J.
Neubert -- filed herewith.
(g) Employment Agreement dated January 1, 1998 by and between the Company and Gregory A.
Lewis -- filed herewith.
10.5 Loan Agreement dated December 19, 1994 by and between the Company and NationsBank with
respect to a $1,000,000 revolving line of credit (Exhibit 10.1 to the Company's
Quarterly Report
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
on Form 10-Q for the period ended March 31, 1995).
10.6 Lease Agreement dated February 5, 1997 by and between the Company and ASC North Fulton
Associates Joint Venture, for the Company's premises located at 1335 Northmeadow
Parkway, Roswell, Georgia, 30076 (Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1997).
21. Subsidiaries of the Registrant -- filed herewith.
23. Consent of Ernst & Young LLP -- filed herewith.
27. Financial Data Schedule -- filed herewith.
</TABLE>
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
38
<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 27, 1998.
CHECKMATE ELECTRONICS, INC.
(Registrant)
By: /s/ GREGORY A. LEWIS
-----------------------------------------
Gregory A. Lewis
PRESIDENT & CHIEF OPERATING OFFICER
Pursuant to the requirements 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 27, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ J. STANFORD SPENCE Chief Executive Officer and
- ------------------------------ Chairman of the Board
J. Stanford Spence
/s/ GREGORY A. LEWIS President, Chief Operating
- ------------------------------ Officer and Director
Gregory A. Lewis Gregory A. Lewis
/s/ JAMES W. CROWLEY Director
- ------------------------------
James W. Crowley
/s/ FRANK C. PETERS Director
- ------------------------------
Frank C. Peters
/s/ HOWARD W. YENKE Director
- ------------------------------
Howard W. Yenke
Chief Financial Officer,
/s/ JOHN J. NEUBERT Senior Vice President
- ------------------------------ Finance and
John J. Neubert Administration and
Director
39
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Cover Page............................................................................ F-1
Report of Independent Auditors........................................................ F-2
Balance Sheets at December 31, 1997 and 1996.......................................... F-3
Statements of Operations for each of the three years in the period ended December 31,
1997................................................................................ F-4
Statements of Shareholders' Equity for each of the three years in the period ended
December 31, 1997................................................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1997................................................................................ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Checkmate Electronics, Inc.
We have audited the balance sheets of Checkmate Electronics, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Checkmate Electronics, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
February 18, 1998
Atlanta, Georgia
F-2
<PAGE>
CHECKMATE ELECTRONICS, INC.
BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 269 $ 2,204
Investments.................................................................................. 3,572 6,970
Accounts receivable, less allowance of $162 and $187 at December 31, 1997
and 1996, respectively..................................................................... 11,048 8,453
Inventories:
Finished goods............................................................................. 3,267 1,365
Work in process............................................................................ 829 107
Raw materials and supplies................................................................. 7,175 6,398
--------- ---------
11,271 7,870
Deferred tax asset........................................................................... 989 636
Refundable income taxes...................................................................... 809 340
Prepaid expenses............................................................................. 136 961
--------- ---------
Total current assets........................................................................... 28,094 27,434
Property and equipment:
Equipment.................................................................................... 9,103 6,377
Furniture and fixtures....................................................................... 1,017 660
--------- ---------
10,120 7,037
Accumulated depreciation and amortization.................................................... (4,201) (2,787)
--------- ---------
5,919 4,250
Identifiable intangible assets, net of accumulated amortization of $899 and $783 at December
31, 1997 and 1996, respectively.............................................................. 292 400
Deferred development costs, net of accumulated amortization of $1,409 and $853 at December 31,
1997 and 1996, respectively.................................................................. 2,935 1,792
Other assets................................................................................... 11 16
--------- ---------
$ 37,251 $ 33,892
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................. $ 2,372 $ 1,158
Accrued liabilities.......................................................................... 1,725 1,709
Deferred revenue............................................................................. 1,188 1,072
Current portion of capital lease obligations................................................. -- 14
Current portion of long-term debt due to related party....................................... 162 146
--------- ---------
Total current liabilities...................................................................... 5,447 4,099
Long-term debt due to related party, less current portion...................................... 41 203
Deferred income taxes.......................................................................... 1,924 1,285
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 40,000,000
Issued and outstanding shares -- 5,400,000 and 5,232,000
at December 31, 1997 and 1996, respectively.............................................. 54 52
Additional paid-in capital................................................................... 24,687 23,026
Retained earnings............................................................................ 5,098 5,227
--------- ---------
Total shareholders' equity..................................................................... 29,839 28,305
--------- ---------
$ 37,251 $ 33,892
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CHECKMATE ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net revenues..................................................................... $ 33,526 $ 35,104 $ 29,160
Cost of goods sold............................................................... 20,879 20,572 17,184
--------- --------- ---------
Gross profit..................................................................... 12,647 14,532 11,976
Operating expenses:
Selling, general and administrative............................................ 11,306 9,325 7,310
Research and development....................................................... 1,129 991 499
Depreciation and amortization.................................................. 722 579 496
--------- --------- ---------
13,157 10,895 8,305
--------- --------- ---------
Operating income (loss).......................................................... (510) 3,637 3,671
Interest expense................................................................. (46) (61) (84)
Interest income.................................................................. 358 432 513
--------- --------- ---------
Income (loss) before income taxes................................................ (198) 4,008 4,100
Provision for income tax expense (benefit)....................................... (69) 1,453 1,558
--------- --------- ---------
Net income (loss)................................................................ $ (129) $ 2,555 $ 2,542
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share:
Basic.......................................................................... $ (0.02) $ 0.50 $ 0.50
Diluted........................................................................ $ (0.02) $ 0.46 $ 0.47
Weighted average shares outstanding:
Basic.......................................................................... 5,352 5,154 5,046
Diluted........................................................................ 5,352 5,580 5,420
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CHECKMATE ELECTRONICS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL TOTAL
------------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995................................ 5,022 $ 50 $ 20,991 $ 130 $ 21,171
Exercise of stock options............................... 62 1 352 -- 353
Net income.............................................. -- -- -- 2,542 2,542
----- ----- ----------- ----------- -------------
Balance at December 31, 1995.............................. 5,084 51 21,343 2,672 24,066
Exercise of stock options............................... 148 1 1,291 -- 1,292
Tax benefit related to employee stock options........... -- -- 392 -- 392
Net income.............................................. -- -- -- 2,555 2,555
----- ----- ----------- ----------- -------------
Balance at December 31, 1996.............................. 5,232 52 23,026 5,227 28,305
Exercise of stock options............................... 168 2 1,445 -- 1,447
Tax benefit related to employee stock options........... -- -- 216 -- 216
Net loss................................................ -- -- -- (129) (129)
----- ----- ----------- ----------- -------------
Balance at December 31, 1997.............................. 5,400 $ 54 $ 24,687 $ 5,098 $ 29,839
----- ----- ----------- ----------- -------------
----- ----- ----------- ----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
CHECKMATE ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss).............................................................. $ (129) $ 2,555 $ 2,542
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................................. 2,086 1,427 1,020
Accretion of marketable securities discount................................ 30 74 (53)
Deferred income taxes...................................................... 286 1 371
Changes in operating assets and liabilities:
Accounts receivable...................................................... (2,595) (1,125) (2,803)
Inventories.............................................................. (3,402) (382) (1,794)
Prepaid expenses......................................................... 831 (772) 28
Refundable income taxes.................................................. (469) 99 (439)
Accounts payable and accrued liabilities................................. 1,446 504 519
Deferred revenue......................................................... 116 500 264
--------- ---------- ----------
Net cash provided by (used in) operating activities............................ (1,800) 2,881 (345)
INVESTING ACTIVITIES
Purchases of property and equipment............................................ (3,083) (1,817) (1,925)
Deferred development costs..................................................... (1,699) (644) (741)
Purchases of investments....................................................... (9,514) (21,483) (11,101)
Proceeds from sale of investments.............................................. 12,882 21,293 14,112
Other.......................................................................... (8) (28) (37)
--------- ---------- ----------
Net cash provided by (used in) investing activities............................ (1,422) (2,679) 308
FINANCING ACTIVITIES
Payments of debt and capital leases............................................ (160) (168) (183)
Proceeds from issuance of common stock......................................... 1,447 1,292 352
--------- ---------- ----------
Net cash provided by financing activities...................................... 1,287 1,124 169
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........................... (1,935) 1,326 132
Cash and cash equivalents at beginning of year................................. 2,204 878 746
--------- ---------- ----------
Cash and cash equivalents at end of year....................................... $ 269 $ 2,204 $ 878
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest......................................................... $ 46 $ 61 $ 84
--------- ---------- ----------
--------- ---------- ----------
Cash paid for income taxes..................................................... $ 270 $ 1,026 $ 1,058
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Checkmate Electronics, Inc. (the "Company") designs, manufactures and
markets point-of-sale payment systems including Magnetic Ink Character
Recognition (MICR) check readers, debit/credit card terminals, electronic
signature capture products, MICR analyzers and related products. The Company's
products allow data from checks, credit cards, debit cards and other payment
cards to be input into and processed by customers' point-of-sale or data
processing systems faster and more accurately than manual key entry systems.
The industry in which the Company operates is subject to rapid change due to
the development of new competing technologies and products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, bank deposits and highly liquid
investments with maturities of three months or less when purchased and are
stated at cost plus accrued interest which approximates market value.
INVESTMENTS
Investments are stated at cost plus accrued interest which approximates
market value. Approximately $3.6 million and $6.9 million was invested in U.S.
Treasury bills at December 31, 1997 and 1996, respectively. These U.S. Treasury
bills had initial maturities of six months and are classified as held-to-
maturity.
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out method. Market is defined as net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed over the
estimated useful lives of the related assets (five years) using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. Depreciation expense approximated $1,414,000, $943,000
and $647,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-7
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets consists of amounts assigned to copyrights,
patents, trademarks, technology property rights and non-compete agreements. Such
assets are being amortized on a straight-line basis from five to eleven years,
with amortization expense of approximately $116,000, $129,000, and $101,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
DEFERRED DEVELOPMENT COSTS
Costs related to internally developed software for new products and
subsequent enhancements are capitalized only after the establishment of
technological feasibility. Software development costs incurred prior to
achieving technological feasibility are considered research and development
expenditures and are expensed as incurred. Capitalized costs are amortized over
the greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current anticipated future gross
revenues for that product or (b) the straight-line method over the estimated
economic life of the related product (currently five years). Amortization
expense was approximately $556,000, $356,000, and $272,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
REVENUE RECOGNITION
Revenues are derived from sales of products and related service agreements.
Revenues from product sales are recognized at the time of shipment, and revenues
from maintenance agreements are deferred and recognized ratably over the life of
the related service agreements.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Such amounts are measured using
enacted tax rates and laws that are expected to be in effect when the
differences reverse.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995 the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF ("Statement 121") which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company adopted Statement 121 as of January 1, 1996. The effect of such
adoption was not material to the accompanying financial statements.
EMPLOYEE STOCK OPTIONS
In October 1995 the FASB issued Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("Statement 123"). Under Statement 123, the Company
could continue following previously existing
F-8
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting rules or adopt a new fair value method of valuing stock-based awards
to employees. The Company elected to continue following the existing accounting
rules under Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations in accounting for
its employee stock options. The pro forma effect on the accompanying statements
of operations of adopting Statement 123 is presented in Note 6.
NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
In February 1997 the FASB issued Statement No. 128, EARNINGS PER SHARE
("Statement 128") which establishes standards for computing and presenting
earnings per share for entities with publicly held common stock or potential
common stock. Statement 128 replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and diluted earnings (loss) per
share. Unlike primary earnings (loss) per share, basic earnings (loss) per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings (loss) per share is very similar to the previously reported
fully diluted earnings (loss) per share. Potential common stock is not included
in the per share calculations where the effect of its inclusion would be
antidilutive. Statement 128 requires the presentation of basic and diluted
earnings (loss) per share on the face of the income statement for all entities
with complex capital structures. The Company adopted Statement 128 in 1997. All
earnings (loss) per share amounts for all periods have been presented and, where
appropriate, restated to conform to the provisions of Statement 128.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME ("Statement 130") which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt Statement 130 in 1998
and does not expect the effect of such adoption to be material to its financial
statements.
In June 1997 the FASB also issued Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("Statement 131") which
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company will adopt Statement 131
in 1998 and does not expect the effect of adoption to be material to its
financial statements.
RECLASSIFICATIONS
Certain reclassifications were made in the 1996 and 1995 financial
statements to conform with the 1997 presentation.
F-9
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company had advertising costs of approximately $125,000, $103,000 and
$41,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
These costs were expensed in the period incurred.
2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable.
The Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. Company policy is designed to
limit exposure at any one institution. The Company performs periodic evaluations
of the relative credit standing of those financial institutions which are
considered in the Company's investment strategy.
Company net revenues are derived from a variety of customers including the
following major customers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----- ----- -----
Company A................................................................ 17% 15% --
Company B................................................................ 10% -- 22%
Company C................................................................ -- 13% --
-- -- --
27% 28% 22%
-- -- --
-- -- --
</TABLE>
The Company performs ongoing credit approvals of its customers. Trade
receivables are unsecured, and the Company is at risk to the extent such amounts
become uncollectible. The Company does not anticipate any non-performance by
customers in excess of the allowance for doubtful accounts. Accounts receivable
from three and two customers amounted to 49% and 25% of accounts receivable at
December 31, 1997 and 1996, respectively.
The carrying amounts reported in the balance sheet for cash and cash
equivalents, short-term investments, accounts receivable and accounts payable
approximate their estimated fair values. The fair value of the notes payable is
estimated using discounted cash flow analyses based on current market rates, and
at December 31, 1997 and 1996, these amounts were not materially different from
their carrying value.
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Note payable to a major shareholder and director.............................. $ 203 $ 349
Less current portion.......................................................... 162 146
--------- ---------
$ 41 $ 203
--------- ---------
--------- ---------
</TABLE>
An unsecured note payable in the amount of $203,000 at December 31, 1997,
originated from an agreement executed between the Company and a major
shareholder and director in 1989. Under the terms of the agreement, the Company
perfected its rights to certain MICR technology, including all worldwide
F-10
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
3. LONG-TERM DEBT (CONTINUED)
copyrights, patent rights, trademarks, service marks, tradenames and other
proprietary rights, and obtained a noncompete agreement with the shareholder
(for a period of 11 years following his removal or resignation from the
Company's Board of Directors) in exchange for this note payable. The Company is
required to make minimum monthly principal and interest payments of $15,000 per
month (of which $10,000 is adjusted semi-annually for inflation) or at the
Company's option, 5% of monthly sales, if this amount exceeds the minimum
monthly payment through March 31, 1999. Payments under the terms of the
agreement are not to exceed $1,758,300 (plus adjustments for inflation). The
inflation adjustments are charged to expense as incurred and amounted to
approximately $36,000, $41,000, and $35,000, for the years ended December 31,
1997, 1996 and 1995, respectively.
As of the effective date of the agreement, the Company recorded the net
present value of the minimum monthly payments of $15,000, assuming an effective
interest rate of 12%, in identifiable intangible assets and long-term debt in
the amount of $1,036,000. During 1997, 1996 and 1995, the Company made total
payments of $216,000, $221,000, and $215,000, respectively, to the shareholder
under this agreement.
On March 31, 1997, the Company renewed its $1,000,000 revolving line of
credit with a bank. The line of credit bears interest at the prime rate (8.5% at
December 31, 1997) with the principal payable in a single installment on May 31,
1998 and interest payable monthly in arrears. The line is secured by certain
assets of the Company. The Company had no outstanding borrowings under the line
at December 31, 1997.
4. CAPITALIZED LEASE OBLIGATIONS
Property and equipment includes the following amounts for leases that have
been capitalized:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Equipment.................................................................... $ 262 $ 262
Furniture and fixtures....................................................... 45 45
--------- ---------
307 307
Less accumulated amortization................................................ (307) (284)
--------- ---------
$ -- $ 23
--------- ---------
--------- ---------
</TABLE>
All capitalized lease agreements expired during 1997, and there were no
future minimum lease payments due at December 31, 1997. Amortization of leased
assets is included in depreciation and amortization expense.
5. OPERATING LEASES
The Company leases certain property and equipment under certain
noncancellable lease agreements. Rental expense under operating leases was
approximately $601,000, $470,000, and $369,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
F-11
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
5. OPERATING LEASES (CONTINUED)
Future minimum payments under noncancellable operating leases with terms of
one year or more consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 534
1999............................................................ 440
2000............................................................ 151
2001............................................................ 156
2002............................................................ 26
---------
Total minimum lease payments.................................... $ 1,307
---------
---------
</TABLE>
6. EQUITY
SHAREHOLDER RIGHTS PLAN
On October 13, 1997, the Board of Directors of the Company adopted a
Shareholder Rights Plan and issued stock purchase rights in connection with this
plan. The Board declared a dividend of one stock purchase Right on each
outstanding share of common stock. The Right will be exercisable only if a
person or group acquires 15% or more of the Company's common stock. Each Right
entitles shareholders to buy one share of common stock at an exercise price of
$50. Prior to the time they become exercisable, the Rights are redeemable for
one cent per Right at the option of the Board.
STOCK OPTION PLANS
The Company has established two employee stock option plans, the 1988 Stock
Option Plan (the "1988 Plan") and the 1993 Stock Option Plan (the "1993 Plan"),
as well as a Directors' Stock Option Plan. Under the Plans, options to purchase
shares of the Company's common stock have been and may be granted to certain
directors, officers and key employees at prices not less than market value at
the date of the grant.
The 1988 Plan has been amended to cease granting new options. Options
outstanding under the 1988 Plan as of July 23, 1993 may be exercised according
to the terms of the option agreements pursuant to which they were granted. Under
the 1988 Plan and 1993 Plan, options vest as determined by the Board of
Directors on the date of grant, generally over three years. As of December 31,
1997, 1,570,000 shares of common stock are reserved for future issuance under
the stock option plans.
On July 6, 1997, the Board of Directors of the Company offered the holders
of options under the 1993 Stock Option Plan who are not executive officers or
directors of the Company the opportunity to exchange their options for options
having an exercise price equal to the average closing price of the Company's
common stock during the week ended July 25, 1997. As a result, options to
purchase 339,000 shares of common stock were repriced through the cancellation
of existing options and granting of new options at $8.70 per share.
F-12
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
6. EQUITY
STOCK OPTION PLANS (CONTINUED)
Option activity under the above-described Company's stock option plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
----------- -----------
<S> <C> <C>
Outstanding at January 1, 1995............................................................. 1,066 $ 8.12
Granted.................................................................................. 498 11.06
Exercised................................................................................ (63) 5.09
Canceled................................................................................. (45) 8.54
-----
Outstanding at December 31, 1995........................................................... 1,456 9.26
Granted.................................................................................. 220 14.05
Exercised................................................................................ (148) 8.77
Canceled................................................................................. (3) 13.75
-----
Outstanding at December 31, 1996........................................................... 1,525 9.99
Granted.................................................................................. 727 8.99
Exercised................................................................................ (168) 8.63
Canceled................................................................................. (743) 11.23
-----
Outstanding at December 31, 1997........................................................... 1,341 8.94
-----
-----
Options exercisable:
At December 31, 1995..................................................................... 646 $ 8.40
At December 31, 1996..................................................................... 821 8.94
At December 31, 1997..................................................................... 623 8.92
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ------------- --------------- ----------- --------------- -----------
$5.00-$8.50.... 425 6.38 $ 7.99 381 $ 7.96
$8.70.......... 636 8.67 8.70 60 8.70
$8.75-$14.75... 280 7.75 10.92 182 11.02
----- ---
1,341 7.75 8.94 623 8.92
----- ---
----- ---
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options
F-13
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
6. EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION 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 the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement No. 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995: risk-free interest rates of approximately
6.0%; no dividend yields; volatility factor of the expected market price of the
Company's common stock of .58; and a weighted-average expected life of the
options of 4 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's 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 management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, assuming Statement 123 had been adopted, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Pro forma net income (loss)......................................................... $ (1,252) $ 1,299 $ 1,856
Pro forma net income (loss) per share:
Basic............................................................................. (0.23) 0.25 0.37
Diluted........................................................................... (0.23) 0.23 0.34
Weighted average fair value of options granted...................................... 3.46 6.38 5.12
</TABLE>
Since Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.
F-14
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
7. INCOME TAXES
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Current income tax expense (benefit):
Federal............................................................... $ (304) $ 1,301 $ 1,073
State................................................................. (51) 151 114
------------ ------------ ------------
Total current tax expense (benefit)..................................... (355) 1,452 1,187
Deferred income tax expense:
Federal............................................................... 243 1 312
State................................................................. 43 -- 59
------------ ------------ ------------
Total deferred tax expense.............................................. 286 1 371
------------ ------------ ------------
Provision for income tax expense (benefit).............................. $ (69) $ 1,453 $ 1,558
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
A reconciliation of the provision for income taxes to the Federal statutory
rate of 34% is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ------------ ------------
Tax expense (benefit) at statutory rate.................................. $ (67) $ 1,363 $ 1,394
State taxes, net of Federal tax expense (benefit)........................ (34) 100 114
Research and development costs........................................... -- (51) --
Other.................................................................... 32 41 50
----------- ------------ ------------
Provision for income tax expense (benefit)............................... $ (69) $ 1,453 $ 1,558
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-15
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets (liabilities) consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Deferred tax assets:
Asset valuation allowances.................................... $ 267 $ 186
Deferred revenue.............................................. 452 406
Other......................................................... 290 63
------------- -------------
Total deferred tax assets....................................... 1,009 655
Deferred tax liabilities:
Depreciation.................................................. (808) (625)
Amortization.................................................. (1,116) (660)
Other......................................................... (20) (19)
------------- -------------
Total deferred tax liabilities.................................. (1,944) (1,304)
------------- -------------
Net deferred tax liabilities.................................... $ (935) $ (649)
------------- -------------
------------- -------------
</TABLE>
8. DEFINED CONTRIBUTION BENEFIT PLAN
Effective January 1, 1992, the Company adopted the Checkmate Electronics,
Inc. 401(k) Plan (the "Plan"), a defined contribution benefit plan which
qualifies under Section 401(k) of the Internal Revenue Code. All employees of
the Company are eligible to participate in the Plan. Participants may contribute
up to 15% of their annual compensation to the Plan and receive a 50% matching
employer contribution on up to 5% of their annual compensation. Contributions
charged to expense were approximately $157,000, $112,000, and $82,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
F-16
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
9. NET INCOME (LOSS) PER SHARE
Net income (loss) per share on a basic and diluted basis as required by
Statement No. 128 is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net income (loss).................................................................... $ (129) $ 2,555 $ 2,542
--------- --------- ---------
--------- --------- ---------
Calculation of weighted average shares outstanding plus assumed conversions:
Weighted average basic shares outstanding.......................................... 5,352 5,154 5,046
Effect of dilutive employee stock options.......................................... -- 426 374
--------- --------- ---------
Weighted average diluted shares outstanding........................................ 5,352 5,580 5,420
--------- --------- ---------
--------- --------- ---------
Basic net income (loss) per share.................................................... $ (0.02) $ 0.50 $ 0.50
--------- --------- ---------
--------- --------- ---------
Diluted net income (loss) per share.................................................. $ (0.02) $ 0.46 $ 0.47
--------- --------- ---------
--------- --------- ---------
</TABLE>
During the year ended December 31, 1997, options to purchase approximately
191,000 shares were outstanding but were not included in the computation because
they were antidilutive.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
QUARTER
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1997:
Net revenues............................................................ $ 9,506 $ 5,074 $ 8,831 $ 10,115
Gross profit............................................................ 3,993 1,832 3,193 3,629
Net income (loss)....................................................... 661 (1,139) 151 198
Basic net income (loss) per share....................................... .13 (.21) .03 .04
Diluted net income (loss) per share..................................... .12 (.21) .03 .04
</TABLE>
<TABLE>
<CAPTION>
QUARTER
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1996:
Net revenues............................................................ $ 7,920 $ 10,669 $ 7,021 $ 9,494
Gross profit............................................................ 3,158 4,459 2,901 4,014
Net income.............................................................. 530 1,190 168 667
Basic net income per share.............................................. .10 .23 .03 .13
Diluted net income per share............................................ .10 .21 .03 .12
</TABLE>
F-17
<PAGE>
CHECKMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS
EXCEPT FOR PERCENTAGES AND PER SHARE AMOUNTS)
11. SUBSEQUENT EVENTS
On December 9, 1997, the Company entered into an agreement for the purchase
of Total Retail Solutions, Inc., a software development and consulting
organization specializing in electronic payments and transaction handling
solutions for supermarkets and retail businesses. The acquisition was completed
in January 1998 for approximately $160,000 in Checkmate Electronics, Inc. common
stock and $75,000 in cash.
On January 16, 1998, the Company entered into a definitive agreement (the
"Combination Agreement") to combine with International Verifact, Inc. ("IVI"), a
company engaged in a business similar to that of Checkmate. The parties intend
for the combination to be accounted for on a pooling of interest basis. Under
the terms of the Combination Agreement, IVI shareholders will receive, for each
IVI common share, either one share of common stock of the newly formed combined
company, IVI Checkmate Corp., or one exchangeable share of IVI which can be
exchanged for a share of IVI Checkmate Corp. common stock in the future.
Checkmate shareholders will receive 1.2775 shares of IVI Checkmate Corp. common
stock for each Checkmate common share. Closing of the transaction is expected to
occur in the second quarter of 1998, subject to shareholder approvals, Ontario
Court approval and customary closing conditions.
Effective January 1, 1998, the Company entered into employment agreements
with the CEO and CFO. The terms of the agreements provide for a base salary and
bonus, which will continue in the event of a change in control of the Company.
The agreements provide for specified salary and bonus increases each year. The
term of each agreement is for the later of the third anniversary of the
agreement or the third anniversary of the combination with IVI, with certain
automatic renewal provisions. If termination of employment occurs within two
years after a change in control, the executives' stock options vest immediately
and the minimum severance benefit is two times the annual base salary and annual
bonus.
The Company and the Chairman have also entered into a five year consulting
agreement to become effective on the date of the combination with IVI and the
Company. The terms of the agreement provide for annual total specified payments
adjusted annually for inflation. In addition, the agreement provides that in the
event the Company terminates the agreement other than for the Chairman's death
or disability, or the Chairman terminates his consulting agreement for good
reason, then the Chairman is to receive a consulting fee of $150,000 per annum
for the length of the remainder of the agreement.
F-18
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2 Combination Agreement dated January 16, 1998 by and among IVI Checkmate Corp.,
International Verifact Inc., Checkmate Electronics, Inc. and Future Merger Corporation
-- filed herewith.
3(i) Articles of Incorporation of the Company (Exhibit 3(i) to the Company's Registration
Statement on Form S-1, No. 33-67048).
3(ii) Bylaws of the Company (Exhibit 3(ii) to the Company's Registration Statement on Form
S-1, No. 33-67048).
4 Specimen Common Stock certificate (Exhibit 4 to the Company's Registration Statement
on Form S-1, No. 33-67048).
10.1 Lease Agreement dated July 17, 1990, as amended, by and between the Company and ASE
North Fulton Associates Joint Venture, for the Company's premises located at 1011
Mansell Road, Suite C, Roswell, Georgia 30076 (Exhibit 10.1 to the Company's
Registration Statement on Form S-1, No. 33-67048).
(a) Fifth Amendment, dated August 16, 1994, to the Lease Agreement filed as Exhibit 10.1
(Exhibit 10.1(a) to the Company's Annual Report on Form 10-K for the period ending
December 31, 1994).
(b) Sixth Amendment, dated February 10, 1995, to the Lease Agreement filed as Exhibit 10.1
and related Termination Agreement dated February 20, 1995 (Exhibit 10.1(b) to the
Company's Annual Report on Form 10-K for the period ending December 31, 1994).
(c) Seventh Amendment, dated January 18, 1996, to the Lease Agreement filed as Exhibit
10.1 and related Termination Agreement dated February 20, 1995 (Exhibit 10.1(c) to the
Company's Annual Report on Form 10-K for the period ending December 31, 1995).
(d) Eighth Amendment, dated April 1, 1996, to the Lease Agreement filed as Exhibit 10.1
(Exhibit 10.1(d) to the Company's Annual Report on Form 10-K for the period ending
December 31, 1996).
(e) Ninth Amendment, dated August 18, 1997, to the Lease Agreement filed as Exhibit
10.1--filed herewith.
10.2 Settlement Agreement dated June 15, 1989, by and among the Company, J. Stanford
Spence, Diane M. Spence, Stanford Technologies, Inc., and Dudley L. Moore (Exhibit
10.2 to the Company's Registration Statement on Form S-1, No. 33-67048).
10.3 Bill of Sale and Assumption Agreement dated November 23, 1993 by and between the
Company and Electronic Signatures Inc. (Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1993).
10.4 Executive Compensation Plans and Arrangements:
(a) 1988 Employee Incentive Stock Option Plan (Exhibit 10.8 to the Company's Registration
Statement on Form S-1, No. 33-67048).
(b) 1993 Stock Option Plan (Exhibit 10.9 to the Company's Registration Statement on Form
S-1, No. 33-67048).
(c) 1994 Directors' Stock Option Plan (Exhibit 10.19(c) to the Company's Annual Report on
Form 10-K for the period ended December 31, 1993).
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <S>
(d) Consulting Agreement dated as of February 1, 1995 between the Company and James W.
Crowley (Exhibit 10.19(e) to the Company's Annual Report on Form 10-K for the period
ended December 31, 1994).
(e) Consulting Agreement for the period of February 1, 1996 to January 31, 1997 between
the Company and James W. Crowley (Exhibit 10.4(f) to the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
(f) Employment Agreement dated January 1, 1998 by and between the Company and John J.
Neubert -- filed herewith.
(g) Employment Agreement dated January 1, 1998 by and between the Company and Gregory A.
Lewis -- filed herewith.
10.5 Loan Agreement dated December 19, 1994 by and between the Company and NationsBank with
respect to a $1,000,000 revolving line of credit (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1995).
21. Subsidiaries of the Registrant -- filed herewith.
23. Consent of Ernst & Young LLP--filed herewith.
27. Financial Data Schedule -- filed herewith.
</TABLE>
E-2
<PAGE>
ANNEX A
COMBINATION AGREEMENT
<PAGE>
EXECUTION COPY
COMBINATION AGREEMENT
BY AND AMONG:
IVI CHECKMATE CORP.,
INTERNATIONAL VERIFACT INC.,
CHECKMATE ELECTRONICS, INC.
AND
FUTURE MERGER CORPORATION
DATED AS OF JANUARY 16, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE 1.00--PRELIMINARY STEP.................................................................... 2
1.1 INCORPORATION AND ORGANIZATION OF NEWCO..................................... 2
1.2 INCORPORATION OF MERGER SUB................................................. 3
ARTICLE 2.00--THE ARRANGEMENT..................................................................... 3
2.1 THE ARRANGEMENT............................................................. 3
2.2 THE VOTING AND EXCHANGE TRUST AGREEMENT..................................... 4
2.3 SUPPORT AGREEMENT........................................................... 4
2.4 DISSENTING SHARES........................................................... 4
ARTICLE 3.00--THE MERGER.......................................................................... 4
3.1 MERGER OF MERGER SUB WITH AND INTO CHECKMATE................................ 4
3.2 EFFECT OF THE MERGER........................................................ 5
3.3 SURVIVING CORPORATION ARTICLES OF INCORPORATION AND BY-LAWS; DIRECTORS...... 5
3.4 CONVERSION OF CHECKMATE COMMON SHARES....................................... 5
3.5 CLOSING OF CHECKMATE TRANSFER BOOKS......................................... 6
3.6 EXCHANGE AGENT.............................................................. 6
3.7 NO FRACTIONAL SHARES........................................................ 6
3.8 DISSENTING SHARES........................................................... 6
3.9 LOST CERTIFICATES........................................................... 7
ARTICLE 4.00--POST-CLOSING CORPORATE STRUCTURE.................................................... 7
4.1 POST-CLOSING CORPORATE STRUCTURE............................................ 7
ARTICLE 5.00--ADDITIONAL AGREEMENTS............................................................... 7
5.1 CLOSING..................................................................... 7
5.2 CONTEMPORANEOUS TRANSACTIONS................................................ 8
5.3 ACCOUNTING CONSEQUENCES..................................................... 8
5.4 MATERIAL ADVERSE EFFECT..................................................... 8
5.5 ADJUSTMENTS TO EXCHANGE RATIOS.............................................. 8
5.6 DISSENTERS' RIGHTS.......................................................... 8
5.7 SHAREHOLDER MEETINGS; PROXY MATERIALS; FORM S-4............................. 9
5.8 ACCESS TO INFORMATION; CONFIDENTIALITY...................................... 10
5.9 CONSENTS; APPROVALS......................................................... 11
5.10 STOCK OPTIONS............................................................... 11
5.11 AGREEMENTS OF AFFILIATES.................................................... 12
5.12 INDEMNIFICATION AND INSURANCE............................................... 12
5.13 NOTIFICATION OF CERTAIN MATTERS............................................. 13
5.14 FURTHER ACTION.............................................................. 13
5.15 PUBLIC ANNOUNCEMENTS........................................................ 14
5.16 LISTING OF NEWCO COMMON STOCK AND EXCHANGEABLE SHARES....................... 14
5.17 CONVEYANCE TAXES............................................................ 14
5.19 DIRECTORS AND OFFICERS...................................................... 14
5.20 STRATEGIC ALLIANCE WITH INGENICO............................................ 15
5.21 FAIR PRICE AND BUSINESS COMBINATIONS REQUIREMENTS........................... 15
5.22 SHAREHOLDER PROTECTION RIGHTS REDEMPTION.................................... 15
5.23 EMPLOYMENT AGREEMENTS....................................................... 16
5.24 REORGANIZATION TREATMENT.................................................... 16
5.25 COMBINED FINANCIAL RESULTS.................................................. 16
ARTICLE 6.00--REPRESENTATIONS AND WARRANTIES OF IVI............................................... 16
6.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES................................ 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C> <C>
6.2 ARTICLES OF CONTINUATION AND BY-LAWS; MINUTES............................... 17
6.3 CAPITALIZATION.............................................................. 17
6.4 AUTHORITY RELATIVE TO THIS AGREEMENT........................................ 18
6.5 MATERIAL CONTRACTS; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.............. 18
6.6 COMPLIANCE; PERMITS......................................................... 19
6.7 SECURITIES REGULATORY AUTHORITY REPORTS AND FINANCIAL STATEMENTS............ 20
6.8 ABSENCE OF CERTAIN CHANGES OR EVENTS........................................ 20
6.9 NO UNDISCLOSED LIABILITIES.................................................. 21
6.10 ABSENCE OF LITIGATION....................................................... 21
6.11 EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS............................... 21
6.12 LABOUR MATTERS.............................................................. 23
6.13 REGISTRATION STATEMENT; PROXY STATEMENT..................................... 23
6.14 RESTRICTIONS ON BUSINESS ACTIVITIES......................................... 24
6.15 TITLE TO PROPERTY........................................................... 24
6.16 TAXES....................................................................... 25
6.17 ENVIRONMENTAL MATTERS....................................................... 27
6.18 BROKERS..................................................................... 28
6.19 FULL DISCLOSURE............................................................. 28
6.20 INTELLECTUAL PROPERTY....................................................... 28
6.21 INTERESTED PARTY TRANSACTIONS............................................... 30
6.22 INSURANCE................................................................... 30
6.23 OPTION PLANS................................................................ 30
6.24 POOLING MATTERS............................................................. 30
6.25 AFFILIATES.................................................................. 30
6.26 OPINION OF FINANCIAL ADVISOR................................................ 31
ARTICLE 7.00-REPRESENTATIONS AND WARRANTIES OF CHECKMATE.......................................... 31
7.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES................................ 31
7.2 ARTICLES OF INCORPORATION AND BY-LAWS; MINUTES.............................. 31
7.3 CAPITALIZATION.............................................................. 32
7.4 AUTHORITY RELATIVE TO THIS AGREEMENT........................................ 32
7.5 MATERIAL CONTRACTS; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.............. 32
7.6 COMPLIANCE; PERMITS......................................................... 33
7.7 SECURITIES REGULATORY AUTHORITY REPORTS AND FINANCIAL STATEMENTS............ 34
7.8 ABSENCE OF CERTAIN CHANGES OR EVENTS........................................ 35
7.9 NO UNDISCLOSED LIABILITIES.................................................. 35
7.10 ABSENCE OF LITIGATION....................................................... 35
7.11 EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS............................... 35
7.12 LABOUR MATTERS.............................................................. 38
7.13 REGISTRATION STATEMENT; PROXY STATEMENT..................................... 38
7.14 RESTRICTIONS ON BUSINESS ACTIVITIES......................................... 39
7.15 TITLE TO PROPERTY........................................................... 39
7.16 TAXES....................................................................... 39
7.17 ENVIRONMENTAL MATTERS....................................................... 41
7.18 BROKERS..................................................................... 42
7.19 FULL DISCLOSURE............................................................. 42
7.20 INTELLECTUAL PROPERTY....................................................... 42
7.21 INTERESTED PARTY TRANSACTIONS............................................... 44
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C> <C>
7.22 INSURANCE................................................................... 44
7.23 OPTION PLANS................................................................ 44
7.24 POOLING MATTERS............................................................. 44
7.25 AFFILIATES.................................................................. 45
7.26 OPINION OF FINANCIAL ADVISOR................................................ 45
ARTICLE 8.00--REPRESENTATIONS AND WARRANTIES OF NEWCO............................................. 45
8.1 ORGANIZATION AND QUALIFICATION.............................................. 45
8.2 ARTICLES OF INCORPORATION AND BY-LAWS; MINUTES.............................. 45
8.3 CAPITALIZATION.............................................................. 45
8.4 AUTHORITY RELATIVE TO THIS AGREEMENT........................................ 45
ARTICLE 9.00--REPRESENTATIONS AND WARRANTIES OF MERGER SUB........................................ 46
9.1 ORGANIZATION AND QUALIFICATION.............................................. 46
9.2 ARTICLES OF INCORPORATION AND BY-LAWS; MINUTES.............................. 46
9.3 CAPITALIZATION.............................................................. 46
9.4 AUTHORITY RELATIVE TO THIS AGREEMENT........................................ 46
ARTICLE 10.00--CONDUCT OF BUSINESS PENDING THE ARRANGEMENT........................................ 46
10.1 CONDUCT OF BUSINESS BY IVI PENDING THE TRANSACTIONS......................... 46
10.2 NO SOLICITATION............................................................. 48
10.3 NO SOLICITATION............................................................. 50
ARTICLE 11.00--CONDITIONS TO THE TRANSACTIONS..................................................... 52
11.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE TRANSACTIONS........... 52
11.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF IVI................................. 53
OPINION OF CHECKMATE COUNSEL................................................ 54
TAX OPINION................................................................. 54
11.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF CHECKMATE........................... 54
ARTICLE 12.00--TERMINATION........................................................................ 56
12.1 TERMINATION................................................................. 56
12.2 EFFECT OF TERMINATION....................................................... 57
12.3 FEES AND EXPENSES........................................................... 57
ARTICLE 13.00--GENERAL PROVISIONS................................................................. 57
13.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS................. 57
13.2 NOTICES..................................................................... 57
13.3 AMENDMENT................................................................... 59
13.4 WAIVER...................................................................... 59
13.5 HEADINGS.................................................................... 59
13.6 SEVERABILITY................................................................ 59
13.7 ENTIRE AGREEMENT............................................................ 59
13.8 ASSIGNMENT.................................................................. 59
13.9 PARTIES IN INTEREST......................................................... 59
13.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE....................... 60
13.11 GOVERNING LAW............................................................... 60
13.12 COUNSEL FEE................................................................. 60
13.13 COUNTERPARTS................................................................ 60
13.14 WAIVER OF JURY TRIAL........................................................ 60
13.15 U.S. CURRENCY............................................................... 60
13.16 ARBITRATION................................................................. 60
SCHEDULE A........................................................................................ 1
</TABLE>
iii
<PAGE>
COMBINATION AGREEMENT
This COMBINATION AGREEMENT is entered into as of January 16, 1998 (this
"Agreement"),
BY AND AMONG:
IVI CHECKMATE CORP., a Delaware corporation ("Newco"),
INTERNATIONAL VERIFACT INC., a Canadian corporation ("IVI"),
CHECKMATE ELECTRONICS, INC., a Georgia corporation ("Checkmate") and
FUTURE MERGER CORPORATION, a Georgia corporation ("Merger Sub").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of IVI and Checkmate have each determined
that it is advisable and in the best interests of their respective shareholders
to carry out the transactions contemplated herein upon the terms and subject to
the conditions set forth herein;
WHEREAS, in furtherance of such transactions, the Board of Directors of IVI
has approved the execution and delivery of this Agreement in order to provide
for the reorganization of the capital of IVI whereby each of the issued and
outstanding common shares in the capital of IVI (the "IVI Common Shares") will
be exchanged, at the holder's election, for either one (the "IVI Exchange
Ratio") share of common stock, no par value of Newco (the "Newco Common Stock")
or one Exchangeable Share (as defined below) of IVI and certain ancillary
agreements will be entered into including the Voting Trust Agreement and the
Support Agreement (as defined below) (such reorganization referred to herein as
the "Arrangement");
WHEREAS, the Exchangeable Shares are exchangeable by the holders thereof for
shares of Newco Common Stock on a one-for-one basis at any time subject to the
terms of this Agreement and the exhibits hereto;
WHEREAS, the Arrangement shall be effected under Section 192 of the CBCA
pursuant to the terms hereof and a plan of arrangement (the "Plan of
Arrangement"), substantially in the form of Exhibit A hereto together with such
other terms and conditions as may be agreed to by the parties hereto acting
reasonably;
WHEREAS, the holders of IVI Common Shares that elect to receive Exchangeable
Shares from IVI (i) will grant and transfer to Newco certain rights to acquire
the Exchangeable Shares ("Call Rights") and (ii) will receive from Newco certain
voting rights in respect of Newco ("Voting Rights") and certain rights to
transfer the Exchangeable Shares directly to Newco ("Exchange Rights");
WHEREAS, the Boards of Directors of Newco, Checkmate and Merger Sub each
have approved the execution and delivery of this Agreement in order to provide
for the merger (the "Merger") of Merger Sub with and into Checkmate in
accordance with the applicable provisions of the Georgia Law, and upon the terms
and subject to the conditions set forth herein;
WHEREAS, pursuant to the Merger, each outstanding share (a "Checkmate
Share") of Checkmate's common stock, $.01 par value (the "Checkmate Common
Shares"), shall be converted into the right to receive the "Merger
Consideration" (as defined in Section 3.4(c)), upon the terms and subject to the
conditions set forth herein;
WHEREAS, Newco, Merger Sub and Checkmate intend, by approving resolutions
authorizing this Agreement, to adopt this Agreement as a plan of reorganization
within the meaning of Section 368(a) of the Code, and the Treasury regulations
thereunder, and further intend that the Merger be treated as a tax-free
reorganization under Section 368(a) of the Code;
WHEREAS, the parties intend that (i) the transfer of IVI Common Shares to
Newco in exchange for Newco Common Stock by those shareholders of IVI that elect
to receive Newco Common Stock, (ii) the transfer of Call Rights to Newco in
exchange for Voting Rights and Exchange Rights by those shareholders of IVI that
elect to receive Exchangeable Shares, and (iii) the transfer of Checkmate Common
Shares to Newco by the shareholders of Checkmate pursuant to the Merger,
collectively, be treated as a single integrated tax-free transaction under
Section 351(a) of the Code;
<PAGE>
WHEREAS, concurrently with the execution of this Agreement, and as an
inducement to IVI, Checkmate and Merger Sub to enter into this Agreement, IVI,
Merger Sub, certain principal shareholders of Checkmate and a certain principal
shareholder of IVI have entered into stockholders agreements (the "Shareholders
Agreements"), pursuant to which such persons have agreed, among other things, to
vote their Checkmate Common Shares or IVI Common Shares, as the case may be, in
favour of any shareholders' resolutions relating to the Transactions proposed by
management at a meeting of shareholders of Checkmate or IVI, as the case may be;
WHEREAS, upon completion of the Transactions the shareholders of IVI,
through their holdings of Newco Common Stock (and options therefor) and the
Exchangeable Shares and related rights, shall be effectively entitled to
approximately 57% of the equity of Newco, and the shareholders of Checkmate,
through their holdings of Newco Common Stock (and options therefor), shall be
effectively entitled to approximately 43% of the equity of Newco, based on a
fully diluted treasury stock method calculation;
WHEREAS, the parties intend as soon as practicable after the execution of
this Agreement, to file with the SEC preliminary proxy materials as a joint
proxy statement to solicit proxies of shareholders with respect to the
shareholders' meetings to be held to approve the Arrangement, in the case of
IVI, and the Merger, in the case of Checkmate, and to cause Newco thereafter to
file with the SEC a registration statement on Form S-4 for the Newco Common
Stock to be issued in connection with the Merger and the Arrangement;
WHEREAS, if required, the parties intend, as soon as practicable after the
execution of this Agreement, to cause Newco to file with the OSC and certain
other securities regulatory authorities in Canada a preliminary "non-offering"
prospectus under subsection 53(2) of the OSA and the equivalent provisions in
such other jurisdictions, or take any other steps necessary, to make Newco a
"reporting issuer" under the OSA and the securities laws of such other
jurisdictions;
WHEREAS, for accounting purposes, it is intended that the Transactions shall
be accounted for as a pooling of interests under United States generally
accepted accounting principles ("GAAP");
WHEREAS, this Agreement uses certain terms as defined terms, the definitions
for which appear in Schedule A hereto;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE 1.00--PRELIMINARY STEPS
1.1 INCORPORATION AND ORGANIZATION OF NEWCO
(a) Checkmate has caused the incorporation of Newco under the Delaware
General Corporation Law ("Delaware Law") with a Certificate of Incorporation
in the form set forth in Exhibit B hereto and which Certificate of
Incorporation does:
(i) authorize the Newco Common Stock to be issued in the Arrangement
and the Merger and a sufficient number of shares of Newco Common Stock so
that the Call Rights, Exchange Rights and retraction and redemption
rights attached to the Exchangeable Shares and the rights of holders of
options issued pursuant to IVI Option Plan and Checkmate Stock Option
Plans may be honoured; and
(ii) create Newco Preferred Stock.
(b) Newco has adopted By-laws in the form set forth in Exhibit D hereto;
(c) The initial directors of Newco are J. Stanford Spence, George
Whitton, L. Barry Thomson and Gregory A. Lewis;
(d) Prior to the Closing, Newco will file a certificate of designation
under Section 151(g) of the Delaware Law in connection with the Newco
Special Voting Stock substantially in the form of Exhibit C hereto.
2
<PAGE>
1.2 INCORPORATION OF MERGER SUB
Newco has caused Merger Sub to be incorporated under the Georgia Law as a
wholly-owned subsidiary of Newco.
ARTICLE 2.00--THE ARRANGEMENT
2.1 THE ARRANGEMENT
As promptly as practicable after the execution of this Agreement, IVI will
apply to the Ontario Court of Justice (General Division) (the "Court") pursuant
to Section 192 of the CBCA for an interim order in form and substance
satisfactory to Checkmate (such approval not to be unreasonably withheld or
delayed) (the "Interim Order") providing for, among other things, the calling
and holding of a special meeting of its shareholders for the purpose of
considering and, if deemed advisable, approving the Arrangement under Section
192 of the CBCA and pursuant to the Plan of Arrangement. Upon approval of the
Arrangement by IVI shareholders, as promptly as practicable thereafter, IVI will
take the necessary steps to submit the Arrangement to the Court and apply for a
final order of the Court approving the Arrangement in such fashion as the Court
may direct (the "Final Order"). At the time specified in the Articles of
Arrangement (the "Effective Time") on the date (the "Effective Date") shown on
the Certificate of Arrangement issued by the Director under the CBCA giving
effect to the Arrangement, the following reorganization of capital shall occur
and shall be deemed to occur in the following order without any further act or
formality:
(a) The Articles of Continuation of IVI shall be amended to authorize a
class of exchangeable shares (the "Exchangeable Shares") and one Series A
Preferred Share of IVI (the "Series A Preferred Share").
(b) IVI shall issue to Newco one Series A Preferred Share in
consideration of the issuance by Newco to IVI of one share of the preferred
stock, $.01 par value, of Newco (the "Newco Preferred Stock"). The stated
capital of the Series A Preferred Share shall be equal to the fair market
value, as determined by the board of directors of IVI, of a share of Newco
Preferred Stock. No certificate shall be issued in respect of the Series A
Preferred Share.
(c) Each of the outstanding IVI Common Shares (other than IVI Common
Shares held by holders who have exercised their rights of dissent in
accordance with the Plan of Arrangement and who are ultimately entitled to
be paid fair value for such shares) will be exchanged either (i) with IVI,
for a number of Exchangeable Shares at the IVI Exchange Ratio or (ii) with
Newco, for a number of shares of Newco Common Stock at the IVI Exchange
Ratio, at the holder's election and Newco shall issue such number of shares
of Newco Common Stock. Each holder of IVI Common Shares (other than IVI
Common Shares held by holders who have exercised their rights of dissent in
accordance with the Plan of Arrangement and who are ultimately entitled to
be paid fair value for such shares) will receive that whole number of
Exchangeable Shares or shares of Newco Common Stock, as the case may be,
resulting from the exchange of such holder's IVI Common Shares. No
fractional shares of Newco Common Stock or fractional Exchangeable Shares
will be issued and no certificate therefor will be issued. Any holder of IVI
Common Shares who would otherwise be entitled to receive a fraction of an
Exchangeable Share or share of Newco Common Stock, as the case may be,
shall, upon surrender of his certificate or certificates representing IVI
Common Shares, receive a share certificate adjusted to the next lower whole
number of Newco Common Stock or Exchangeable Shares, as the case may be.
(d) Upon the exchange referred to in paragraph (c) above, each holder of
an IVI Common Share shall cease to be such a holder, shall have his name
removed from the register of holders of IVI Common Shares and shall become a
holder of either (i) the number of fully paid Exchangeable Shares to which
he is entitled as a result of the exchange referred to in paragraph (c) or
(ii) the number of fully paid shares of Newco Common Stock to which he is
entitled as a result of the exchange referred to in paragraph (c) and such
holder's name shall be added to the register of holders of Exchangeable
Shares or shares of Newco Common Stock, as the case may be.
3
<PAGE>
(e) The stated capital of the Exchangeable Shares will be equal to the
stated capital of the IVI Common Shares actually exchanged for Exchangeable
Shares immediately prior to the Arrangement.
(f) Pursuant to the Arrangement and the Voting Trust Agreement, the
holders of IVI Common Shares that elect to receive Exchangeable Shares (i)
will grant and transfer directly to Newco the Call Rights and (ii) will
receive directly from Newco the Voting Rights and the Exchange Rights.
(g) The one outstanding Series A Preferred Share held by Newco will be
exchanged for one IVI Common Share and Newco shall cease to be a holder of
the Series A Preferred Share, shall have its name removed from the register
of holders of Series A Preferred Shares, and Newco's name shall be added to
the register of holders of IVI Common Shares accordingly, and the one Series
A Preferred Share shall be cancelled by IVI.
(h) The stated capital of the one IVI Common Share referred to in
Section 2.1(g) shall be equal to the stated capital of the one Series A
Preferred Share prior to the Arrangement.
(i) The Newco Preferred Stock shall be purchased from IVI by Newco for
the fair market value determined by the board of directors of IVI in
accordance with Section 2.1(b) and immediately thereafter shall be cancelled
by Newco.
2.2 THE VOTING AND EXCHANGE TRUST AGREEMENT
Prior to the Effective Time, Newco, IVI and a Canadian trust company
reasonably acceptable to all the parties (the "Trustee"), shall execute and
deliver a Voting and Exchange Trust Agreement in substantially the form set
forth as Exhibit E hereto, and such changes and additions thereto as may be
reasonably requested by the Trustee together with such other terms and
conditions as may be agreed to by the parties hereto acting reasonably (as so
executed the "Voting Trust Agreement"). Newco shall issue and deposit with the
Trustee, for the benefit of the holders of the Exchangeable Shares, the one
share of Newco Special Voting Stock to be held in accordance with the Voting
Trust Agreement.
2.3 SUPPORT AGREEMENT
Prior to the Effective Time, Newco and IVI shall execute and deliver the
Support Agreement (the "Support Agreement") containing the terms and conditions
set forth in Exhibit F hereto, together with such other terms and conditions as
may be agreed to by the parties hereto acting reasonably.
2.4 DISSENTING SHARES
Notwithstanding anything in this Agreement to the contrary, IVI Common
Shares that are issued and outstanding immediately prior to the Effective Time
and that are held by shareholders who have not voted such shares in favour of
the Arrangement and who have delivered a written demand for appraisal of such
shares in the manner provided in Section 190 of the CBCA ("IVI Dissenting
Shares") shall not be exchanged for Exchangeable Shares or Newco Common Stock as
described in Section 2.1 and shall from and after the Effective Time represent
only the right to receive such consideration as shall be determined to be due to
such shareholder pursuant to Section 190 of the CBCA; provided, however, that
IVI Common Shares outstanding immediately prior to the Effective Time and held
by a person who shall, with the written approval of IVI if required by Section
190 of the CBCA, withdraw his demand for the value of his shares or lose his
right to demand to receive the value of his shares, in either case pursuant to
Section 190 of the CBCA, shall be deemed to be and become and have substituted
therefor, as of the Effective Time, the appropriate number of Exchangeable
Shares of IVI as specified in Section 2.1 without interest.
ARTICLE 3.00--THE MERGER
3.1 MERGER OF MERGER SUB WITH AND INTO CHECKMATE
(a) Subject to the terms and conditions of this Agreement, at the
Effective Time, Merger Sub shall be merged with and into Checkmate and the
separate existence of Merger Sub shall cease. Checkmate shall be the
surviving corporation in the Merger (the "Surviving Corporation").
4
<PAGE>
(b) As provided in Section 5.1, Checkmate and Merger Sub will file a
certificate of merger with the Secretary of State of the State of Georgia
(the "Georgia Certificate of Merger") and make all other filings or
recordings required by the Georgia Law in connection with the Merger. The
Merger will become effective on the Effective Date at the Effective Time as
specified in the Georgia Certificate of Merger duly filed with the Secretary
of State of Georgia.
3.2 EFFECT OF THE MERGER
The Merger shall have the effects set forth in the Georgia Law. Without
limiting the generality of the foregoing, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises, of a public as well
as a private nature, and be subject to all the restrictions, disabilities and
duties, of each of Merger Sub and Checkmate (collectively, the "Constituent
Corporations"). The Surviving Corporation shall be vested with the rights,
privileges, powers and franchises, all property (real, personal, and mixed) and
all debts due on whatever account and all other things in action or belonging
to, and all and every other interest of, each of the Constituent Corporations.
All debts, liabilities and duties of each of the Constituent Corporations shall
attach to the Surviving Corporation and may be enforced against it to the same
extent as if such debts, liabilities and duties had been incurred or contracted
by it.
3.3 SURVIVING CORPORATION ARTICLES OF INCORPORATION AND BY-LAWS; DIRECTORS
The Articles of Incorporation of Merger Sub shall be the Articles of
Incorporation of the Surviving Corporation immediately after the Effective Time,
until amended in accordance with applicable law, except that the name of the
Surviving Corporation shall be "IVI Checkmate Inc.". The By-laws of Merger Sub
shall be the By-laws of the Surviving Corporation immediately after the
Effective Time. The directors of the Surviving Corporation immediately after the
Effective Time shall be J. Stanford Spence, George Whitton, L. Barry Thomson and
Gregory A. Lewis.
3.4 CONVERSION OF CHECKMATE COMMON SHARES
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of the holder of any shares of Checkmate Common Shares or
Merger Sub:
(i) Each share of common stock, par value $.01 per share, of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock of the Surviving
Corporation and shall constitute the only outstanding shares of capital
stock of the Surviving Corporation.
(ii) Each Checkmate Common Share and the associated share purchase
right of Checkmate (a "Share") outstanding immediately prior to the
Effective Time shall, except as provided in Section 3.8 with respect to
Shares as to which appraisal rights have been exercised, and subject to
Section 3.7, be converted into the right to receive 1.2775 shares of
Newco Common Stock; provided, however, that the number of shares of Newco
Common Stock so to be received is subject to adjustment as provided in
Section 5.5. The ratio of 1.2775 shares of Newco Common Stock to one
Checkmate Common Share, as such ratio may be adjusted pursuant to Section
5.5 below, is hereinafter referred to as the "Checkmate Exchange Ratio".
(b) From and after the Effective Time, all Shares converted in
accordance with Section 3.4(a)(ii) shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such Shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration and any dividends or distributions with a record date after
the Effective Time theretofore paid or payable with respect to Newco Common
Stock ("Subsequent Dividends"). From and after the Effective Time, all
certificates representing the common stock of Merger Sub shall be deemed for
all purposes to represent the number of shares of Common Stock of the
Surviving Corporation into which they were converted in accordance with
Section 3.4(a)(i).
(c) The Newco Common Stock to be received in consideration pursuant to
the Merger by each holder of Shares is referred to herein as the "Merger
Consideration".
5
<PAGE>
3.5 CLOSING OF CHECKMATE TRANSFER BOOKS
At and after the Effective Time, holders of certificates representing Shares
shall cease to have any rights as shareholders of Checkmate and the stock
transfer books of Checkmate shall be closed with respect to Checkmate Common
Shares issued and outstanding immediately prior to the Effective Time and no
further transfer of such shares shall thereafter be made on such stock transfer
books. If, after the Effective Time, valid certificates previously representing
such shares are presented to the Surviving Corporation or the Exchange Agent
(duly endorsed as the Exchange Agent may require) they shall be exchanged as
provided in Section 3.6.
3.6 EXCHANGE AGENT
(a) Prior to the Effective Time, Newco shall appoint an agent (the
"Exchange Agent") for the purpose of exchanging certificates representing
Shares for the Merger Consideration. The Exchange Agent shall be a bank or
trust company to be agreed by IVI and Checkmate prior to the Effective Time.
For purposes of determining the Merger Consideration to be made available,
Newco shall assume that no shareholder of Checkmate will perfect his right
to appraisal of his Shares. Promptly following the Effective Time, Newco
will send, or will cause the Exchange Agent to send, to each holder of
Shares at the Effective Time a letter of transmittal for use in such
exchange.
(b) Each holder of Shares that have been converted into a right to
receive the Merger Consideration and Subsequent Dividends, upon surrender to
the Exchange Agent of a certificate or certificates representing Shares,
will be entitled to receive the Merger Consideration and Subsequent
Dividends payable in respect of such Shares. Until so surrendered, each such
certificate shall, after the Effective Time, represent for all purposes only
the right to receive the Merger Consideration and the Subsequent Dividends.
(c) If any portion of the Merger Consideration in respect of any Share
is to be issued to a person other than the registered holder of the Shares
represented by the certificate or certificates surrendered, it shall be a
condition to such issuance that the certificate or certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment shall pay to the
Exchange Agent any transfer or other taxes required as a result of such
payment to a person other than the registered holder of such Shares or
establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(d) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to paragraph (a) of this Section 3.6 in respect of
Shares for which appraisal rights have been perfected shall be returned to
Newco upon demand.
3.7 NO FRACTIONAL SHARES
No fractional shares of Newco Common Stock will be issued in connection with
the Merger and no certificate therefor will be issued. Any holder of Shares who
would otherwise receive a fractional share of Newco Common Stock shall, upon
surrender of his certificate or certificates representing Shares, receive a
share certificate adjusted to the next lower whole number of shares of Newco
Common Stock.
3.8 DISSENTING SHARES
Notwithstanding anything in this Agreement to the contrary, Shares that are
issued and outstanding immediately prior to the Effective Time and held by a
holder who has delivered written notice to Checkmate before the vote has been
taken demanding payment for his Shares if the Merger is consummated and has not
voted in favour of the Merger and who has otherwise perfected his dissenters'
rights in the manner provided in the Georgia Law ("Checkmate Dissenting Shares")
shall not be canceled and converted into a right to receive the Merger
Consideration in accordance with the Checkmate Exchange
6
<PAGE>
Ratio as described in Section 3.4 and shall from and after the Effective Time
represent only the right to receive such consideration as shall be determined to
be due to such shareholder pursuant to the Georgia Law, unless such holder fails
to perfect or withdraws or otherwise loses his right to dissent. If after the
Effective Time such holder fails to perfect or waives, rescinds, withdraws or
otherwise loses his right to dissent, such Shares shall be treated as if they
had been converted as of the Effective Time into a right to receive the Merger
Consideration payable in respect of such Shares pursuant to Section 3.4 without
interest.
3.9 LOST CERTIFICATES
If any certificate which immediately prior to the Effective Time represented
outstanding Checkmate Common Shares that were exchanged pursuant to Section 3.6
has been lost, stolen or destroyed, upon the making of an affidavit of that fact
by the person claiming such certificate to be lost, stolen or destroyed, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
certificate, certificates representing shares of Newco Common Stock (and any
dividends or distributions with respect thereto) deliverable in respect thereof
as determined in accordance with Section 3.6. When authorizing such payment in
exchange for any lost, stolen or destroyed certificate, the person to whom
certificates represented shares of Newco Common Stock are to be issued shall, as
a condition precedent to the issuance thereof, give a bond satisfactory to the
Surviving Corporation and the Exchange Agent, as the case may be, in such sum as
the Surviving Corporation may direct or otherwise indemnify the Surviving
Corporation and the Exchange Agent in a manner satisfactory to the Surviving
Corporation and the Exchange Agent against any claim that may be made against
the Surviving Corporation or the Exchange Agent with respect to the certificate
alleged to have been lost, stolen or destroyed.
ARTICLE 4.00--POST-CLOSING CORPORATE STRUCTURE
4.1 POST-CLOSING CORPORATE STRUCTURE
It is the parties' intention, on or immediately after the Effective Date, to
restructure the corporate holdings of Newco, IVI and the Surviving Corporation,
in a tax-efficient manner which does not adversely affect the pooling treatment
of the Transactions, such that
(i) the Surviving Corporation acquires (by merger or otherwise) the
assets and liabilities of, or the stock of, IVI International Inc., a
Delaware corporation and International Verifact Inc. ("U.S."), a Delaware
corporation, and
(ii) the shareholdings of IVI in NTN and IVI Ingenico Inc. are
transferred to Newco. For greater certainty, 1245344 Ontario Limited
shall remain a subsidiary of IVI.
It is also the parties' intention, on or immediately after the Effective
Date, to take the steps necessary to have the Surviving Corporation, as a
"statutory close corporation", eliminate its board of directors, in accordance
with the Georgia Law.
ARTICLE 5.00--ADDITIONAL AGREEMENTS
5.1 CLOSING
Unless this Agreement shall have been terminated pursuant to Section 12.1
hereof, and subject to the satisfaction or waiver of the conditions set forth in
Article 11 hereof, the consummation of the Transactions (the "Closing") will
take place two business days after satisfaction or waiver of the conditions set
forth in Article 11 hereof, at the offices of Meighen Demers, Merrill Lynch
Canada Tower, 200 King Street West, Suite 1100, Toronto, Ontario, M5H 3T4,
unless another date, time or place is agreed to in writing by the parties
hereto. At the Closing, the parties hereto shall deliver the documents
contemplated hereby
7
<PAGE>
together with such other customary documents as may be reasonably requested by
the parties. Concurrently with the Closing, the Articles of Arrangement shall be
filed with the Director and the Georgia Certificate of Merger shall be filed
with the Secretary of State of the State of Georgia.
5.2 CONTEMPORANEOUS TRANSACTIONS
The parties hereto agree that each of the Transactions that is in fact
consummated will, to the extent permitted by applicable law, be consummated
substantially contemporaneously with any other Transaction that is in fact
consummated.
5.3 ACCOUNTING CONSEQUENCES
It is intended by the parties hereto that the Transactions shall qualify for
accounting treatment as a pooling of interests under GAAP.
5.4 MATERIAL ADVERSE EFFECT
When used in connection with IVI or any of its subsidiaries, or Checkmate or
any of its subsidiaries, as the case may be, any reference to any event, change
or effect being "material" means any material event, change or effect related to
the condition (financial or otherwise), properties, Liabilities, businesses,
operations, results of operations or prospects of such entity or group of
entities. When used in connection with IVI or any of its subsidiaries, or
Checkmate or any of its subsidiaries, as the case may be, the term "Material
Adverse Effect" means any change or effect that, individually or when taken
together with any other occurrences, events, changes or effects that have
occurred prior to the date of determination of the occurrence of the Material
Adverse Effect, is or is reasonably likely to be materially adverse to
(i) the business, properties, financial condition, results of
operations or prospects of IVI and its subsidiaries or Checkmate and its
subsidiaries, as the case may be, in each case taken as a whole or
(ii) the ability of IVI or Checkmate, as the case may be, to perform
its obligations under this Agreement or to consummate the Transactions
contemplated by this Agreement; provided that "Material Adverse Effect"
shall not be deemed to include the impact of the Transactions and
compliance with the provisions of this Agreement on the operating
performance of the parties.
5.5 ADJUSTMENTS TO EXCHANGE RATIOS
The IVI Exchange Ratio and the Checkmate Exchange Ratio shall be
proportionally adjusted to reflect fully the effect of any stock split, reverse
split, stock dividend (including any dividend or distribution of securities
convertible into IVI Common Shares or Checkmate Common Shares), reorganization,
recapitalization or other like change with respect to IVI Common Shares or
Checkmate Common Shares which has a record date or (if no record date is
required or established, by operation of law or otherwise) effective date on or
after the date hereof and prior to the Effective Date.
5.6 DISSENTERS' RIGHTS
Each of IVI and Checkmate shall give the other
(i) prompt notice of any written demand of a right of dissent,
withdrawals of such demands, and any other instruments served pursuant to
the CBCA or the Georgia Law and received by IVI or Checkmate, as the case
may be, and
(ii) the opportunity to participate in all negotiations and
proceedings with respect to such demands. Neither IVI nor Checkmate
shall, except with the prior written consent of the other, make any
payment with respect to, or offer to settle or settle, any such demands.
8
<PAGE>
5.7 SHAREHOLDER MEETINGS; PROXY MATERIALS; FORM S-4
(a) Unless the Board of Directors of Checkmate shall take any action
permitted by the third sentence of this Section 5.7(a) or the Board of
Directors of IVI shall take any action permitted by the third sentence of
Section 5.7(b), Checkmate shall cause a meeting of its shareholders (the
"Checkmate Shareholders' Meeting") to be duly called and held as soon as
reasonably practicable after the date of this Agreement for the purpose of
voting on the approval and adoption of this Agreement and the Merger (the
"Checkmate Shareholder Approval"). Except as provided in the next sentence,
the Board of Directors of Checkmate shall recommend approval and adoption of
this Agreement and the Merger by the shareholders of Checkmate. The Board of
Directors of Checkmate shall be permitted to
(i) not recommend to Checkmate's shareholders that they give the
Checkmate Shareholder Approval,
(ii) withdraw or modify in a manner adverse to IVI its recommendation
to Checkmate's shareholders that they give the Checkmate Shareholder
Approval, or
(iii) cancel the Checkmate Shareholders' Meeting, but in each of
cases (i), (ii) and (iii) only if and to the extent that Checkmate has
complied with Section 10.2(a) and a Superior Proposal with respect to
Checkmate is pending at the time Checkmate's Board of Directors
determines to take any such action or inaction. In connection with the
Checkmate Shareholders' Meeting, Checkmate
(iv) will promptly prepare and file with the SEC, will use its
reasonable best efforts to have cleared by the SEC and will thereafter
mail to its shareholders as promptly as practicable a proxy statement and
all other materials for such meeting (the "Checkmate Proxy Statement"),
(v) will use its reasonable best efforts, subject to the immediately
preceding sentence, to obtain the Checkmate Shareholder Approval, and
(vi) will otherwise comply with all legal requirements applicable to
such meeting.
(b) Unless the Board of Directors of IVI shall take any action permitted
by the third sentence of this Section 5.7(b) or the Board of Directors of
Checkmate shall have taken any action permitted by the third sentence of
Section 5.7(a), IVI shall cause a meeting of its shareholders (the "IVI
Shareholders' Meeting") to be duly called and held as soon as reasonably
practicable after the date of this Agreement for the purpose of voting on
the approval and adoption of this Agreement and the Arrangement (the "IVI
Shareholder Approval"). Except as provided in the next sentence, the Board
of Directors of IVI shall recommend approval and adoption of this Agreement
and the Arrangement by IVI's shareholders. The Board of Directors of IVI
shall be permitted to
(i) not recommend to IVI's shareholders that they give the IVI
Shareholder Approval,
(ii) withdraw or modify in a manner adverse to Checkmate its
recommendation to IVI's shareholders that they give the IVI Shareholder
Approval, or
(iii) cancel the IVI Shareholders' Meeting, but in each of cases (i),
(ii) and (iii) only if and to the extent that IVI has complied with
Section 10.2(a) and a Superior Proposal with respect to IVI is pending at
the time IVI's Board of Directors determines to take any such action or
inaction. In connection with the IVI Shareholders' Meeting, IVI
(x) will promptly prepare and file with the OSC, the TSE and the SEC,
will use its reasonable best efforts to have cleared by the OSC, the TSE
and the SEC and will thereafter mail to its shareholders as promptly as
practicable the proxy statement and management information circular and
all other materials for such meeting (the "IVI Proxy Statement", and
collectively with the Checkmate Proxy Statement, the "Proxy Statements"),
9
<PAGE>
(y) will use its reasonable best efforts, subject to the immediately
preceding sentence, to obtain the IVI Shareholder Approval, and
(z) will otherwise comply with all legal requirements applicable to
such meeting.
(c) Newco shall, and IVI and Checkmate shall cause Newco, promptly to
prepare and file with the SEC a registration statement (the "Registration
Statement") on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Newco Common Stock issuable
at the Effective Time in connection with the Arrangement and the Merger and
take any action required to be taken under applicable SEC, state and
provincial securities Laws, the regulations of the TSE and the regulations
of NASD for the Nasdaq National Market in connection with the issuance of
such Newco Common Stock. Subject to the terms and conditions of this
Agreement and unless the Board of Directors of Checkmate or IVI, as the case
may be, shall take any action permitted by the third sentence of paragraph
(a) or (b) of Section 5.7 above, as the case may be, IVI and Checkmate shall
cause Newco to use its reasonable best efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after the Registration Statement is filed.
(d) Newco shall, and IVI and Checkmate shall cause Newco, to prepare and
file as soon as practicable after the Effective Date with the SEC a
registration statement on Form S-3 (the "Form S-3") under the Securities
Act, with respect to the shares of Newco Common Stock issuable in connection
with the exchange of the Exchangeable Shares and take any action required to
be taken under applicable SEC, state and provincial securities Laws, the
regulations of the TSE and the regulations of NASD for the Nasdaq National
Market in connection with the issuance of such shares of Newco Common Stock.
Subject to the terms and conditions of this Agreement and unless it is
determined by counsel to Newco that Newco is not eligible to use the Form
S-3, IVI and Checkmate shall cause Newco to use its reasonable best efforts
to have such registration statement on Form S-3 declared effective under the
Securities Act as promptly as practicable after such registration statement
is filed.
(e) Newco shall, and IVI and Checkmate shall cause Newco, if required,
promptly to prepare and file with the OSC and certain other securities
regulatory authorities in Canada a preliminary "non-offering" prospectus
(together with the (final) prospectus, the "Prospectus") under subsection
53(2) of the OSA and the equivalent provisions in the securities Laws of
such other jurisdictions, or file such other documents and take such other
steps as may be required so that Newco will become a "reporting issuer"
under the OSA and the securities Laws of such other jurisdictions, and take
any action required to be taken under applicable provincial securities Laws
and the regulations of the TSE in connection therewith. Subject to the terms
and conditions of this Agreement and unless the Board of Directors of
Checkmate or IVI, as the case may be, shall take any action permitted by the
third sentence of paragraph (a) or (b) of Section 5.7 above, as the case may
be, IVI and Checkmate shall cause Newco to use its reasonable best efforts
to obtain a receipt for the (final) "non-offering" prospectus or such other
document on or before the Effective Date.
5.8 ACCESS TO INFORMATION; CONFIDENTIALITY
Upon reasonable notice and subject to restrictions contained in
confidentiality agreements to which such party is subject, IVI and Checkmate
shall each (and shall cause each of their subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of the
other, reasonable access during the period prior to the Effective Date, to all
its properties, books, contracts, commitments and records and, during such
period, IVI and Checkmate each shall (and shall cause each of their subsidiaries
to) furnish promptly to the other all information concerning its business,
properties and personnel as such other party may reasonably request, and each
shall make available to the other the appropriate individuals (including
attorneys, accountants and other professionals) for discussion of the other's
business, properties
10
<PAGE>
and personnel as either party may reasonably request. Each party shall keep such
information confidential in accordance with the terms of the existing
confidentiality and standstill agreement (the "Confidentiality/ Standstill
Agreement") between IVI and Checkmate, notwithstanding the expiration thereof on
March 31, 1998.
5.9 CONSENTS; APPROVALS
IVI, Checkmate and Newco shall each use all reasonable efforts to obtain all
Approvals and IVI, Checkmate and Newco shall make all filings (including,
without limitation, all filings with United States, Canadian federal and
provincial and foreign governmental entities) required in connection with the
authorization, execution and delivery of this Agreement by IVI, Newco, Merger
Sub and Checkmate and the consummation by them of the transactions contemplated
hereby. IVI and Checkmate (with respect to themselves and their respective
subsidiaries), upon the reasonable request of any party hereto, shall furnish
all information required to be included in the Registration Statement, Proxy
Statements, Form S-3, Prospectus or for any Approval or other filing to be made
pursuant to all Laws in connection with the transactions contemplated by this
Agreement.
5.10 STOCK OPTIONS
(a) On the Effective Date, IVI's obligations with respect to each
outstanding option to purchase IVI Common Shares (each an "IVI Option")
under IVI's 1997 Stock Option Plan ("IVI Option Plan"), and Checkmate's
obligations with respect to each outstanding option to purchase Checkmate
Common Shares (each a "Checkmate Option") under Checkmate's 1988 Employee
Incentive Stock Option Plan, 1993 Stock Option Plan and 1994 Directors'
Stock Option Plan (individually, a "Checkmate Stock Option Plan," and,
collectively, the "Checkmate Stock Option Plans") (the IVI Option Plan and
the Checkmate Stock Option Plans are collectively referred to herein as the
"Stock Option Plans"), whether vested or unvested, will be assumed by Newco
and, on such assumption, the rights to acquire IVI Common Shares under the
IVI Option Plan and the rights to acquire Checkmate Common Shares under the
Checkmate Stock Option Plans shall be exchanged for rights to acquire Newco
Common Stock under such plans. Each IVI Option and Checkmate Option so
assumed by Newco under this Agreement shall continue to have, and be subject
to, the same terms and conditions set forth in the IVI Option Plan or the
Checkmate Stock Option Plans, as the case may be, and the agreement pursuant
to which such IVI Option or Checkmate Option, as the case may be, was issued
as in effect immediately prior to the Effective Date, except that
(i) such IVI Option or Checkmate Option, as the case may be, will be
deemed to constitute an option to purchase that number of shares of Newco
Common Stock that the holder of such option would have been entitled to
receive pursuant to the Arrangement or the Merger, as the case may be,
had such holder exercised such option immediately prior to the Effective
Date (not taking into account whether such option was in fact
exercisable), rounded down to the nearest whole number of shares of Newco
Common Stock, and
(ii) the per share exercise price for the shares of Newco Common
Stock issuable upon exercise of such assumed IVI Option or Checkmate
Option, as the case may be, will be equal to the quotient determined by
dividing the exercise price per share of IVI Common Shares or Checkmate
Common Shares at which such IVI Option or Checkmate Option, as the case
may be, was exercisable immediately prior to the Effective Date by the
IVI Exchange Ratio or the Checkmate Exchange Ratio, as the case may be,
and rounding the resulting exercise price up to the nearest whole cent.
(b) It is the intention of the parties that the IVI Options and
Checkmate Options assumed by Newco qualify following the Effective Date as
incentive stock options as defined in the Code
11
<PAGE>
("ISOs"), to the extent the IVI Options or Checkmate Options, as the case
may be, qualified as ISOs prior to the Effective Date.
(c) IVI and Checkmate shall obtain any required consents of holders of
such options to such assumptions prior to the Effective Date.
(d) As soon as practicable after the Effective Date, Newco shall deliver
to each holder of an outstanding IVI Option or Checkmate Option, an
appropriate notice setting forth such holder's rights pursuant thereto and
such IVI Option or Checkmate Option shall continue in effect on the same
terms and conditions (including further anti-dilution provisions, and
subject to the adjustments required by this Section 5.10 after giving effect
to the Transactions). Newco shall comply with the terms of all such IVI
Options and Checkmate Options. Newco shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Newco
Common Stock for delivery pursuant to the terms set forth in this Section
5.10.
(e) Newco shall file and cause to become effective not later than the
Effective Date a registration statement on Form S-8 under the Securities Act
with respect to the issuance of shares of Newco Common Stock upon exercise
of those IVI Options and Checkmate Options referred to in this Section 5.10
and shall keep such registration statement effective throughout the term of
such options.
5.11 AGREEMENTS OF AFFILIATES
Each of IVI and Checkmate shall deliver to Newco and to the other, prior to
the date the Registration Statement becomes effective under the Securities Act,
a letter (each, an "Affiliate Letter") identifying all persons who are, or may
be deemed to be, at the Effective Time, affiliates of IVI or Checkmate, as the
case may be, for purposes of Rule 145 under the Securities Act. Each of IVI and
Checkmate shall use its reasonable best efforts to cause each person who is
identified as an "affiliate" in the Affiliate Letter to deliver to Newco and to
the other, prior to the Effective Date, a written agreement (an "Affiliate
Agreement") substantially in the form of Exhibit G-1 or G-2, respectively. Newco
shall be entitled to place restrictive legends upon certificates for shares of
Newco Common Stock issued to affiliates of Checkmate or IVI in connection with
the Transactions to enforce applicable provisions of Law.
5.12 INDEMNIFICATION AND INSURANCE
The provisions of this Section 5.12 are intended for the benefit of the
parties indemnified herein, and shall be enforceable by such parties.
(a) The By-Laws of IVI and the By-Laws of the Surviving Corporation
shall not be amended, repealed or otherwise modified, for a period of six
years from the Effective Date in any manner that would adversely affect the
rights thereunder of individuals who immediately prior to the Effective Date
were directors, officers, employees or agents of IVI or Checkmate, as the
case may be, unless such modification is required by Law.
(b) Newco shall, to the fullest extent permitted under applicable Law,
indemnify and hold harmless, each present and former director, officer,
employee, fiduciary and agent of each of IVI and Checkmate or any of their
subsidiaries (collectively, the "Indemnified Parties") against any costs or
expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, Liabilities and amounts paid in settlement in connection with any
Litigation, claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or pertaining to
any action or omission occurring at or prior to the Effective Date
(including, without limitation, the transactions contemplated by this
Agreement) for a period of six years after the Effective Date; PROVIDED,
HOWEVER, that in the event that any claim or claims for indemnification are
asserted or made within such six-year period, all rights to indemnification
in respect of any such claim or claims shall continue until the disposition
of any and all such claims. The Indemnified Parties as a group may
12
<PAGE>
retain only one law firm to represent them with respect to any single action
unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties. Any counsel retained by the Indemnified Parties shall
be reasonably satisfactory to Newco and Newco shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld).
(c) If Newco or any successors or assigns of Newco shall consolidate
with or merge into any other person and shall not be the continuing or
surviving person of such consolation or merger or shall transfer all or
substantially all of its properties to any person, then and in each case,
proper provision shall be made, so that such successors and assigns shall
assume the obligations of Section 5.12(b).
(d) Newco shall obtain directors' and officers' insurance for the
directors and officers of Newco, Checkmate and IVI, including, without
limitation, policy limits at least as high as, and risks protected against
at least as expansive as, Checkmate's just prior to the date hereof.
5.13 NOTIFICATION OF CERTAIN MATTERS
Each party hereto shall give prompt notice to all other parties of:
(i) the occurrence, or non-occurrence, of any event the occurrence,
or non-occurrence, of which would be likely to cause any representation
or warranty of such party contained in this Agreement to be incomplete,
untrue or inaccurate; and
(ii) any failure of such party materially to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by
it hereunder;
PROVIDED, HOWEVER, that the delivery of any notice pursuant to this Section
5.13 shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice; and
PROVIDED, FURTHER, that failure to give such notice shall not be treated as
a breach of covenant for the purposes of Sections 11.2(b) or 11.3(b) unless the
failure to give such notice results in material prejudice to IVI or Checkmate,
as the case may be.
5.14 FURTHER ACTION
Upon the terms and subject to the conditions hereof, each of the parties
hereto shall use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, to obtain in a timely manner all
necessary waivers, consents and Approvals and to effect all necessary
registrations and filings, and to otherwise satisfy or cause to be satisfied all
conditions precedent to its obligations under this Agreement. In addition, IVI
and Checkmate shall provide each other with such cooperation and information as
either of them reasonably may request of the other in filing any Tax Return,
amended Tax Return or claim for refund, determining a Liability for Taxes or a
right to a refund of Taxes, participating in or conducting any audit or other
proceeding in respect of Taxes or making representations to or furnishing
information to parties subsequently desiring to purchase any of the Newco Common
Stock. Such cooperation and information shall include providing copies of
relevant Tax Returns or portions thereof, together with accompanying schedules,
related work papers and documents relating to rulings or other determinations by
Tax authorities.
13
<PAGE>
5.15 PUBLIC ANNOUNCEMENTS
IVI and Checkmate shall consult with each other before issuing any press
release or otherwise making any public statements with respect to the
Transactions or this Agreement and shall not issue any such press release or
make any such public statement without the prior consent of such other party,
which shall not be unreasonably withheld; PROVIDED, HOWEVER, that IVI or
Checkmate may, without the prior consent of such other party, issue such press
release or make such public statement as may upon the advice of counsel be
required by Law, the SEC, NASD, TSE, OSC or any other governmental entity to
which such party is subject if it has used all reasonable efforts to consult
with such other party as to the timing and content of such release or statement.
5.16 LISTING OF NEWCO COMMON STOCK AND EXCHANGEABLE SHARES
Newco shall use its reasonable best efforts to cause the shares of Newco
Common Stock to be issued in the Transactions (including shares of Newco Common
Stock to be issued as a result of rights attaching to the Exchangeable Shares)
to be approved for quotation on the Nasdaq National Market and listing on the
TSE. Newco and IVI shall use their reasonable best efforts to cause the
Exchangeable Shares to be approved for listing on the TSE.
5.17 CONVEYANCE TAXES
IVI and Checkmate shall cooperate in the preparation, execution and filing
of all returns, questionnaires, applications or other documents regarding any
real property transfer or gains, sales, use, transfer, value added, stock
transfer and stamp taxes, any transfer, recording, registration and other fees,
and any similar taxes which become payable in connection with the Transactions
that are required or permitted to be filed on or before the Effective Date.
5.18 POOLING ACCOUNTING TREATMENT
Each of IVI and Checkmate agree not to knowingly take any action that would
adversely affect the ability of Newco to treat the Transactions as a pooling of
interests under GAAP.
5.19 DIRECTORS AND OFFICERS
Effective as of the Effective Time:
(a) the Newco Board of Directors shall increase the number of Directors
from four to nine and the Board of Directors shall be constituted in the
following manner:
(i) three nominees of IVI (the "IVI Directors"), including George
Whitton and L. Barry Thomson;
(ii) three nominees of Checkmate (the "Checkmate Directors"),
including J. Stanford Spence and Gregory A. Lewis; and
(iii) three Directors mutually agreed upon by IVI and Checkmate (the
"Outside Directors"), which shall include Gerard Compain and a second
nominee of Ingenico;
(b) the Board of Directors of the Surviving Corporation shall be
comprised of four members, being J. Stanford Spence, George Whitton, L.
Barry Thomson and Gregory A. Lewis;
(c) IVI shall cause all of its Directors but L. Barry Thomson to resign,
the number of Directors who shall constitute the whole Board shall be
reduced to three and the Directors shall elect J. Stanford Spence and the
senior operating officer of IVI as new Directors for the balance of the term
and until their successors shall have been elected and qualified;
14
<PAGE>
(d) the Newco Board of Directors shall cause the officers of Newco to
include J. Stanford Spence as Chairman, George Whitton as Vice-Chairman and
L. Barry Thomson as President and Chief Executive Officer; provided that in
the event that the Chairman becomes inactive (as defined in his employment
agreement) for any reason, the Vice-Chairman shall assume the position of
Chairman;
(e) the Board of Directors of the Surviving Corporation shall cause the
Officers of the Surviving Corporation to include L. Barry Thomson as Chief
Executive Officer, Gregory A. Lewis as President and Chief Operating
Officer, William McKiever as Executive Vice-President, Sales and Marketing,
John C. Neubert as Executive Vice-President and Chief Financial Officer and
Alan Roberts as Vice-President, Development; and
(f) the Newco Board of Directors shall appoint and constitute four
Committees of the Board of Directors, being the Audit Committee, the
Nomination/Governance Committee, the Compensation Committee and the
Executive Committee. The Executive Committee shall be comprised of J.
Stanford Spence, L. Barry Thomson and Gerard Compain. The Executive
Committee's mandate will include the review of key operational and strategic
initiatives of management and will be regularly consulted by management.
Each of the other committees will be comprised of three members, being a
nominee of the IVI Directors, a nominee of the Checkmate Directors and a
nominee of the Outside Directors, except for the Nomination/Governance
Committee which shall be comprised of four members. In the case of the
Nomination/Governance Committee, it shall be comprised of J. Stanford
Spence, George Whitton, Gerard Compain and one Outside Director, who is not
associated with Ingenico, who shall be chairman of such committee.
5.20 STRATEGIC ALLIANCE WITH INGENICO
IVI shall assign to Newco, in a tax-efficient manner, as of the Effective
Time, all of its right, title, interest and obligations in, to and under certain
agreements between IVI and Ingenico, being the Master Alliance Agreement dated
December 5, 1996, the Investment Agreement dated December 5, 1996, as amended,
the Marketing and Distribution Agreement dated December 17, 1996, the Joint
Development and Procurement Agreement dated December 17, 1996, the Technology
License Agreement dated December 17, 1996 and the Latin America Unanimous
Shareholders' Agreement dated December 17, 1996.
5.21 FAIR PRICE AND BUSINESS COMBINATIONS REQUIREMENTS
Checkmate shall take all steps necessary to ensure that the provisions of
Article 11, Part 2 and Part 3, Sections 14-2-1110 through 1113 and 14-2-1131
through 1133 (and any successor provisions thereto) and any other applicable
State Take-Over Laws of the Georgia Law are satisfied and do not in any way
inhibit, affect or prohibit the Transactions.
5.22 SHAREHOLDER PROTECTION RIGHTS REDEMPTION
Checkmate shall take all necessary action (including, if required, redeeming
all of the outstanding rights or amending or terminating the Shareholder
Protection Rights Agreement between Checkmate and First Union National Bank
dated October 13, 1997 (the "Shareholder Protection Rights Agreement")) so that
the entering into of this Agreement and consummation of the transactions
contemplated hereby do not and will not result in the grant of any rights to any
person under the Shareholder Protection Rights Agreement or enable or require
such rights to be exercised, distributed or triggered. Checkmate shall not,
except in accordance with the acceptance of a Superior Proposal, waive,
terminate or otherwise render the Shareholder Protection Rights Agreement
inoperative with respect to any other Acquisition Proposal.
15
<PAGE>
5.23 EMPLOYMENT AGREEMENTS
On or before the Effective Date Newco or one of its subsidiaries shall enter
into or assume responsibility for Employment Agreements with J. Stanford Spence,
George Whitton, L. Barry Thomson, Gregory A. Lewis and John C. Neubert,
substantially on the terms set forth in Exhibit H to take effect at the
Effective Time.
5.24 REORGANIZATION TREATMENT
Each of IVI and Checkmate agree not to knowingly take any action that will
adversely affect the ability of IVI, Checkmate, Newco and Merger Sub to treat
(i) the Merger as a reorganization under Sections 368 (a)(1)(A) and
368(a)(2)(E) of the Code,
(ii) the Arrangement as a reorganization of capital under Section 86
of the ITA, and
(iii) the transfers of IVI Common Shares, Call Rights and Checkmate
Common Shares to Newco as a tax-free transaction under Section 351 of the
Code.
5.25 COMBINED FINANCIAL RESULTS
Each of Surviving Corporation, IVI and Newco covenant and agree for the
benefit of the persons specified in Schedules 6.25 and 7.25 that, as promptly as
practicable following the Effective Time and in any event no later than 45 days
after the end of the calendar month in which the Effective Time occurs it will
publicly release the combined financial results of IVI and the Surviving
Corporation for the 30 or 31-day period ending on a calendar month end following
the Effective Date.
ARTICLE 6.00--REPRESENTATIONS AND WARRANTIES OF IVI
Except as set forth in the IVI Disclosure Schedule, IVI hereby represents
and warrants to Checkmate that:
6.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES
IVI and each of its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the requisite corporate power and
authority and is in possession of or has duly made all federal, state,
provincial, local and foreign governmental franchises, grants, authorizations,
licences, permits, easements, consents, certificates, rights, filings,
registration declarations, approvals and orders ("Approvals") necessary to own,
lease and operate the properties it purports to own, operate or lease and to
carry on its business as it is now being conducted, except where the failure to
have such power, authority and Approvals would not have a Material Adverse
Effect. Each of IVI and each of its subsidiaries is duly qualified or licensed
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, leased or operated by
it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and in
good standing that would not have a Material Adverse Effect. A true and complete
list of all of IVI's subsidiaries, together with the jurisdiction of
incorporation or organization of each subsidiary is set forth in Section 6.1 of
the written disclosure schedule previously delivered by IVI to Checkmate (the
"IVI Disclosure Schedule"). Except as set forth in Section 6.1 of the IVI
Disclosure Schedule, IVI or one of its subsidiaries owns all of the issued and
outstanding equity or similar securities of each IVI subsidiary. No equity or
similar securities of any IVI subsidiary are or may become required to be issued
by reasons of any Rights, and there are no Contracts by which IVI or any IVI
subsidiary is bound to issue additional equity or similar securities or Rights
or by which IVI or any IVI subsidiary is or may be bound to transfer any equity
or similar securities of any IVI subsidiary. There are no Contracts relating to
the rights of IVI or any IVI subsidiary to vote or to dispose of any equity or
similar
16
<PAGE>
securities of any IVI subsidiary. All of the equity or similar securities of
each IVI subsidiary held by IVI or another IVI subsidiary are fully paid and
nonassessable under the applicable corporation Law of the jurisdiction in which
such subsidiary is incorporated or organized and are owned by IVI or an IVI
subsidiary free and clear of any Lien. Except as set forth in Section 6.1 of the
IVI Disclosure Schedule, neither IVI nor any IVI subsidiary directly or
indirectly owns any equity or similar interest in, or any Rights in, any
corporation, partnership, joint venture or other business association or entity.
6.2 ARTICLES OF CONTINUATION AND BY-LAWS; MINUTES
IVI has heretofore furnished to Checkmate a complete and correct copy of its
Articles of Continuation and By-Laws, as amended to date, and equivalent
organizational documents of each of its subsidiaries. Such Articles of
Continuation, By-Laws and equivalent organizational documents of each of its
subsidiaries are in full force and effect. Neither IVI nor any of its
subsidiaries is in violation of any of the provisions of its Articles of
Continuation or By-Laws or equivalent organizational documents. The minute books
of IVI and its subsidiaries have been made available to Checkmate for review.
Except as disclosed in Section 6.2 of the IVI Disclosure Schedule, the minute
books of IVI and its subsidiaries provided to Checkmate pursuant to this Section
6.2 are true and complete in all material respects as of the date of this
Agreement and accurately reflect in all material respects all proceedings of the
Board of Directors and equity securities holders thereof.
6.3 CAPITALIZATION
The authorized capital stock of IVI consists of an unlimited number of IVI
Common Shares and an unlimited number of preference shares, issuable in series
(the "IVI Preference Shares"). As of January 8, 1998:
(i) 9,163,135 IVI Common Shares were issued and outstanding, all of
which are validly issued, fully paid and nonassessable under the CBCA.
None of the outstanding shares of capital stock of IVI has been issued in
violation of any preemptive rights of any current or past holder of IVI
share capital;
(ii) no IVI Common Shares were held by subsidiaries of IVI;
(iii) IVI has outstanding IVI Options to purchase 477,100 IVI Common
Shares pursuant to the IVI Option Plan. Section 6.3 of the IVI Disclosure
Schedule accurately sets forth the name of each optionee, the number of
IVI Common Shares subject to each such IVI Option, the date of grant,
exercise price and termination date of each such IVI Option, and a
vesting schedule for each such IVI Option. Section 6.3 of the IVI
Disclosure Schedule sets forth a true and correct copy of the IVI Option
Plan;
(iv) except as is provided by the Investment Agreement between IVI
and Ingenico dated December 5, 1996, as amended (the "Participation
Right") or as set forth in this Section 6.3 or in Section 6.3 or Section
6.11 of the IVI Disclosure Schedule, there are not any shares of capital
stock or other ownership interests of IVI authorized, reserved for
issuance, issued or outstanding or any outstanding Rights relating to the
share capital or other ownership interests of IVI;
(v) no IVI Preference Shares were issued or outstanding.
No change in such capitalization has occurred between January 8, 1997 and
the date hereof, except for the issuance of IVI Common Shares under the exercise
of options or other Rights outstanding prior to January 8, 1998.
17
<PAGE>
6.4 AUTHORITY RELATIVE TO THIS AGREEMENT
IVI has all necessary corporate power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by IVI and the consummation by IVI of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action and no other
corporate proceedings on the part of IVI are necessary to authorize this
Agreement or to consummate the transactions so contemplated (other than the
approval and adoption of the Arrangement by the holders of at least two-thirds
of the outstanding shares of IVI Common Shares who are permitted to, and who,
vote in accordance with and subject to the CBCA, the OSA, IVI's Articles of
Continuation and By-Laws and the approval of the Court in accordance with the
CBCA). The Board of Directors of IVI has determined that it is advisable and in
the best interest of IVI's shareholders for IVI to enter into a business
combination with Checkmate, Newco and Merger Sub upon the terms and subject to
the conditions of this Agreement. This Agreement has been duly and validly
executed and delivered by IVI and, assuming the due authorization, execution and
delivery by Checkmate, Newco and Merger Sub, as applicable, and subject to
approval by the holders of IVI Common Shares and approval of the Court,
constitutes a legal, valid and binding obligation of IVI.
6.5 MATERIAL CONTRACTS; NO CONFLICT; REQUIRED FILINGS AND CONSENTS
(a) Section 6.5(a) of the IVI Disclosure Schedule includes a list of:
(i) all material Contracts of IVI and its subsidiaries including,
without limitation,
A. any Contract which restricts or prohibits IVI or any
subsidiary of IVI from engaging in any business activity in any
geographic area, line of business or otherwise in competition with
any person, and
B. any Contracts with Ingenico; and
(ii) all agreements which, as of the date hereof, would be required
to be filed as an exhibit to Form 10-K filed by IVI pursuant to the
requirements of the Exchange Act and the SEC's rules thereunder ((i) and
(ii) being, collectively, the "IVI Material Contracts").
(b) The execution and delivery of this Agreement by IVI does not, and
the performance of this Agreement by IVI will not,
(i) conflict with or result in a default or violation of the Articles
of Continuation or By-Laws or equivalent organizational documents of IVI
or any of its subsidiaries,
(ii) conflict with or violate any Law or Order applicable to IVI or
any of its subsidiaries or by which its or any of their respective
businesses or properties is bound or affected, or
(iii) result in any default or violation, or impair IVI's or any of
its subsidiaries' rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any IVI Material Contract, or result in
the creation of a Lien on any of the properties of IVI or any of its
subsidiaries pursuant to any Contract or Approval to which IVI or any of
its subsidiaries is a party or by which IVI or any of its subsidiaries or
its or any of their respective properties is bound or affected.
(c) No Approval of or with any court, administrative agency or
commission or other governmental authority or instrumentality, federal,
state, provincial, local, or foreign (each a "governmental entity"), is
required to be obtained by IVI or any of its subsidiaries in connection with
the execution and delivery of this Agreement or the Plan of Arrangement or
the consummation of the Transactions, except for:
18
<PAGE>
(i) the filing with the OSC, the SEC, the Director and the Court and
the mailing to shareholders of IVI of the IVI Proxy Statement;
(ii) the furnishing to the SEC of such reports and information under
the Exchange Act and the rules and regulations promulgated by the SEC
thereunder, as may be required in connection with this Agreement and the
Transactions (the "IVI SEC Filings");
(iii) approval by the Court of the Arrangement and the filings of the
Articles of Arrangement and any other required amalgamation, arrangement,
notice or other documents as required by the CBCA;
(iv) such Approvals as may be required under state "control share
acquisition," "anti-takeover", "fair price", "business combinations" or
other similar statutes and regulations (collectively, "State Takeover
Laws");
(v) such Approvals as may be required under the OSA and other
relevant Canadian securities Laws, any other applicable federal,
provincial or state securities Laws and the rules of the NASD or the TSE;
(vi) such filings and notifications as may be necessary under the HSR
Act;
(vii) required notices and filings under the INVESTMENT CANADA ACT
and under the COMPETITION ACT (Canada); and
(vii) where the failure to obtain such Approval, would not prevent or
delay the consummation of the Arrangement or otherwise would not have a
Material Adverse Effect on IVI.
6.6 COMPLIANCE; PERMITS
(a) Neither IVI nor any of its subsidiaries is in conflict with, or in
default or violation of,
(i) any Law or Order applicable to IVI or any of its subsidiaries or
by which its or any of their respective properties or businesses is bound
or affected, or
(ii) any Contract to which IVI or any of its subsidiaries is a party
or by which IVI or any of its subsidiaries or its or any of their
respective properties is bound or affected, except for any such
conflicts, defaults or violations which would not have a Material Adverse
Effect. All of the indebtedness of IVI or any subsidiary of IVI (and all
indebtedness guaranteed by any such person) for money borrowed is
prepayable at any time by such person without penalty or premium.
(b) IVI and its subsidiaries hold all Approvals from governmental
entities that are material to the operation of the business of IVI and its
subsidiaries (collectively, the "IVI Permits"). IVI and its subsidiaries are
in compliance with, and not in default or violation of, the terms of IVI
Permits, except where the failure to so comply, or such default or
violation, would not have a Material Adverse Effect.
(i) Except as disclosed in Section 6.6 of the IVI Disclosure
Schedule, neither IVI nor any IVI subsidiary has, since January 1, 1995,
received any notification or communication from any governmental entity
(a) asserting that IVI or any IVI subsidiary is not in compliance in any
material respect with any Law or Order, (b) threatening to revoke any IVI
Permits, or (c) requiring IVI or any IVI subsidiary to (1) enter into or
consent to the issuance of a cease and desist order (or other similar
Order) or a formal agreement, directive, commitment or memorandum of
understanding (or other similar Contract), or (2) to adopt any board or
shareholder resolution or similar undertaking.
19
<PAGE>
6.7 SECURITIES REGULATORY AUTHORITY REPORTS AND FINANCIAL STATEMENTS
(a) CANADIAN COMPLIANCE
Since January 1, 1995, IVI has filed all forms, reports and documents
with the OSC required to be filed by it pursuant to the OSA and the
regulations promulgated thereunder and the applicable policies and rules of
the OSC (collectively, the "IVI OSC Reports"), all of which have complied in
all material respects with all applicable requirements of such statute,
regulations, policies and rules. None of the IVI OSC Reports, at the time
filed or as subsequently amended, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. IVI has
delivered to Checkmate's counsel correct and complete copies of each IVI OSC
Report.
(b) SEC REPORTS
IVI has delivered to Checkmate's counsel correct and complete copies of
each report, schedule, registration statement and definitive proxy or
information statement (if any) filed by IVI with the SEC on or after January
1, 1995 (the "IVI SEC Documents"), which are all the documents that IVI was
required to file with the SEC on or after such date and all of which were
timely filed in accordance with the rules and regulations of the SEC. As of
their respective dates or, in the case of registration statements, their
effective dates (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing), none of the IVI SEC
Documents (including all exhibits and schedules thereto and documents
incorporated by reference therein) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and the IVI
SEC Documents complied when filed in all material respects with the then
applicable requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations promulgated by the SEC
thereunder. IVI has filed all material documents and agreements which were
required to be filed as exhibits to the IVI SEC Documents.
(c) FINANCIAL STATEMENTS
The consolidated balance sheets and the consolidated statements of
operations, retained earnings and cash flows (including the related notes
thereto) of IVI contained in the IVI OSC Reports are in accordance with the
books and records of IVI and its subsidiaries, and present fairly the
consolidated financial position and the consolidated results of operations
and cash flows of IVI and its consolidated subsidiaries as of the dates or
for the periods presented therein in conformity with Canadian generally
accepted accounting principles and have been reconciled to GAAP as set out
in the notes to such financial statements, applied on a consistent basis
during the periods involved, except as otherwise noted therein and subject
in the case of quarterly financial statements to normal and recurring year-
end audit adjustments, none of which were or are reasonably expected to be
material as to kind or amount, individually or in the aggregate.
6.8 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as set forth in Section 6.8 of the IVI Disclosure Schedule and the
IVI OSC Reports and IVI SEC Reports, since September 30, 1997, IVI and its
subsidiaries have conducted their business in the ordinary course and there has
not occurred:
(i) any Material Adverse Effect;
(ii) any amendments or changes in the Articles of Continuation or
By-laws of IVI or organizational documents of IVI's subsidiaries;
20
<PAGE>
(iii) any damage to, destruction or loss of any properties of IVI and
its subsidiaries (whether or not covered by insurance) that have a
Material Adverse Effect;
(iv) any revaluation by IVI of any of its and its subsidiaries'
properties, including, without limitation, writing down the value of
capitalized software or inventory or writing off notes or accounts
receivable other than in the ordinary course of business;
(v) any other action or event that would have required the consent of
Checkmate pursuant to Section 10.1 hereof had such action or event
occurred after the date of this Agreement; or
(vi) any sale of a material amount of the properties of IVI and its
subsidiaries, except for the sale of inventory in the ordinary course of
business.
6.9 NO UNDISCLOSED LIABILITIES
Except as is disclosed in Section 6.9 of the IVI Disclosure Schedule,
neither IVI nor any of its subsidiaries has any Liabilities which are,
individually or in the aggregate, material to the business, operations or
financial condition of IVI and its subsidiaries on a consolidated basis, except
Liabilities
(a) accrued or reserved against in IVI's balance sheet (including any
related notes thereto) for the period ended September 30, 1997 included in
the IVI OSC Reports (the "IVI Balance Sheet"),
(b) incurred since September 30, 1997 in the ordinary course of business
consistent with past practices
(c) disclosed in the IVI OSC Reports, or
(d) incurred in connection with this Agreement.
6.10 ABSENCE OF LITIGATION
Except as set forth in Section 6.10 of the IVI Disclosure Schedule, there
are no claims, actions, suits, proceedings (arbitration, litigation or
otherwise) or investigations (collectively, "Litigation") pending or, to the
knowledge of IVI, threatened (or unasserted but considered by IVI probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against IVI or any of its subsidiaries, or any
properties or rights of IVI or any of its subsidiaries, before any governmental
entity that have a Material Adverse Effect, nor are there any Orders outstanding
against IVI or any IVI subsidiary that have a Material Adverse Effect. Section
6.10 of the IVI Disclosure Schedule contains a summary of all Litigation as of
the date of this Agreement to which IVI or an IVI subsidiary is a party, or for
which IVI or a subsidiary of IVI has any potential Liability.
6.11 EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS
(a) Section 6.11(a) of the IVI Disclosure Schedule lists all employee
benefit plans (as defined in Section 3(3) of ERISA), regardless of whether
ERISA is applicable thereto, all other bonus, stock option, stock purchase,
incentive, deferred compensation, supplemental retirement, severance or
termination pay, or medical, life or other insurance, supplemental
unemployment benefits, profit-sharing, pension or retirement plans,
agreements or arrangements and other similar fringe or employee benefit
plans, programs or arrangements (including those sponsored by the federal or
any provincial government of Canada, collectively "Government Sponsored or
Mandated Plans") and any current or former (solely to the extent obligations
thereunder are still enforceable) employment or executive compensation or
severance Contracts, for the benefit of, or relating to, any employee of
IVI, any trade or business (whether or not incorporated) which is a member
of a controlled group including IVI or which is under common control with
IVI (an "IVI ERISA Affiliate") within the meaning of Section 414 of the
Code, or any subsidiary of IVI, as well as each plan with respect to
21
<PAGE>
which IVI or an IVI ERISA Affiliate could incur Liability if such plan has
been or were terminated (together, along with all amendments thereto, the
"IVI Employee Plans"), and a complete and correct copy of each such written
IVI Employee Plan has been made available to Checkmate.
(b) Except as set forth in Section 6.11(b) of the IVI Disclosure
Schedule,
(i) none of the IVI Employee Plans promises or provides retiree
medical, post termination medical or other retiree or post termination
welfare benefits to any person and none of the IVI Employee Plans is a
"multiemployer plan" as such term is defined in Section 3(37) of ERISA;
(ii) there has been no transaction or failure to act with respect to
any IVI Employee Plan by any person, which could result in any material
Liability of IVI or any of its subsidiaries;
(iii) all IVI Employee Plans are in compliance in all material
respects with the requirements prescribed by any and all Laws and Orders
currently in effect with respect thereto, and IVI and each of its
subsidiaries have performed all material obligations required to be
performed by them under, are not in any material respect in default or
violation of, and have no knowledge of any default or violation by any
other party to, any of the IVI Employee Plans;
(iv) each IVI Employee Plan intended to qualify under Section 401(a)
of the Code and each trust intended to qualify under Section 501(a) of
the Code is the subject of a favorable determination letter from the IRS,
and to the knowledge of IVI nothing has occurred which may reasonably be
expected to impair such determination;
(v) all contributions required to be made to any IVI Employee Plan,
under the terms of the IVI Employee Plan or any collective bargaining
agreement, have been made on or before their due dates and a reasonable
amount has been accrued for contributions to each IVI Employee Plan for
the current plan years;
(vi) with respect to each IVI Employee Plan subject to Title IV of
ERISA, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice
requirement has been waived under the regulations to Section 4043 of
ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has
occurred;
(vii) neither IVI nor any IVI ERISA Affiliate has incurred, nor
reasonably expects to incur, any Liability under Title IV of ERISA (other
than liability for premium payments to the Pension Benefit Guaranty
Corporation arising in the ordinary course);
(viii) no material oral or written representation or communication
with respect to any aspect of the IVI Employee Plans has been made to
employees of IVI or any IVI subsidiary prior to the date hereof that is
not in accordance with the written or otherwise preexisting terms and
provisions of such plans; and
(ix) no IVI Employee Plan is an employee pension benefit plan as
defined in ERISA Section 3(2).
(c) Each IVI Employee Plan that is required or intended to be qualified
under applicable Law or registered or approved by a governmental entity has
been so qualified, registered or approved by the appropriate governmental
entity, and nothing has occurred since the date of the last qualification,
registration or approval to adversely affect, or cause, the appropriate
governmental entity to revoke such qualification, registration or approval.
(d) All contributions (including premiums) required by any Law or
Contract to have been made or approved by IVI and its subsidiaries under or
with respect to the IVI Employee Plans have been paid or accrued by IVI.
Without limiting the foregoing, there are no material unfunded Liabilities
under any IVI Employee Plan.
22
<PAGE>
(e) There is no pending or to the knowledge of IVI, threatened
Litigation against IVI or any of its subsidiaries with respect to any of the
IVI Employee Plans.
(f) There is no pending or, to the knowledge of IVI, threatened
Litigation by former or present employees of IVI and its subsidiaries (or
their beneficiaries) with respect to the IVI Employee Plans or the assets or
fiduciaries thereof (other than routine claims for benefits).
(g) Neither IVI nor any of its subsidiaries maintains any 401(k) or
other type of pension plan subject to Section 401(a) of the Code in the
United States.
(h) No condition or event has occurred with respect to the IVI Employee
Plans which has a Material Adverse Effect.
(i) IVI has made available to Checkmate:
(ii) copies of all employment Contracts with officers of IVI or a
subsidiary of IVI;
(iii) copies of all Contracts with consultants or employees who are
individuals obligating IVI and its subsidiaries (collectively) to make
annual cash payments in an amount exceeding $100,000;
(iv) a schedule listing all officers of IVI and its subsidiaries who
have executed a non-competition agreement with IVI or a subsidiary of
IVI;
(i) copies of all severance Contracts, programs and policies of IVI
and its subsidiaries with or relating to their employees;
(i) copies of all plans, programs, Contracts and other arrangements
of IVI and its subsidiaries with or relating to their employees which
contain change in control provisions.
6.12 LABOUR MATTERS
(i) There is no Litigation pending or, to the knowledge of IVI,
threatened, between IVI or any of its subsidiaries and any of their
respective current or former employees, which have or may have a Material
Adverse Effect, or asserting that IVI or any subsidiary has committed an
unfair labor practice (within the meaning of the National Labor Relations
Act of the United States or any other comparable Law), or seeking to
compel IVI or one of its subsidiaries to bargain with any labor union or
other collective bargaining unit.
(ii) Neither IVI nor any of its subsidiaries is a party to any
collective bargaining agreement or other labour union contract applicable
to persons employed by IVI or any of its subsidiaries nor does IVI know
of any activities or proceedings of any labour union or other collective
bargaining unit to organize any such employees.
(iii) There are no strikes, slowdowns, work stops, lockouts, or other
labor disputes pending, or, to the knowledge of IVI, threatened, by or
with respect to any employees of IVI or any of its subsidiaries.
6.13 REGISTRATION STATEMENT; PROXY STATEMENT
None of the information supplied or to be supplied by IVI in writing for
inclusion or incorporation by reference in
(i) the Registration Statement,
(ii) the Proxy Statements and the prospectus contained in the
Registration Statement (the "Proxy Statement/Prospectus"),
23
<PAGE>
(iii) the Prospectus, and
(iv) any other document to be filed with the SEC, OSC or any
regulatory agency by Newco, Merger Sub or IVI in connection with the
transactions contemplated by this Agreement (the "IVI Other Filings")
will, at the respective times filed with the SEC, OSC or other regulatory
agency and, in addition,
A. in the case of the Proxy Statement/Prospectus, at the date it
or any amendments or supplements thereto are mailed to shareholders,
B. in the case of the Registration Statement, when it becomes
effective under the Securities Act, and
C. in the case of the Prospectus, at the date of the receipt from
the OSC for the Prospectus,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they
are made, not misleading. The IVI Proxy Statement will comply as to form
in all material respects with the applicable provisions of the OSC and
the Exchange Act and the rules and regulations thereunder. If at any time
prior to the Effective Date any event relating to IVI or any of its
respective affiliates, officers or directors should be discovered by IVI
which should be set forth in an amendment to the Registration Statement
or Prospectus, or a supplement to the IVI Proxy Statement, IVI shall
promptly inform Newco and Checkmate.
Notwithstanding the foregoing, IVI makes no representation or warranty with
respect to any information supplied by Checkmate or Newco which is contained in
any of the foregoing documents.
6.14 RESTRICTIONS ON BUSINESS ACTIVITIES
Except for this Agreement and as set forth in Section 6.14 of the IVI
Disclosure Schedule, there is no material Contract or Order binding upon IVI or
any of its subsidiaries which has or could reasonably be expected to have the
effect of prohibiting or impairing any material business practice of IVI or any
of its subsidiaries, the acquisition of property by IVI or any of its
subsidiaries or the conduct of business by IVI or any of its subsidiaries as
currently conducted or as proposed to be conducted by IVI.
6.15 TITLE TO PROPERTY
IVI owns no real property. Section 6.15 of the IVI Disclosure Schedule sets
forth a true and complete list of all real property leased by IVI or any of its
subsidiaries requiring annual lease payments of more than $50,000, and the
aggregate monthly rental or other fee payable under such lease. IVI and each of
its subsidiaries have good and marketable title to all of their properties, free
and clear of all Liens, except for any Lien:
(i) identified in Section 6.15 of the IVI Disclosure Schedule or
disclosed or reserved against in the IVI Balance Sheet;
(ii) created, arising or existing under or in connection with any
agreement or other matter referred to in the IVI Disclosure Schedule,
provided that such Lien (and a description of its material terms) is
identified with such Agreement or matter in the IVI Disclosure Schedule;
(iii) relating to any Tax or other governmental charge or levy that
is not yet due and payable;
(iv) relating to, or created arising or existing in connection with,
any Litigation that is being contested in good faith, provided that any
such Lien (and a description of its material terms) is identified with
such Litigation in the IVI Disclosure Schedule; or
24
<PAGE>
(v) which, individually or in the aggregate, would not result in a
Material Adverse Effect to IVI;
and all leases pursuant to which IVI or any of its subsidiaries lease from
others material items or amounts of real or personal property, are in good
standing, valid, effective and enforceable in accordance with their respective
terms, and there is not, under any of such leases, any existing material default
or violation except where the lack of such good standing, validity,
effectiveness or enforceability or the existence of such default or violation
would not have a Material Adverse Effect. All the facilities of IVI and its
subsidiaries, except such as may be under construction, are in good operating
condition and repair, reasonable wear and tear excepted, and are usable in the
ordinary course of business consistent with past practice except where the
failure of such plants, structures and equipment to be in such good operating
condition and repair or so usable would not have a Material Adverse Effect. The
properties of IVI and its subsidiaries include, in the aggregate, all of the
properties required to operate the business of IVI and its subsidiaries as
presently conducted. All items of inventory of IVI and its subsidiaries
reflected in the IVI Balance Sheet consisted of items of a quality and quantity
usable and saleable in the ordinary course of business and conform to generally
accepted standards in the industry in which IVI and its subsidiaries are a part.
6.16 TAXES
(a) For purposes of this Agreement, "Tax" or "Taxes" shall mean all
taxes, fees, levies, duties, tariffs, imposts, premiums and governmental
impositions or charges of any kind, payable to any federal, state,
provincial, local or foreign taxing authority, including (without
limitation):
(i) income, capital, business, franchise, profits, corporate,
alternative minimum, gross receipts, ad valorem, goods and services,
customs, net worth, value added, sales, use, service, real or personal
property, special assessments, capital stock, licence, payroll,
withholding, employment, social security, workers' compensation,
employment insurance or compensation, utility, severance, production,
excise, stamp, occupation, premiums, windfall profits, transfer and gains
taxes, surtaxes, fees, levies, duties, tariffs, imposts, premiums and
governmental impositions, whether disputed or not; and
(ii) interest, penalties, additional taxes and additions to tax
imposed with respect thereto;
and "Tax Returns" shall mean returns, reports and information statements of
any kind with respect to Taxes required to be filed with Revenue Canada, the
IRS or any other taxing authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns.
(b) IVI and its subsidiaries have filed all Canadian and United States
federal income Tax Returns and all other Tax Returns required to be filed by
them on or prior to the date hereof, or requests for extensions have been
timely filed, granted and have not expired; all Tax Returns filed by IVI and
its subsidiaries are complete and accurate; and IVI and its subsidiaries
have paid and discharged all Taxes when due, whether or not shown on any Tax
Return, except such as are being contested in good faith by appropriate
proceedings (in each case, as disclosed in Section 6.16(b) of the IVI
Disclosure Schedule) and with respect to which IVI is maintaining reserves
to the extent currently required for their payment; except to the extent
that the failure so to file, to be complete and correct, to reserve or so to
pay, individually or in the aggregate with all other such failures, would
not have a Material Adverse Effect. Neither Revenue Canada, the IRS nor any
other taxing authority is now asserting or, to the knowledge of IVI,
threatening to assert against IVI or any of its subsidiaries any deficiency
or claim for additional Taxes other than additional Taxes (except, in each
case, as disclosed in Section 6.16(b) of the IVI Disclosure Schedule) with
respect to which IVI is maintaining reserves in all material respects
adequate for their payment. Except as disclosed in Section 6.16(b) of the
IVI Disclosure Schedule, neither IVI nor any of its subsidiaries is
currently being audited by any taxing authority nor has notice been given by
any taxing authority that it will commence such an audit or
25
<PAGE>
examination. There are no Tax Liens on any properties of IVI or any
subsidiary thereof and neither IVI nor any of its subsidiaries has granted
any waiver of any statute of limitations with respect to, or any extension
of a period for the assessment of, any Tax. Neither IVI nor any of its
subsidiaries has received any notice of seizure from any taxation authority.
The accruals and reserves for Taxes reflected in the IVI Balance Sheet are
in all material respects sufficient to cover all Taxes accruable through the
date thereof (including Taxes being contested and any deferred Taxes) in
accordance with Canadian generally accepted accounting principles and, as of
the Effective Date, such accruals and reserves, as adjusted for the passage
of time through the Effective Date, will be sufficient for the then unpaid
Taxes of IVI and its subsidiaries. Except as disclosed in Section 6.16(b) of
IVI Disclosure Schedule, neither IVI nor any of its subsidiaries (whether as
a result of the Transactions or otherwise) is required to include in income:
(i) items in respect of any change in accounting principles or
deferred intercompany transactions; or
(ii) any installment sale gain,
in each case where the inclusion in income would result in a tax
Liability materially in excess of the reserves therefor.
(c) IVI, on behalf of itself and all its subsidiaries, hereby represents
that, other than as disclosed on Section 6.16(c) of the IVI Disclosure
Schedule, and other than with respect to items the inaccuracy of which would
not have a Material Adverse Effect:
(i) neither IVI nor any of its subsidiaries has made any payment or
is a party to any agreement, contract or arrangement that may result,
separately or in the aggregate, in the payment of any "excess parachute
payment" within the meaning of Section 280G of the Code, determined
without regard to Section 280G(b)(4) of the Code;
(ii) neither IVI nor any of its subsidiaries has been subject to any
accumulated earnings tax or personal holding company tax;
(iii) neither IVI nor any of its subsidiaries owns stock in a passive
foreign investment company within the meaning of Section 1296 of the
Code;
(iv) neither IVI nor any of its subsidiaries is obligated under any
agreement with respect to industrial development bonds or other
obligations the tax exempt character of which for United States federal
or state income tax purposes could be affected by the transactions
contemplated hereunder; and
(v) neither IVI nor any of its subsidiaries has, prior to the date
hereof, acquired or had the use of any material property from a person
with whom it was not dealing at arm's length, or disposed of any material
property to a person with whom it was not dealing at arm's length for
proceeds less than the fair market value thereof.
(d) No power of attorney has been granted by IVI or any of its
subsidiaries with respect to any matter relating to Taxes which is currently
in force.
(e) Neither IVI nor any of its subsidiaries
(i) is a party to any agreement or arrangement (written or oral)
providing for the allocation or sharing of Taxes, or
(ii) has any Liability for Taxes of any person (other than IVI and
its subsidiaries) under Treasury Regulation Section 1.1502-6 (or similar
provision of Law) as a transferee or successor or by Contract or
otherwise.
26
<PAGE>
(f) IVI and each of its subsidiaries has withheld all material amounts
from each payment made to any of its respective past or present employees,
officers or directors, suppliers, customers or other third parties the
amount of all Taxes and other material deductions required to be withheld
therefrom and have paid the same to the proper taxation authority or other
receiving officers within the time required under applicable Law.
(g) IVI has remitted to the appropriate tax authority when required by
law to do so all amounts collected by it on account of all GST, retail sales
and similar Taxes.
(h) IVI has withheld from each payment made to any non-resident of
Canada the amount of all material Taxes and other deductions required to be
withheld therefrom and has paid the same to the proper taxation authority or
other receiving officers within the time required under applicable Law.
(i) IVI has not deducted any material amounts in computing its income in
a taxation year which will be included in a subsequent taxation year under
section 78 of the ITA.
(j) IVI and all of the subsidiaries of IVI have taxation years ending on
December 31 of each year.
(k) Neither IVI nor any of its subsidiaries has (except as disclosed in
section 6.16(k) of the IVI Disclosure Schedule), prior to the date hereof,
(i) made or filed any election under Section 85 of the ITA with
respect to the acquisition or disposition of any property; or
(ii) made or filed any election under Section 83 of the ITA with
respect to the payment out of the capital dividend account of IVI or any
of its subsidiaries.
6.17 ENVIRONMENTAL MATTERS
(a) Except in all cases as do not have a Material Adverse Effect, IVI
and each of its subsidiaries;
(i) have obtained all applicable Approvals which are required under
foreign, federal, state, provincial or local laws relating to pollution
or protection of human health or the environment, including Laws relating
to emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous substances or wastes into ambient air, surface
water, ground water or land or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants or hazardous substances or wastes
("Environmental Laws"); and
(ii) are in compliance with all terms and conditions of such
Approvals and also are in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in Environmental Laws or
contained in any Law or Order issued, entered, promulgated or approved
thereunder.
(b) There is no Litigation pending or, to the knowledge of IVI,
threatened before any governmental entity in which IVI or any IVI subsidiary
or any of the properties owned, leased, managed or operated by IVI or one of
its subsidiaries has been or, with respect to threatened Litigation, may be
named as a defendant for alleged noncompliance (including by any
predecessor) with any Environmental Law, whether or not occurring at, on,
under, or involving a property owned, leased, managed, or operated (in whole
or in part) by IVI or any subsidiary of IVI or any of their properties. To
the knowledge of IVI, there is no reasonable basis for any Litigation of a
type described in the immediately foregoing sentence.
(c) During the period of IVI's or any of its subsidiaries'
(i) ownership or operation of any of their respective current
properties,
27
<PAGE>
(ii) participation in the management of any properties of any other
person, or
(iii) holding of a security interest in any properties of any other
person, there have been no releases of "hazardous substances" in, on,
under, or affecting such properties. Prior to the period of IVI's or any
of its subsidiaries'
A. ownership or operation of any of their respective current
properties,
B. IVI's or any of its subsidiaries' participation in the
management of any properties of any other person, or
C. holding of a security interest in any properties of any other
person, there were no releases of "hazardous substances" in, on,
under, or affecting any such properties.
(d) For purposes of this Section 6.17 and Section 7.17, "hazardous
substances" shall mean
(i) any hazardous substance, hazardous material, hazardous waste,
regulated substance or toxic substance (as those terms are defined by any
applicable Environmental Laws) and
(ii) any chemicals, pollutants, contaminants, petroleum, petroleum
products, or oil (and specifically shall include asbestos requiring
abatement, removal or encapsulation pursuant to the requirements of
governmental authorities and any polychlorinated biphenyls).
6.18 BROKERS
No broker, finder or investment banker (other than BancAmerica Robertson
Stephens) is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of IVI. A complete and correct copy of all
agreements between IVI and BancAmerica Robertson Stephens pursuant to which such
firm would be entitled to any payment relating to the transactions contemplated
hereunder are set forth in Section 6.18 of the IVI Disclosure Schedule.
6.19 FULL DISCLOSURE
No statement contained in this Agreement or any certificate or schedule
furnished or to be furnished by IVI or any of its subsidiaries to Checkmate in,
or pursuant to the provisions of, this Agreement contains or shall contain any
untrue statement of a material fact or omits or will omit to state any material
fact necessary, in the light of the circumstances under which it was made, in
order to make the statements herein or therein not misleading.
6.20 INTELLECTUAL PROPERTY
(a) Except in such instances that do not have a Material Adverse Effect,
IVI or an IVI Subsidiary owns, or is licensed or otherwise possesses legally
enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights and any applications therefor, technology, know-how,
computer software programs or applications (in both source code and object
code form), tangible or intangible proprietary information or material and
other intellectual property rights that are used or proposed to be used in
the business of IVI and its subsidiaries as currently conducted. Section
6.20 (a) of the IVI Disclosure Schedule lists all current and past (lapsed,
expired, abandoned or canceled) patents, registered and material
unregistered trademarks and service marks, registered and material
unregistered copyrights, trade name, other intellectual property and any
applications therefor owned by IVI and its subsidiaries (the "IVI
Intellectual Property Rights"), and specifies the jurisdictions in which
each such IVI Intellectual Property Right has been issued or registered (if
any) or in which an application for such issuance and registration has been
filed (if any), including the respective registration or application numbers
and the names of all registered owners, together with a list of all
28
<PAGE>
of IVI's and its subsidiaries' currently marketed software products and an
indication as to which, if any, of such software products have been
registered for copyright protection with the United States or Canadian
Copyright Office and any other foreign offices and by whom such items have
been registered. Section 6.20 (a) of the IVI Disclosure Schedule includes
and specifically identifies all third-party patents, trademarks or
copyrights (including software), and other intellectual property (the "IVI
Third Party Intellectual Property Rights") to the knowledge of IVI which are
incorporated in, are, or form a part of, any product of IVI or are otherwise
used in (or proposed to be used in) or necessary for the conduct of IVI's
business as currently conducted. Section 6.20 (a) of the IVI Disclosure
Schedule lists:
(i) any requests IVI has received to make any such registration,
including the identity of the requestor and the item requested to be so
registered, and the jurisdiction for which such request has been made;
(ii) except for object code licence agreements for IVI's and its
subsidiaries' products executed in the ordinary course of business and in
accordance with IVI's and its subsidiaries' past practices, all material
licences, sublicences and other Contracts as to which IVI or any
subsidiary of IVI is a party and pursuant to which any person is
authorized to use any IVI Intellectual Property Right, including any
trade secret material to IVI or any subsidiary of IVI; and
(iii) all material licences, sublicences and other Contracts as to
which IVI is a party and pursuant to which IVI is authorized to use any
IVI Third Party Intellectual Property Rights, including any trade secret
of a third party, and includes the identity of all parties thereto, a
description of the nature and subject matter thereof, the applicable
royalty and the term thereof.
(b) IVI and its subsidiaries are not, nor will they be as a result of
the execution and delivery of this Agreement by IVI or the performance of
its obligations hereunder, in violation in any material respect of any
licence, sublicence or Contract described in Section 6.20(a) of the IVI
Disclosure Schedule. No Litigation with respect to the IVI Intellectual
Property Rights, including any trade secret material to IVI, or IVI Third
Party Intellectual Property Rights is currently pending or, to the knowledge
of IVI, is threatened by any person, nor does IVI know of any valid grounds
for any bona fide Litigation:
(i) to the effect that the manufacture, sale, licensing or use of any
product as now used, sold or licensed or proposed for use, sale or
license by IVI or any of its subsidiaries infringes on any copyright,
patent, trademark, service mark or trade secret;
(ii) against the use by IVI or any of its subsidiaries of any
trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in IVI's or
any of its subsidiaries, business as currently conducted or as proposed
to be conducted by IVI or any of its subsidiaries;
(iii) challenging the ownership, validity or effectiveness of any of
the IVI Intellectual Property Rights, including trade secrets, material
to IVI or any of its subsidiaries; or
(iv) challenging IVI's or any of its subsidiaries' license or legally
enforceable right to use of the IVI Third Party Intellectual Property
Rights. To IVI's knowledge, all patents, registered trademarks, maskworks
and copyrights held by IVI or any of its subsidiaries are valid and
subsisting. Except as set forth in Section 6.20 (b) of the IVI Disclosure
Schedule, to IVI's knowledge, there is no material unauthorized use,
infringement or misappropriation of any of the IVI Intellectual Property
by any third party, including any employee or former employee of IVI or
any of its subsidiaries.
Except as set forth in Section 6.20 (b) of the IVI Disclosure Schedule,
neither IVI nor any of its subsidiaries
29
<PAGE>
(i) has been sued or charged in writing as a defendant in any
Litigation, claim, suit, action or proceeding which involves a claim or
infringement of trade secrets, any patents, trademarks, service marks,
maskworks or copyrights and which has not been finally terminated prior
to the date hereof, or been informed or notified by any third party that
IVI or any of its subsidiaries may be engaged in such infringement, or
(ii) has knowledge of any infringement Liability with respect to, or
infringement by, IVI or any of its subsidiaries of any trade secret,
patent, trademark, service mark, maskwork, copyright or other
intellectual property of another.
(c) Except as noted in Section 6.20 (c) of the IVI Disclosure Schedule,
all software that is IVI Intellectual Property Rights and IVI's and its
subsidiaries' business systems (including hardware and software) and
products, are Year 2000 Compliant.
6.21 INTERESTED PARTY TRANSACTIONS
Except as set forth in Section 6.21 of the IVI Disclosure Schedule, since
December 31, 1996, no event has occurred that would be required to be reported
as a Certain Relationship or Related Transaction, pursuant to Item 404 of
Regulation S-K promulgated by the SEC or that is a related party transaction for
the purposes of OSC Policy 9.1.
6.22 INSURANCE
Section 6.22 of the IVI Disclosure Schedule lists all material insurance
policies and fidelity bonds covering the business, properties, operations,
employees, officers and directors of IVI and its subsidiaries. Except as is set
forth in Section 6.22 of the IVI Disclosure Schedule, there is no claim by IVI
or any of its subsidiaries pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums payable under all such policies and bonds
have been paid and IVI and its subsidiaries are otherwise in compliance in all
material respects with the terms of such policies and bonds (or other policies
and bonds providing substantially similar insurance coverage). Such policies of
insurance and bonds are of the type and in amounts customarily carried by
persons conducting businesses similar to those of IVI and its subsidiaries. IVI
and its subsidiaries have not received notice of and do not know of any
threatened termination of, or material premium increase with respect to, any of
such policies.
6.23 OPTION PLANS
Except as set forth in Section 6.23 of the IVI Disclosure Schedule, the
Board of Directors of IVI has taken all necessary action (or refrained from
taking action, where appropriate) under the IVI Option Plan so that none of the
IVI Stock Options (or any portion thereof) will be entitled to receive cash or
other property as a result of the consummation of the transactions contemplated
hereby, but instead shall be assumed as provided in Section 5.10 hereof.
6.24 POOLING MATTERS
Neither IVI nor to IVI's knowledge any of its affiliates has taken or agreed
to take any action that (without giving effect to any action taken or agreed to
be taken by Checkmate or any of its affiliates or Newco) would affect the
ability of Newco to account for the business combination to be effected by the
Transactions as a pooling of interests.
6.25 AFFILIATES
Section 6.25 of the IVI Disclosure Schedule sets forth each person who, as
of the date hereof, is an affiliate of IVI.
30
<PAGE>
6.26 OPINION OF FINANCIAL ADVISOR
IVI has been advised by its financial advisor, BancAmerica Robertson
Stephens, that, in its opinion, as of the date hereof, the terms of the
Arrangement are fair to IVI from a financial point of view, and has delivered a
written copy of such opinion to IVI.
ARTICLE 7.00--REPRESENTATIONS AND WARRANTIES OF CHECKMATE
Except as set forth in the Checkmate Disclosure Schedule, Checkmate hereby
represents and warrants to IVI that:
7.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES
Checkmate and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the requisite corporate power and
authority and is in possession of or has duly made all Approvals necessary to
own, lease and operate the properties it purports to own, operate or lease and
to carry on its business as it is now being conducted, except where the failure
to have such power, authority and Approvals would not have a Material Adverse
Effect. Each of Checkmate and each of its subsidiaries is duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary, except for such failures to be so duly qualified or
licensed and in good standing that would not have a Material Adverse Effect. A
true and complete list of all of Checkmate's subsidiaries, together with the
jurisdiction of incorporation or organization of each subsidiary is set forth in
Section 7.1 of the written disclosure schedule previously delivered by Checkmate
to IVI (the "Checkmate Disclosure Schedule"). Except as set forth in Section 7.1
of the Checkmate Disclosure Schedule, Checkmate or one of its subsidiaries owns
all of the issued and outstanding equity or similar securities of each Checkmate
subsidiary. No equity or similar securities of any Checkmate subsidiary are or
may become required to be issued by reason of any Rights, and there are no
Contracts by which Checkmate or any Checkmate subsidiary is bound to issue
additional equity or similar securities or Rights or by which Checkmate or any
Checkmate subsidiary is or may be bound to transfer any equity or similar
securities of any Checkmate subsidiary. There are no Contracts relating to the
rights of Checkmate or any Checkmate subsidiary to vote or to dispose of any
equity or similar securities of any Checkmate subsidiary. All of the equity or
similar securities of each Checkmate subsidiary held by Checkmate or another
Checkmate subsidiary are fully paid and nonassessable under the applicable
corporation Law of the jurisdiction in which such subsidiary is incorporated or
organized and are owned by Checkmate or a Checkmate subsidiary free and clear of
any Lien. Except as set forth in Section 7.1 of the Checkmate Disclosure
Schedule, neither Checkmate nor any Checkmate subsidiary directly or indirectly
owns any equity or similar interest in, or any Rights in, any corporation,
partnership, joint venture or other business association or entity.
7.2 ARTICLES OF INCORPORATION AND BY-LAWS; MINUTES
Checkmate has heretofore furnished to IVI a complete and correct copy of its
Articles of Incorporation and By-Laws, as amended to date, and equivalent
organizational documents of each of its subsidiaries. Such Articles of
Incorporation, By-Laws and equivalent organizational documents of each of its
subsidiaries are in full force and effect. Neither Checkmate nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or By-Laws or equivalent organizational documents. The minute
books of Checkmate and its subsidiaries have been made available to IVI for
review. Except as disclosed in Section 7.2 of the Checkmate Disclosure Schedule,
the minute books of Checkmate and its subsidiaries provided to IVI pursuant to
this Section 7.2 are true and complete in all material respects as of the date
of this Agreement and accurately reflect in all material respects all
proceedings of the Board of Directors and equity securities holders thereof.
31
<PAGE>
7.3 CAPITALIZATION
The authorized capital stock of Checkmate consists of 40,000,000 shares of
Checkmate Common Stock. As of January 12, 1998:
(i) 5,420,188 Checkmate Common Shares were issued and outstanding,
all of which are validly issued, fully paid and nonassessable under the
Georgia Law. None of the outstanding shares of capital stock of Checkmate
has been issued in violation of any preemptive rights of any current or
past holder of Checkmate capital stock;
(ii) no Checkmate Common Shares were held by subsidiaries of
Checkmate;
(iii) Checkmate has outstanding Checkmate Options to purchase
1,337,175 Checkmate Common Shares pursuant to Checkmate Stock Option
Plans. Section 7.3 of the Checkmate Disclosure Schedule accurately sets
forth the name of each optionee, the number of Checkmate Common Shares
subject to each such Checkmate Option, the date of grant, exercise price
and termination date of each such Checkmate Option, and a vesting
schedule for each such Checkmate Option. Section 7.3 of the Checkmate
Disclosure Schedule sets forth a true and correct copy of the Checkmate
Stock Option Plans;
(iv) except in connection with the Shareholder Protection Rights
Agreement, as set forth in this Section 7.3, or as disclosed in Section
7.3 or Section 7.11 of the Checkmate Disclosure Schedule, there are not
any shares of capital stock or other ownership interests of Checkmate
authorized, reserved for issuance, issued or outstanding or any
outstanding Rights relating to the capital stock or other ownership
interests of Checkmate.
No change in such capitalization has occurred between January 12, 1998 and
the date hereof, except for the issuance of shares under the exercise of options
or other Rights outstanding prior to January 12, 1998.
7.4 AUTHORITY RELATIVE TO THIS AGREEMENT
Checkmate has all necessary corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Checkmate and the consummation by Checkmate of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Checkmate are necessary to authorize this Agreement or to consummate the
transactions so contemplated (other than the approval and adoption of the Merger
by the holders of at least a majority of the outstanding Checkmate Common Shares
who are permitted to vote in accordance with the Georgia Law and Checkmate's
Articles of Incorporation). The Board of Directors of Checkmate has determined
that it is advisable and in the best interest of Checkmate's shareholders for
Checkmate to enter into a business combination with IVI, Newco and Merger Sub
upon the terms and subject to the conditions of this Agreement. This Agreement
has been duly and validly executed and delivered by Checkmate and, assuming the
due authorization, execution and delivery by IVI, Newco and Merger Sub, as
applicable, and subject to approval by the holders of Checkmate Common Shares,
constitutes a legal, valid and binding obligation of Checkmate.
7.5 MATERIAL CONTRACTS; NO CONFLICT; REQUIRED FILINGS AND CONSENTS
(a) Section 7.5(a) of the Checkmate Disclosure Schedule includes a list
of:
(i) all material Contracts of Checkmate and its subsidiaries
including, without limitation, any Contract which restricts or prohibits
Checkmate or any subsidiary of Checkmate from engaging in any business
activity in any geographic area, line of business or otherwise in
competition with any person; and
32
<PAGE>
(ii) all Contracts which, as of the date hereof, would be required to
be filed as an exhibit to a Form 10-K filed by Checkmate pursuant to the
requirements of the Exchange Act, and the SEC's rules thereunder ((i) and
(ii) being, collectively, the "Checkmate Material Contracts").
(b) The execution and delivery of this Agreement by Checkmate does not,
and the performance of this Agreement by Checkmate will not,
(i) conflict with or result in a default or violation of the Articles
of Incorporation or By-Laws or equivalent organizational documents of
Checkmate or any of its subsidiaries,
(ii) conflict with or violate any Law or Order applicable to
Checkmate or any of its subsidiaries or by which its or any of their
respective businesses or properties is bound or affected, or
(iii) result in any default or violation or impair Checkmate's or any
of its subsidiaries' rights or alter the rights or obligations of any
third party under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any Checkmate Material
Contract, or result in the creation of a Lien on any of the properties of
Checkmate or any of its subsidiaries pursuant to any Contract or Approval
to which Checkmate or any of its subsidiaries is a party or by which
Checkmate or any of its subsidiaries or its or any of their respective
properties is bound or affected.
(c) No Approval of or with any governmental entity is required to be
obtained by Checkmate or any of its subsidiaries in connection with the
execution and delivery of this Agreement or the Merger or the consummation
of the Transactions, except for:
(i) the filing with SEC and the mailing to shareholders of Checkmate
of the Checkmate Proxy Statement;
(ii) the filing of the Registration Statement or the furnishing to
the SEC of such reports and information under the Exchange Act and the
rules and regulations promulgated by the SEC thereunder, as may be
required in connection with this Agreement and the Transactions (the
"Checkmate SEC Filings");
(iii) Approvals as may be required under State Takeover Laws;
(iv) such Approvals as may be required under applicable federal,
provincial or state securities Laws and the rules of NASD;
(v) such Approvals as may be necessary under the HSR Act; and
(vi) where the failure to obtain such Approval would not prevent or
delay the consummation of the Transactions or otherwise would not have a
Material Adverse Effect on Checkmate.
7.6 COMPLIANCE; PERMITS
(a) Neither Checkmate nor any of its subsidiaries is in conflict with,
or in default or violation of,
(i) any Law or Order applicable to Checkmate or any of its
subsidiaries or by which its or any of their respective properties or
businesses is bound or affected, or
(ii) any Contract to which Checkmate or any of its subsidiaries is a
party or by which Checkmate or any of its subsidiaries or its or any of
their respective properties is bound or affected, except for any such
conflicts, defaults or violations which would not have a Material Adverse
Effect. All of the indebtedness of Checkmate or any subsidiary of
Checkmate (and all indebtedness guaranteed by any such person) for money
borrowed is prepayable at any time by such person without penalty or
premium.
33
<PAGE>
(b) Checkmate and its subsidiaries hold all Approvals from governmental
entities that are material to the operation of the business of Checkmate and
its subsidiaries (collectively, the "Checkmate Permits"). Checkmate and its
subsidiaries are in compliance with, and not in default or violation of the
terms of Checkmate Permits, except where the failure to so comply, or such
default or violation would not have a Material Adverse Effect.
(i) Except as disclosed in Section 7.6 of the Checkmate Disclosure
Schedule, neither Checkmate nor any Checkmate subsidiary has, since
January 1, 1995, received any notification or communication from any
governmental entity
A. asserting that Checkmate or any Checkmate subsidiary is not in
compliance in any material respect with any Law or Order,
B. threatening to revoke any Checkmate Permits, or
C. requiring Checkmate or any Checkmate subsidiary to
(1) enter into or consent to the issuance of a cease and
desist order (or other similar Order) or a formal agreement,
directive, commitment or memorandum of understanding (or other
similar Contract), or
(2) to adopt any board or shareholder resolution or similar
undertaking.
7.7 SECURITIES REGULATORY AUTHORITY REPORTS AND FINANCIAL STATEMENTS
(a) SEC REPORTS
Checkmate has delivered to IVI's counsel correct and complete copies of
each report, schedule, registration statement and definitive proxy statement
(other than preliminary material) filed by Checkmate with the SEC on or
after January 1, 1995 (the "Checkmate SEC Documents"), which are all the
documents that Checkmate was required to file with the SEC on or after such
date and all of which were timely filed in accordance with the rules and
regulations of the SEC. As of their respective dates or, in the case of
registration statements, their effective dates (or if amended or superseded
by a filing prior to the date of this Agreement, then on the date of such
filing), none of the Checkmate SEC Documents (including all exhibits and
schedules thereto and documents incorporated by reference therein) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and the Checkmate SEC Documents complied when filed in all
material respects with the then applicable requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
promulgated by the SEC thereunder. Checkmate has filed all material
documents and agreements which were required to be filed as exhibits to the
Checkmate SEC Documents.
(b) FINANCIAL STATEMENTS
The consolidated balance sheets and the consolidated statements of
income, stockholders' equity and cash flows (including the related notes
thereto) of Checkmate contained in the Checkmate SEC Reports are in
accordance with the books and records of Checkmate and its subsidiaries, and
present fairly the consolidated financial position and the consolidated
results of operations and cash flows of Checkmate and its consolidated
subsidiaries as of the dates or for the periods presented therein in
conformity with GAAP applied on a consistent basis during the periods
involved, except as otherwise noted therein and, in the case of unaudited
quarterly financial statements, as permitted by Form 10-Q and Rule 10-01 of
Regulation S-X as promulgated by the SEC, and subject in the case of
quarterly financial statements to normal and recurring year-end audit
adjustments, none of which were or are reasonably expected to be material as
to kind or amount, individually or in the aggregate.
34
<PAGE>
7.8 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as set forth in Section 7.8 of the Checkmate Disclosure Schedule and
Checkmate SEC Reports, since September 30, 1997, Checkmate and its subsidiaries
have conducted their business in the ordinary course and there has not occurred:
(i) any Material Adverse Effect;
(ii) any amendments or changes in the Articles of Incorporation or
By-laws of Checkmate;
(iii) any damage to, destruction or loss of any properties of
Checkmate and its subsidiaries (whether or not covered by insurance) that
could have a Material Adverse Effect;
(iv) any revaluation by Checkmate of any of its and its subsidiaries'
properties, including, without limitation, writing down the value of
capitalized software or inventory or writing off notes or accounts
receivable other than in the ordinary course of business;
(v) any other action or event that would have required the consent of
Checkmate pursuant to Section 10.3 hereof had such action or event
occurred after the date of this Agreement; or
(vi) any sale of a material amount of the properties of Checkmate and
its subsidiaries, except for the sale of inventory in the ordinary course
of business.
7.9 NO UNDISCLOSED LIABILITIES
Except as is disclosed in Section 7.9 of Checkmate Disclosure Schedule,
neither Checkmate nor any of its subsidiaries has any Liabilities which are,
individually or in the aggregate, material to the business, operations or
financial condition of Checkmate and its subsidiaries on a consolidated basis,
except Liabilities
(a) accrued or reserved against in Checkmate's balance sheet (including
any related notes thereto) for the period ended September 30, 1997 included
in Checkmate SEC Reports (the "Checkmate Balance Sheet"),
(b) incurred since September 30, 1997 in the ordinary course of business
consistent with past practices,
(c) disclosed in the Checkmate SEC Reports,
(d) incurred in connection with this Agreement.
7.10 ABSENCE OF LITIGATION
Except as set forth in Section 7.10 of the Checkmate Disclosure Schedule,
there is no Litigation pending or, to the knowledge of Checkmate, threatened (or
unasserted but considered by Checkmate probable of assertion and which if
asserted would have at least a reasonable probability of an unfavourable
outcome) against Checkmate or any of its subsidiaries, or any properties or
rights of Checkmate or any of its subsidiaries, before any governmental entity
that have a Material Adverse Effect, nor are there any Orders outstanding
against Checkmate or any Checkmate subsidiary that have a Material Adverse
Effect. Section 7.10 of the Checkmate Disclosure Schedule contains a summary of
all Litigation as of the date of this Agreement to which Checkmate or a
Checkmate subsidiary is a party, or for which Checkmate or a subsidiary of
Checkmate has any potential Liability.
7.11 EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS
(a) Section 7.11(a) of the Checkmate Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of ERISA), regardless of
whether ERISA is applicable thereto, all other
35
<PAGE>
bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance or termination pay, or medical, life or
other insurance, supplemental unemployment benefits, profit-sharing, pension
or retirement plans, agreements or arrangements and other similar fringe or
employee benefit plans, programs or arrangements and any current or former
(solely to the extent obligations thereunder are still enforceable)
employment or executive compensation or severance Contracts for the benefit
of, or relating to, any employee of Checkmate, any trade or business
(whether or not incorporated) which is a member of a controlled group
including Checkmate or which is under common control with Checkmate (a
"Checkmate ERISA Affiliate") within the meaning of Section 414 of the Code,
or any subsidiary of Checkmate, as well as each plan with respect to which
Checkmate or a Checkmate ERISA Affiliate could incur Liability if such plan
has been or were terminated (together, along with all amendments thereto,
the "Checkmate Employee Plans"), and a complete and correct copy of each
such written Checkmate Employee Plan has been made available to IVI.
(b) Except as set forth in Section 7.11(b) of the Checkmate Disclosure
Schedule,
(i) none of the Checkmate Employee Plans promises or provides retiree
medical, post termination medical or other retiree or post termination
welfare benefits to any person and none of the Checkmate Employee Plans
is a "multiemployer plan" as such term is defined in Section 3(37) of
ERISA;
(ii) there has been no transaction or failure to act with respect to
any Checkmate Employee Plan by any person, which could result in any
material Liability of Checkmate or any of its subsidiaries;
(iii) all Checkmate Employee Plans are in compliance in all material
respects with the requirements prescribed by any and all Laws and Orders
currently in effect with respect thereto, and Checkmate and each of its
subsidiaries have performed all material obligations required to be
performed by them under, are not in any material respect in default or
violation of, and have no knowledge of any default or violation by any
other party to, any of the Checkmate Employee Plans;
(iv) each Checkmate Employee Plan intended to qualify under Section
401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code is the subject of a favorable determination letter
from the IRS, and to the knowledge of Checkmate nothing has occurred
which may reasonably be expected to impair such determination;
(v) all contributions required to be made to any Checkmate Employee
Plan, under the terms of the Checkmate Employee Plan or any collective
bargaining agreement, have been made on or before their due dates and a
reasonable amount has been accrued for contributions to each Checkmate
Employee Plan for the current plan years;
(vi) with respect to each Checkmate Employee Plan subject to Title IV
of ERISA, no "reportable event" within the meaning of Section 4043 of
ERISA (excluding any such event for which the thirty (30) day notice
requirement has been waived under the regulations to Section 4043 of
ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has
occurred;
(vii) neither Checkmate nor any Checkmate ERISA Affiliate has
incurred, nor reasonably expects to incur, any Liability under Title IV
of ERISA (other than liability for premium payments to the Pension
Benefit Guaranty Corporation arising in the ordinary course);
(viii) no material oral or written representation or communication
with respect to any aspect of the Checkmate Employee Plans has been made
to employees of Checkmate or any Checkmate subsidiary prior to the date
hereof that is not in accordance with the written or otherwise
preexisting terms and provisions of such plans;
36
<PAGE>
(ix) no Checkmate Employee Plan is an employee pension benefit plan
as defined in ERISA Section 3(2).
(c) Each Checkmate Employee Plan that is required or intended to be
qualified under applicable Law or registered or approved by a governmental
entity has been so qualified, registered or approved by the appropriate
governmental entity, and nothing has occurred since the date of the last
qualification, registration or approval to adversely affect, or cause, the
appropriate governmental entity to revoke such qualification, registration
or approval.
(d) All contributions (including premiums) required by any Law or
Contract to have been made or approved by Checkmate and its subsidiaries
under or with respect to the Checkmate Employee Plans have been paid or
accrued by Checkmate. Without limiting the foregoing, there are no material
unfunded liabilities under any Checkmate Employee Plan.
(e) There is no pending, or to the knowledge of Checkmate, threatened
Litigation against Checkmate or any of its subsidiaries with respect to any
of the Checkmate Employee Plans to the knowledge of Checkmate.
(f) There is no pending or, to the knowledge of Checkmate, threatened
Litigation by former or present employees of Checkmate and its subsidiaries
(or their beneficiaries) with respect to the Checkmate Employee Plans or the
assets or fiduciaries thereof (other than routine claims for benefits).
(g) Except as set forth in Section 7.11 of the Checkmate Disclosure
Schedule neither Checkmate nor any of its subsidiaries maintains any 401(k)
or other type of pension plan subject to Section 401(a) of the Code in the
United States.
(h) No condition or event has occurred with respect to the Checkmate
Employee Plans which has a Material Adverse Effect.
(i) Checkmate has made available to IVI:
(i) copies of all employment Contracts with officers of Checkmate or
a subsidiary of Checkmate;
(ii) copies of all Contracts with consultants or employees who are
individuals obligating Checkmate and its subsidiaries (collectively) to
make annual cash payments in an amount exceeding $100,000;
(iii) a schedule listing all officers of Checkmate and its
subsidiaries who have executed a non-competition agreement with Checkmate
or a subsidiary of Checkmate;
(iv) copies of all severance Contracts, programs and policies of
Checkmate and its subsidiaries with or relating to their employees; and
(v) copies of all plans, programs, Contracts and other arrangements
of Checkmate and its subsidiaries with or relating to their employees
which contain change in control provisions.
37
<PAGE>
7.12 LABOUR MATTERS
(i) There is no Litigation pending or, to the knowledge of Checkmate,
threatened, between Checkmate or any of its subsidiaries and any of their
respective current or former employees, which have or may have a Material
Adverse Effect, or asserting that Checkmate or any subsidiary has committed
an unfair labor practice (within the meaning of the National Labor Relations
Act of the United States or any other comparable Law), or seeking to compel
Checkmate or one of its subsidiaries to bargain with any labor union or
other collective bargaining unit.
(ii) Neither Checkmate nor any of its subsidiaries is a party to any
collective bargaining agreement or other labour union contract applicable to
persons employed by Checkmate or any of its subsidiaries nor does Checkmate
know of any activities or proceedings of any labour union or other
collective bargaining unit to organize any such employees.
(iii) There are no strikes, slowdowns, work stops, lockouts, or other
labour disputes pending or, to the knowledge of Checkmate, threatened by or
with respect to any employees of Checkmate or any of its subsidiaries.
7.13 REGISTRATION STATEMENT; PROXY STATEMENT
None of the information supplied or to be supplied by Checkmate in writing
for inclusion or incorporation by reference in
(i) the Registration Statement,
(ii) the Proxy Statement/Prospectus,
(iii) the Prospectus, and
(iv) any other document to be filed with the SEC or any regulatory
agency by Newco, Merger Sub or Checkmate in connection with the transactions
contemplated by this Agreement (the "Other Checkmate Filings")
will, at the respective times filed with the SEC or other regulatory
agency and, in addition,
A. in the case of the Proxy Statement/Prospectus, at the date it or
any amendments or supplements thereto are mailed to shareholders,
B. in the case of the Registration Statement, when it becomes
effective under the Securities Act, and
C. in the case of the Prospectus, at the date of the receipt from the
OSC for the Prospectus
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. The Checkmate Proxy Statement will comply as to form
in all material respects with the applicable provisions of the Exchange Act
and the rules and regulations thereunder. If at any time prior to the
Effective Date any event relating to Checkmate or any of its respective
affiliates, officers or directors should be discovered by Checkmate which
should be set forth in an amendment to the Registration Statement or
Prospectus or a supplement to the Checkmate Proxy Statement, Checkmate shall
promptly inform Newco and IVI.
Notwithstanding the foregoing, Checkmate makes no representation or warranty
with respect to any information supplied by IVI or Newco which is contained in
any of the foregoing documents.
38
<PAGE>
7.14 RESTRICTIONS ON BUSINESS ACTIVITIES
Except for this Agreement and as set forth in Section 7.14 of the Checkmate
Disclosure Schedule, there is no material Contract or Order binding upon
Checkmate or any of its subsidiaries which has or could reasonably be expected
to have the effect of prohibiting or impairing any material business practice of
Checkmate or any of its subsidiaries, the acquisition of property by Checkmate
or any of its subsidiaries or the conduct of business by Checkmate or any of its
subsidiaries as currently conducted or as proposed to be conducted by Checkmate.
7.15 TITLE TO PROPERTY
Checkmate owns no real property. Section 7.15 of the Checkmate Disclosure
Schedule sets forth a true and complete list of all real property leased by
Checkmate or any of its subsidiaries requiring annual lease payments of more
than $50,000, and the aggregate monthly rental or other fee payable under such
lease. Checkmate and each of its subsidiaries have good and marketable title to
all of their properties free and clear of all Liens except for any Lien:
(i) identified in Section 7.15 of the Checkmate Disclosure Schedule or
disclosed or reserved against the Checkmate Balance Sheet;
(ii) created, arising or existing under or in connection with any
agreement or other matter referred to in the Checkmate Disclosure Schedule,
provided that any such Lien (and a description of its material terms) is
identified with such Agreement or matter in the Checkmate Disclosure
Schedule;
(iii) relating to any Tax or other governmental charge or levy that is
not yet due and payable;
(iv) relating to, or created arising or existing in connection with, any
Litigation that is being contested in good faith, provided that any such
Lien (and a description of its material terms) is identified with such
Litigation in the Checkmate Disclosure Schedule, or
(vi) which, individually or in the aggregate, would not result in a
Material Adverse Effect to Checkmate;
and all leases pursuant to which Checkmate or any of its subsidiaries lease from
others material items or amounts of real or personal property, are in good
standing, valid, effective and enforceable in accordance with their respective
terms, and there is not, under any of such leases, any existing material default
or violation except where the lack of such good standing, validity,
effectiveness or enforceability or the existence of such default or violation
would not have a Material Adverse Effect. All the facilities of Checkmate and
its subsidiaries, except such as may be under construction, are in good
operating condition and repair, reasonable wear and tear expected, and are
usable in the ordinary course of business consistent with past practice, except
where the failure of such plants, structures and equipment to be in such good
operating condition and repair or so usable would not have a Material Adverse
Effect. The properties of Checkmate and its subsidiaries include, in the
aggregate, all of the properties required to operate the business of Checkmate
and its subsidiaries as presently conducted. All items of inventory of Checkmate
and its subsidiaries reflected in the Checkmate Balance Sheet consisted of items
of a quality and quantity usable and saleable in the ordinary course of business
and conform to generally accepted standards in the industry in which Checkmate
and its subsidiaries are a part.
7.16 TAXES
(a) For purposes of this Agreement, "Tax" or "Taxes" shall mean all taxes,
fees, levies, duties, tariffs, imposts, premiums and governmental impositions or
charges of any kind, payable to any federal, state, provincial, local or foreign
taxing authority, including (without limitation):
39
<PAGE>
(i) income, capital, business, franchise, profits, corporate,
alternative minimum, gross receipts, ad valorem, goods and services,
customs, net worth, value added, sales, use, service, real or personal
property, special assessments, capital stock, licence, payroll, withholding,
employment, social security, workers' compensation, unemployment insurance
or compensation, utility, severance, production, excise, stamp, occupation,
premiums, windfall profits, transfer and gains taxes, surtaxes, fees,
levies, duties, tariffs, imposts, premiums and governmental impositions,
whether disputed or not; and
(ii) interest, penalties, additional taxes and additions to tax imposed
with respect thereto;
and "Tax Returns" shall mean returns, reports and information statements
of any kind with respect to Taxes required to be filed with the IRS or any
other taxing authority, domestic or foreign, including, without limitation,
consolidated, combined and unitary tax returns.
(b) Checkmate and its subsidiaries have filed all United States federal
income Tax Returns and all other Tax Returns required to be filed by them on or
prior to the date hereof, or requests for extensions have been timely filed,
granted and have not expired; all Tax Returns filed by Checkmate and its
subsidiaries are complete and accurate; and Checkmate and its subsidiaries have
paid and discharged all Taxes when due, whether or not shown on any Tax Return,
except such as are being contested in good faith by appropriate proceedings
(except in each case, as disclosed in Section 7.16(b) of the Checkmate
Disclosure Schedule) and with respect to which Checkmate is maintaining reserves
to the extent currently required for their payment; except to the extent that
the failure so to file, to be complete and correct, to reserve or so to pay,
individually or in the aggregate with all other such failures, would not have a
Material Adverse Effect. Neither the IRS nor any other taxing authority is now
asserting or, to the knowledge of Checkmate, threatening to assert against
Checkmate or any of its subsidiaries any deficiency or claim for additional
Taxes other than additional Taxes (in each case, as disclosed in Section 7.16(b)
of the Checkmate Disclosure Schedule) with respect to which Checkmate is
maintaining reserves in all material respects adequate for their payment. Except
as disclosed in Section 7.16(b) of the Checkmate Disclosure Schedule, neither
Checkmate nor any of its subsidiaries is currently being audited by any taxing
authority nor has notice been given by any taxing authority that it will
commence such an audit or examination. There are no Tax Liens on any properties
of Checkmate or any subsidiary thereof and neither Checkmate nor any of its
subsidiaries has granted any waiver of any statute of limitations with respect
to, or any extension of a period for the assessment of, any Tax. Neither
Checkmate nor any of its subsidiaries has received any notice of seizure from
any taxation authority. The accruals and reserves for Taxes reflected in the
Checkmate Balance Sheet are in all material respects sufficient to cover all
Taxes accruable through the date thereof (including Taxes being contested and
any deferred Taxes) in accordance with GAAP and, as of the Effective Date, such
accruals and reserves, as adjusted for the passage of time through the Effective
Date, will be sufficient for the then unpaid Taxes of Checkmate and its
subsidiaries. Except as disclosed in Section 7.16(b) of the Checkmate Disclosure
Schedule, neither Checkmate nor any of its subsidiaries (whether as a result of
the Transactions or otherwise) is required to include in income:
(i) items in respect of any change in accounting principles or deferred
intercompany transactions; or
(ii) any installment sale gain;
in each case where the inclusion in income would result in a tax
Liability materially in excess of the reserves therefor.
(c) Checkmate, on behalf of itself and all its subsidiaries, hereby
represents that, other than as disclosed on Section 7.16(c) of the Checkmate
Disclosure Schedule, and other than with respect to items the inaccuracy of
which would not have a Material Adverse Effect:
(i) neither Checkmate nor any of its subsidiaries has made any payment
or is a party to any agreement, contract or arrangement that may result,
separately or in the aggregate, in the payment of
40
<PAGE>
any "excess parachute payment" within the meaning of Section 280G of the
Code, determined without regard to Section 280G(b)(4) of the Code;
(ii) neither Checkmate nor any of its subsidiaries has been subject to
any accumulated earnings tax or personal holding company tax;
(iii) neither Checkmate nor any of its subsidiaries owns stock in a
passive foreign investment company within the meaning of Section 1296 of the
Code;
(iv) neither Checkmate nor any of its subsidiaries is obligated under
any agreement with respect to industrial development bonds or other
obligations the tax exempt character of which for United States federal or
state income tax purposes could be affected by the transactions contemplated
hereunder; and
(v) neither Checkmate nor any of its subsidiaries has, prior to the date
hereof, acquired or had the use of any material property from a person with
whom it was not dealing at arm's length, or disposed of any material
property to a person with whom it was not dealing at arm's length for
proceeds less than the fair market value thereof.
(d) No power of attorney has been granted by Checkmate or any of its
subsidiaries with respect to any matter relating to Taxes which is currently in
force.
(e) Neither Checkmate nor any of its subsidiaries
(i) is a party to any agreement or arrangement (written or oral)
providing for the allocation or sharing of Taxes,
(ii) has been a member of an affiliated group filing a consolidated Tax
Return (other than a group the common parent of which is Checkmate), or
(iii) has any Liability for Taxes of any person (other than Checkmate
and its subsidiaries) under Treasury Regulation Section 1.1502-6 (or any
similar provision of Law) as a transferee or successor, by Contract or
otherwise.
(f) Checkmate and each of its subsidiaries has withheld all material
amounts from each payment made to any of its respective past or present
employees, officers or directors, suppliers, customers or other third
parties the amount of all Taxes and other material deductions required to be
withheld therefrom and has paid the same to the proper taxation authority or
other receiving officers within the time required under any applicable Law.
(g) Checkmate has remitted to the appropriate taxation authority when
required by law to do so all amounts collected by it on account of all
retail sales and similar Taxes.
(h) Checkmate has withheld from each payment made to any non-resident of
the United States of America the amount of all material Taxes and other
deductions required to be withheld therefrom and has paid the same to the
proper taxation authority or other receiving officers within the time
required under any applicable Law.
(i) Checkmate and all of the subsidiaries of Checkmate have taxation
years ending on December 31 of each year.
7.17 ENVIRONMENTAL MATTERS
(a) Except in all cases as do not have a Material Adverse Effect, Checkmate
and each of its subsidiaries:
(i) have obtained all applicable Approvals which are required under
Environmental Laws; and
41
<PAGE>
(ii) are in compliance with all terms and conditions of such Approvals
and also are in compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules
and timetables contained in Environmental Laws or contained in any Law or
Order issued, entered, promulgated or approved thereunder.
(b) There is no Litigation pending or, to the knowledge of Checkmate,
threatened before any governmental entity in which Checkmate or any Checkmate
subsidiary or any of the properties owned, leased, managed or operated by
Checkmate or one of its subsidiaries has been or, with respect to threatened
Litigation, may be named as a defendant for alleged noncompliance (including by
any predecessor) with any Environmental Law, whether or not occurring at, on,
under, or involving a property owned, leased, managed or operated (in whole or
in part) by Checkmate or any subsidiary of Checkmate or any of their properties.
To the knowledge of Checkmate, there is no reasonable basis for any Litigation
of a type described in the immediately foregoing sentence.
(c) During the period of Checkmate's or any of its subsidiaries'
(i) ownership or operation of any of their respective current
properties,
(ii) participation in the management of any properties of any other
person, or
(iii) holding of a security interest in any properties of any other
person, there have been no releases of "hazardous substances" in, on, under,
or affecting such properties. Prior to the period of Checkmate's or any of
its subsidiaries'
A. ownership or operation of any of their respective current
properties,
B. Checkmate's or any of its subsidiaries' participation in the
management of any properties of any other person, or
C. holding of a security interest in any properties of any other
person, there were no releases of "hazardous substances" in, on, under,
or affecting any such properties.
7.18 BROKERS
Except as set forth in Section 7.18 of the Checkmate Disclosure Schedule, no
broker, finder or investment banker (other than BT Alex.Brown) is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Checkmate. A complete and correct copy of all agreements between
Checkmate and BT Alex.Brown pursuant to which such firm would be entitled to any
payment relating to the transactions contemplated hereunder are set forth in
Section 7.18 of the Checkmate Disclosure Schedule.
7.19 FULL DISCLOSURE
No statement contained in this Agreement or any certificate or schedule
furnished or to be furnished by Checkmate or any of its subsidiaries to IVI in,
or pursuant to the provisions of, this Agreement contains or shall contain any
untrue statement of a material fact or omits or will omit to state any material
fact necessary, in the light of the circumstances under which it was made, in
order to make the statements herein or therein not misleading.
7.20 INTELLECTUAL PROPERTY
(a) Except in such instances that do not have a Material Adverse Effect,
Checkmate or a Checkmate subsidiary owns, or is licensed or otherwise possesses
legally enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights and any applications therefor, technology, know-how, computer
software programs or applications (in both source code and object code form)
tangible or intangible proprietary information or material and other
intellectual property rights that are used or
42
<PAGE>
proposed to be used in the business of Checkmate and its subsidiaries as
currently conducted. Section 7.20(a) of the Checkmate Disclosure Schedule lists
all current and past (lapsed, expired, abandoned or canceled) patents,
registered and material unregistered trademarks and service marks, registered
and material unregistered copyrights, trade names, other intellectual property
and any applications therefor owned by Checkmate and its subsidiaries (the
"Checkmate Intellectual Property Rights"), and specifies the jurisdictions in
which each such Checkmate Intellectual Property Right has been issued or
registered (if any) or in which an application for such issuance and
registration has been filed (if any), including the respective registration or
application numbers and the names of all registered owners, together with a list
of all of Checkmate's and its subsidiaries' currently marketed software products
and an indication as to which, if any, of such software products have been
registered for copyright protection with the United States or Canadian Copyright
Office and any other foreign offices and by whom such items have been
registered. Section 7.20(a) of the Checkmate Disclosure Schedule includes and
specifically identifies all third-party patents, trademarks or copyrights
(including software), and other intellectual property (the "Checkmate Third
Party Intellectual Property Rights") to the knowledge of Checkmate which are
incorporated in, are, or form a part of, any product of Checkmate or are
otherwise used in (or proposed to be used in) or necessary for the conduct of
Checkmate's business as currently conducted. Section 7.20(a) of the Checkmate
Disclosure Schedule lists:
(i) any requests Checkmate has received to make any such registration,
including the identity of the requestor and the item requested to be so
registered, and the jurisdiction for which such request has been made;
(ii) except for object code licence agreements for Checkmate's and its
subsidiaries' products executed in the ordinary course of business and in
accordance with Checkmate's and its subsidiaries' past practices, all
material licences, sublicences and other Contracts as to which Checkmate or
any subsidiary of Checkmate is a party and pursuant to which any person is
authorized to use any Checkmate Intellectual Property Right, including any
trade secret material to Checkmate or any subsidiary of Checkmate; and
(iii) all material licences, sublicences and other Contracts as to which
Checkmate is a party and pursuant to which Checkmate is authorized to use
any Checkmate Third Party Intellectual Property Rights, including any trade
secret of a third party, and includes the identity of all parties thereto, a
description of the nature and subject matter thereof, the applicable royalty
and the term thereof.
(b) Checkmate and its subsidiaries are not, nor will they be as a result of
the execution and delivery of this Agreement by Checkmate or the performance of
its obligations hereunder, in violation in any material respect of any licence,
sublicence or Contract described in Section 7.20(a) of the Checkmate Disclosure
Schedule. No Litigation with respect to the Checkmate Intellectual Property
Rights, including any trade secret material to Checkmate, or Checkmate Third
Party Intellectual Property Rights is currently pending or, to the knowledge of
Checkmate, is threatened by any person, nor does Checkmate know of any valid
grounds for any bona fide Litigation:
(i) to the effect that the manufacture, sale, licensing or use of any
product as now used, sold or licensed or proposed for use, sale or license
by Checkmate or any of its subsidiaries infringes on any copyright, patent,
trademark, service mark or trade secret;
(ii) against the use by Checkmate or any of its subsidiaries of any
trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in Checkmate's
or any of its subsidiaries' business as currently conducted or as proposed
to be conducted by Checkmate or any of its subsidiaries;
(iii) challenging the ownership, validity or effectiveness of any of the
Checkmate Intellectual Property Rights, including trade secrets, material to
Checkmate or any of its subsidiaries; or
43
<PAGE>
(iv) challenging Checkmate's or any of its subsidiaries' license or
legally enforceable right to use of the Checkmate Third Party Intellectual
Property Rights. To Checkmate's knowledge, all patents, registered
trademarks, maskworks and copyrights held by Checkmate or any of its
subsidiaries are valid and subsisting. Except as set forth in Section
7.20(b) of the Checkmate Disclosure Schedule, to Checkmate's knowledge,
there is no material unauthorized use, infringement or misappropriation of
any of the Checkmate Intellectual Property by any third party, including any
employee or former employee of Checkmate or any of its subsidiaries.
Except as set forth in Section 7.20(b) of the Checkmate Disclosure Schedule,
neither Checkmate nor any of its subsidiaries
(i) has been sued or charged in writing as a defendant in any Litigation
which involves a claim or infringement of trade secrets, any patents,
trademarks, service marks, maskworks or copyrights and which has not been
finally terminated prior to the date hereof, or been informed or notified by
any third party that Checkmate or any of its subsidiaries may be engaged in
such infringement, or
(ii) has knowledge of any infringement Liability with respect to, or
infringement by, Checkmate or any of its subsidiaries of any trade secret,
patent, trademark, service mark, maskwork, copyright or other intellectual
property of another.
(c) Except as noted in Section 7.20(d) of the Checkmate Disclosure Schedule,
all software that is Checkmate Intellectual Property Rights and Checkmate's and
its subsidiaries' business systems (including hardware and software) and
products are Year 2000 Compliant.
7.21 INTERESTED PARTY TRANSACTIONS
Except as disclosed in Section 7.21 of the Checkmate Disclosure Schedule,
since December 31, 1996 no event has occurred that would be required to be
reported as a Certain Relationship or Related Transaction, pursuant to Item 404
of Regulation S-K promulgated by the SEC.
7.22 INSURANCE
Section 7.22 of the Checkmate Disclosure Schedule lists all material
insurance policies and fidelity bonds covering the business, properties,
operations, employees, officers and directors of Checkmate and its subsidiaries.
Except as is set forth in Section 7.22 of the Checkmate Disclosure Schedule,
there is no claim by Checkmate or any of its subsidiaries pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums payable
under all such policies and bonds have been paid and Checkmate and its
subsidiaries are otherwise in compliance in all material respects with the terms
of such policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). Such policies of insurance and bonds are of the
type and in amounts customarily carried by persons conducting businesses similar
to those of Checkmate and its subsidiaries. Checkmate and its subsidiaries have
not received notice of and do not know of any threatened termination of, or
material premium increase with respect to, any of such policies.
7.23 OPTION PLANS
Except as set forth in Section 7.23 of the Checkmate Disclosure Schedule,
the Board of Directors of Checkmate has taken all necessary action (or refrained
from taking action, where appropriate) under the Checkmate Stock Option Plans so
that none of the Checkmate Stock Options (or any portion thereof) will be
entitled to receive cash or other property as a result of the consummation of
the transactions contemplated hereby, but instead shall be assumed as provided
in Section 5.10 hereof.
7.24 POOLING MATTERS
Neither Checkmate nor to Checkmate's knowledge any of its affiliates has
taken or agreed to take any action that (without giving effect to any action
taken or agreed to be taken by IVI or any of its affiliates or Newco) would
affect the ability of Newco to account for the business combination to be
effected by the Transactions as a pooling of interests.
44
<PAGE>
7.25 AFFILIATES
Section 7.25 of the Checkmate Disclosure Schedule sets forth each person
who, as of the date hereof, is an affiliate of Checkmate.
7.26 OPINION OF FINANCIAL ADVISOR
Checkmate has been advised by its financial advisor, BT Alex.Brown, that, in
its opinion, as of the date hereof, the terms of the Transactions are fair to
the stockholders of Checkmate from a financial point of view, and has delivered
a written copy of such opinion to Checkmate.
ARTICLE 8.00--REPRESENTATIONS AND WARRANTIES OF NEWCO
Newco hereby represents and warrants to IVI and Checkmate that:
8.1 ORGANIZATION AND QUALIFICATION
Newco is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware or organization and has the requisite
corporate power and authority and is in possession of all Approvals necessary to
own, lease and operate the properties it purports to own, operate or lease and
to carry on its business as it is now being conducted. Newco does not directly
or indirectly own any equity or similar interest in, or any Rights in, any
corporation, partnership, joint venture or other business association or entity,
except that it owns all of the outstanding capital stock of Merger Sub.
8.2 ARTICLES OF INCORPORATION AND BY-LAWS; MINUTES
The Certificate of Incorporation and By-Laws of Newco are in full force and
effect. Newco is not in violation of any of the provisions of its Certificate of
Incorporation or By-Laws or equivalent organizational documents.
8.3 CAPITALIZATION
The authorized capital stock of Newco consists of 99,000,000 shares of Newco
Common Stock and 1,000,000 shares of preferred stock of Newco ("Newco Preferred
Stock"). As of the date of this Agreement:
(i) 10 shares of Newco Common Stock are issued and outstanding, all
of which are validly issued, fully paid and nonassessable under the
Delaware Law. None of the outstanding shares of capital stock of Newco
has been issued in violation of any preemptive rights of any current or
past holder of Newco capital stock; and
(ii) no shares of Newco Preferred Stock are issued or outstanding.
8.4 AUTHORITY RELATIVE TO THIS AGREEMENT
Newco has all necessary corporate power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Newco and the consummation by Newco of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action and no
other corporate proceedings on the part of Newco are necessary to authorize this
Agreement or to consummate the transactions so contemplated. The Board of
Directors of Newco has determined that it is advisable and in the best interest
of Newco's shareholders for Newco to enter into a business combination with IVI,
Checkmate and Merger Sub upon the terms and subject to the conditions of this
Agreement. This
45
<PAGE>
Agreement has been duly and validly executed and delivered by Newco and,
assuming the due authorization, execution and delivery by IVI, Checkmate and
Merger Sub, as applicable, constitutes a legal, valid and binding obligation of
Newco.
ARTICLE 9.00--REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Merger Sub hereby represents and warrants to IVI and Checkmate that:
9.1 ORGANIZATION AND QUALIFICATION
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Georgia or organization and has the
requisite corporate power and authority and is in possession of all Approvals
necessary to own, lease and operate the properties it purports to own, operate
or lease and to carry on its business as it is now being conducted. Merger Sub
does not directly or indirectly own any equity or similar interest in, or any
Rights in, any corporation, partnership, joint venture or other business
association or entity.
9.2 ARTICLES OF INCORPORATION AND BY-LAWS; MINUTES
The Articles of Incorporation and By-Laws of Merger Sub are in full force
and effect. Merger Sub is not in violation of any of the provisions of its
Articles of Incorporation or By-Laws or equivalent organizational documents.
9.3 CAPITALIZATION
The authorized capital stock of Merger Sub consists of 1,000 shares of
Merger Sub Common Stock. As of the date of this Agreement 100 shares of Merger
Sub Common Stock are issued and outstanding, all of which are validly issued,
fully paid and nonassessable.
9.4 AUTHORITY RELATIVE TO THIS AGREEMENT
Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Merger Sub and the consummation by Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions so contemplated. The Board of Directors of Merger Sub has
determined that it is advisable and in the best interest of Merger Sub's
shareholders for Merger Sub to enter into a business combination with IVI, Newco
and Checkmate upon the terms and subject to the conditions of this Agreement.
This Agreement has been duly and validly executed and delivered by Merger Sub
and, assuming the due authorization, execution and delivery by IVI, Newco and
Checkmate, as applicable, constitutes a legal, valid and binding obligation of
Merger Sub.
ARTICLE 10.00--CONDUCT OF BUSINESS PENDING THE ARRANGEMENT
10.1 CONDUCT OF BUSINESS BY IVI PENDING THE TRANSACTIONS
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Date, IVI
covenants and agrees that, unless Checkmate shall otherwise agree in writing,
IVI shall conduct its business and shall cause the businesses of its
subsidiaries to be conducted only in, and IVI and its subsidiaries shall not
take any action except in, the ordinary course of business and in a manner
consistent with past practice except as may be otherwise provided herein; and
IVI shall use reasonable commercial efforts to preserve substantially intact the
business organization of IVI and its subsidiaries, to keep available the
services of the present officers, employees and consultants of
46
<PAGE>
IVI and its subsidiaries, to take all action reasonably necessary to prevent the
loss, cancellation, abandonment, forfeiture or expiration of any IVI
Intellectual Property and to preserve the present relationships of IVI and its
subsidiaries with customers, suppliers and other persons with which IVI or any
of its subsidiaries has significant business relations.
In addition, except as contemplated by this Agreement, IVI shall not, and
shall cause its subsidiaries not to, except to the extent necessary to implement
the Transactions and to carry out the intentions of the parties set forth in
Section 4.1, during the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Date,
directly or indirectly do, or agree, propose or Contract to do, any of the
following without the prior written consent of Checkmate:
(a) amend or otherwise change IVI's Articles of Continuation or By-Laws;
(b) issue, sell, pledge, dispose of or encumber or otherwise subject to
any Lien, or authorize the issuance or reservation for issuance, sale,
pledge, disposition or encumbrance of or otherwise subjecting to any Lien,
any shares of capital stock of any class or other ownership interests, or
any Rights of IVI, any of its subsidiaries or affiliates (except for the
issuance of IVI Common Shares issuable pursuant to employee stock options
under the IVI Option Plan or pursuant to the Participation Right, which
options or rights, as the case may be, are outstanding on the date hereof
and except for the issuance of shares of NTN common stock pursuant to
employee stock options which options are outstanding on the date hereof);
(c) sell, dispose of or subject any properties of IVI or any of its
subsidiaries to any Lien (except for
(i) sales of properties in the ordinary course of business and in a
manner consistent with past practice and
(ii) dispositions of obsolete or worthless properties);
(d) amend or change the period (or permit any acceleration, amendment or
change) of exercisability of options or restricted stock granted under the
IVI Employee Plans (including the IVI Option Plan) or authorize cash
payments in exchange for any options granted under any of such plans;
(e) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof)
in respect of any of its capital stock or other ownership interest, except
that a wholly-owned subsidiary of IVI may declare and pay a dividend to its
parent,
(ii) split, combine or reclassify any of its capital stock or other
ownership interests or issue or authorize or propose the issuance of any
other securities or Rights in respect of, in lieu of or in substitution
for shares of its capital stock or other ownership interests, or
(iii) amend the terms of, repurchase, redeem or otherwise acquire, or
permit any subsidiary to repurchase, redeem or otherwise acquire, any of
its securities or any securities of its subsidiaries;
(f) sell, transfer, license, sublicense or otherwise dispose of any IVI
Intellectual Property, or amend or modify any existing Contracts with
respect to any IVI Intellectual Property or IVI Third Party Intellectual
Property Rights, other than nonexclusive object and source code licences in
the ordinary course of business consistent with past practice;
(g) acquire (by merger, consolidation, acquisition of stock or assets or
otherwise) any corporation, partnership or other business organization or
division thereof, other than the purchase of the assets of BancTec Payment
System's Open Payment Systems Group by NTN;
(i) incur or amend any indebtedness for borrowed money or issue any
debt securities or assume, guarantee (other than guarantees of currently
existing bank debt of IVI or IVI's
47
<PAGE>
subsidiaries entered into in the ordinary course of business), endorse or
otherwise as an accommodation become responsible for, the obligations of
any person, or make any loans or advances, except in the ordinary course
of business consistent with past practice; or
(ii) authorize any capital expenditures or purchase of fixed assets
which are, in the aggregate, in excess of $1,000,000 for IVI and its
subsidiaries taken as a whole;
(h) increase the compensation payable or to become payable to its
officers or employees, except for increases in salary or wages of officers
or employees of IVI or any of its subsidiaries subject to performance and
compensation reviews, or grant any severance or termination pay to, or enter
into any employment or severance agreement with, any director, officer or
other employee of IVI or any of its subsidiaries, or (except as required by
Law) terminate, establish, adopt, enter into or amend any IVI Employee Plan;
(i) take any action to change accounting policies or procedures
(including, without limitation, procedures with respect to revenue
recognition, capitalization of software development costs, payments of
accounts payable and collection of accounts receivable) other than as may be
required by Canadian generally accepted accounting principles applied on a
basis consistent with past practice;
(j) make any material Tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign Tax
Liability or agree to an extension of a statute of limitations except to the
extent the amount of any such settlement has been reserved for on the
consolidated balance sheet contained in IVI's most recent OSC Report;
(k) pay, discharge or satisfy any material Litigation or Liabilities,
other than the payment, discharge or satisfaction, in the ordinary course of
business and consistent with past practice, of Liabilities reflected or
reserved against on the consolidated balance sheet contained in IVI's most
recent OSC Report or incurred in the ordinary course of business and
consistent with past practice;
(l) modify, amend or terminate any Contracts, waive, release, relinquish
or assign any contract or other rights or claims or cancel or forgive any
indebtedness owed to it, other than in the ordinary course of business
consistent with past practice or with respect to Contracts which are not
material to IVI and its subsidiaries taken as a whole;
(m) take or allow to be taken or fail or omit to take any act which
would jeopardize the treatment of the Transactions as a pooling of interests
for accounting purposes under GAAP; or
(n) any action which would make any of the representations or warranties
of IVI contained in this Agreement untrue or incorrect in any material
respect or prevent IVI from performing or cause IVI not to perform its
covenants hereunder or result in any of the conditions to the Arrangement
set forth herein not being satisfied.
10.2 NO SOLICITATION
(a) Neither IVI nor Checkmate (each, for purposes of this Section 10.2,
a "Company"), nor any of their respective subsidiaries shall (whether
directly or indirectly through advisors, agents or other intermediaries),
nor shall such Company or any of its subsidiaries authorize or permit any of
its or their officers, directors, agents, representatives, advisors or
subsidiaries to solicit, initiate or knowingly take any action to facilitate
the submission of inquiries, proposals or offers from any Third Party
relating to (A) any acquisition or purchase of 5% or more of the assets of
such Company and its subsidiaries as stated in the consolidated balance
sheet contained in IVI's most recent OSC Report or Checkmate's most recent
Checkmate SEC Document, as the case may be, or of 5% or more of the number
of outstanding equity securities of any class of such Company or any of its
subsidiaries, (B) any tender offer (including a self tender offer) or
exchange offer, (C) any merger, consolidation, business combination, sale of
substantially all assets, recapitalization, liquidation, dissolution or
48
<PAGE>
similar transaction involving such Company or any of its subsidiaries whose
assets, individually or in the aggregate, constitute 5% or more of the
assets of such Company and its subsidiaries as stated in the consolidated
balance sheet contained in IVI's most recent OSC Report or Checkmate's most
recent Checkmate SEC Document, as the case may be, other than the
transactions contemplated by this Agreement, the Shareholders Agreements and
any transaction pursuant to the Participation Right, or (D) any other
transaction the consummation of which would, or could reasonably be expected
to materially impede, interfere with, prevent or delay any or all of the
Transactions (collectively, "Acquisition Proposals"), or (ii) agree to or
endorse an Acquisition Proposal, or (iii) enter into or participate in any
discussions or negotiations regarding any of the foregoing, or furnish to
any Third Party any information with respect to its business or properties
or any of the foregoing, or otherwise cooperate in any way with, or
knowingly assist or participate in, facilitate or encourage, any effort or
attempt by any Third Party to do or seek any of the foregoing; provided,
however, that the foregoing shall not prohibit such Company (either directly
or indirectly through advisors, agents or other intermediaries) from (i)
engaging in discussions or negotiations with such a Third Party who has made
a Superior Proposal but only to the extent that the Board of Directors of
such Company shall have concluded in good faith on the basis of written
advice from its outside counsel that such action is required to prevent the
Board of Directors of such Company from breaching its fiduciary duties to
the stockholders or shareholders of such Company under applicable law; or
(ii) furnishing information pursuant to an appropriate confidentiality
letter (which letter shall not be less favorable to such Company in any
material respect than the Confidentiality/Standstill Agreement, and a copy
of which shall be provided for informational purposes only to the other
Company) concerning such Company and its businesses or properties to a Third
Party who has made a Superior Proposal; provided, further, that if the Board
of Directors of such Company receives a Superior Proposal, to the extent it
may do so without breaching its fiduciary duties as advised in writing by
its outside counsel and as determined in good faith, and without violating
any of the conditions of such Superior Proposal, (A) the Board of Directors
of such Company shall not, and shall not authorize any officers or
representatives to, take any of the foregoing actions until reasonable
notice to the other Company of its intent to take such action shall have
been given in writing to the other Company; and (B) such Company shall
promptly inform the other Company of the terms and conditions of such
proposal and the identity of the person making it. As of the date hereof,
each Company shall immediately cease and cause each of its subsidiaries and
its and their advisors, agents and other intermediaries to cease, any and
all existing activities, discussions or negotiations with any Third Party
conducted heretofore with respect to any of the foregoing, and shall use its
reasonable best efforts to cause any such parties in possession of
confidential information about such Company that was furnished by or on
behalf of such Company to return or destroy all such information in the
possession of any such Third Party or in the possession of any agent or
advisor of any such party.
(b) If (A) a Third Party has made an Acquisition Proposal, (B) the
Agreement is terminated pursuant to Section 12.1(e), 12.1(f), 12.1(g) or
12.1(h) and (C) any Acquisition Proposal (whether or not proposed prior to
the IVI Shareholders' Meeting or the Checkmate Stockholders' Meeting, as the
case may be, and whether or not it involves the Third Party making the
Acquisition Proposal referred to in Section 10.2(b)(A) above) has been
consummated within twelve months following the termination of this
Agreement, then, the Company (i) whose Board of Directors took the action or
failed to take the action referred to in Section 12.1(e), (ii) which made
the Terminating Breach, (iii) who is the subject of the Superior Proposal
referred to in Sections 12.1(g) or 12.1(h); or (iv) which is subject to such
consummated Acquisition Proposal, shall pay to the other Company, within two
business days following such occurrence, a fee of $3,000,000, as liquidated
damages and not as a penalty, together with reimbursement of all reasonable
out-of-pocket costs, fees and expenses, including, without limitation, the
reasonable fees and disbursements of banks, investment banks, accountants
and legal counsel and the expenses of any litigation incurred in connection
with collecting the fee provided for in this subsection 10.2(b).
49
<PAGE>
(c) For purposes of this Agreement, "Superior Proposal" means a bona
fide Acquisition Proposal that the Board of Directors of the Company subject
to such Acquisition Proposal believes, in its good faith judgment (based on
the advice of a financial advisor of nationally recognized reputation,
taking into account all the terms and conditions of the Acquisition
Proposal, including any break-up fees, expense reimbursement provisions and
conditions to consummation) is more favorable, from a financial point of
view, to the stockholders or shareholders of such Company than this
Agreement and the Transactions and that the funds or other consideration
necessary for the Acquisition Proposal are reasonably likely to be
available. For purposes of this Agreement, "Third Party" means any "group,"
as described in Rule 13d-5(b) promulgated under the Exchange Act, or person,
other than IVI, Checkmate or any of their respective affiliates as of the
date hereof.
(d) Both IVI and Checkmate shall ensure that the respective officers,
directors and employees of itself and its subsidiaries and any investment
bankers or other advisors or representatives retained by IVI or Checkmate,
as the case may be, are aware of the restrictions described in this Section
10.2, and shall be responsible for any breach of this Section 10.2 by such
officers, directors, employees, bankers, advisors or representatives.
10.3 CONDUCT OF BUSINESS BY CHECKMATE PENDING THE TRANSACTIONS
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Date, Checkmate
covenants and agrees that, unless IVI shall otherwise agree in writing,
Checkmate shall conduct its business and shall cause the businesses of its
subsidiaries to be conducted only in, and Checkmate and its subsidiaries shall
not take any action except in, the ordinary course of business and in a manner
consistent with past practice except as may be otherwise provided herein; and
Checkmate shall use reasonable commercial efforts to preserve substantially
intact the business organization of Checkmate and its subsidiaries, to keep
available the services of the present officers, employees and consultants of
Checkmate and its subsidiaries, to take all action reasonably necessary to
prevent the loss, cancellation, abandonment, forfeiture or expiration of any
Checkmate Intellectual Property and to preserve the present relationships of
Checkmate and its subsidiaries with customers, suppliers and other persons with
which Checkmate or any of its subsidiaries has significant business relations.
In addition, except as contemplated by this Agreement, Checkmate shall not,
and shall cause its subsidiaries not to, except to the extent necessary to
implement the Transactions and carry out the intentions of the parties set forth
in Section 4.1 during the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Date,
directly or indirectly do, or agree, propose or Contract to do, any of the
following without the prior written consent of IVI:
(a) amend or otherwise change Checkmate's Articles of Incorporation or
By-Laws;
(b) issue, sell, pledge, dispose of or encumber or otherwise subject to
any Lien, or authorize the issuance or reservation for issuance, sale,
pledge, disposition or encumbrance of or otherwise subjecting to any Lien,
any shares of capital stock of any class or other ownership interests, or
any Rights (except for the issuance of Checkmate Common Shares issuable
pursuant to employee stock options under the Checkmate Stock Option Plans,
which options are outstanding on the date hereof);
(c) sell, dispose of or subject any properties of Checkmate or any of
its subsidiaries to any Lien (except for
(i) sales of properties in the ordinary course of business and in a
manner consistent with past practice and
(ii) dispositions of obsolete or worthless properties);
50
<PAGE>
(d) amend or change the period (or permit any acceleration, amendment or
change) of exercisability of options or restricted stock granted under the
Checkmate Employee Plans (including the Checkmate Stock Option Plans) or
authorize cash payments in exchange for any options granted under any of
such plans;
(e) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof)
in respect of any of its capital stock or other ownership interest, except
that a wholly-owned subsidiary of Checkmate may declare and pay a dividend
to its parent,
(ii) split, combine or reclassify any of its capital stock or other
ownership interests or issue or authorize or propose the issuance of any
other securities or Rights in respect of, in lieu of or in substitution
for shares of its capital stock or other ownership interests, or
(iii) amend the terms of, repurchase, redeem or otherwise acquire, or
permit any subsidiary to repurchase, redeem or otherwise acquire, any of
its securities or any securities of its subsidiaries;
(f) sell, transfer, license, sublicense or otherwise dispose of any
Checkmate Intellectual Property, or amend or modify any existing Contracts
with respect to any Checkmate Intellectual Property or Checkmate Third Party
Intellectual Property Rights, other than nonexclusive object and source code
licences in the ordinary course of business consistent with past practice;
(g) (i) acquire (by merger, consolidation, or acquisition of stock or
assets or otherwise) any corporation, partnership or other business
organization or division thereof;
(ii) incur or amend any indebtedness for borrowed money or issue any
debt securities or assume, guarantee (other than guarantees of currently
existing bank debt of Checkmate's subsidiaries entered into in the
ordinary course of business), endorse or otherwise as an accommodation
become responsible for, the obligations of any person, or make any loans
or advances, except in the ordinary course of business consistent with
past practice; or
(iii) authorize any capital expenditures or purchase of fixed assets
which are, in the aggregate, in excess of $1,000,000 for Checkmate and
its subsidiaries taken as a whole;
(h) increase the compensation payable or to become payable to its
officers or employees, except for increases in salary or wages of officers
or employees of Checkmate or any of its subsidiaries subject to performance
and compensation reviews, or grant any severance or termination pay to, or
enter into any employment or severance agreement with, any director, officer
or other employee of Checkmate or any of its subsidiaries, or (except as
required by Law) terminate, establish, adopt, enter into or amend any
Checkmate Employee Plan;
(i) take any action to change accounting policies or procedures
(including, without limitation, procedures with respect to revenue
recognition, capitalization of software development costs, payments of
accounts payable and collection of accounts receivable) other than as may be
required by GAAP;
(j) make any material Tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign Tax
Liability or agree to an extension of a statute of limitations except to the
extent the amount of any such settlement has been reserved for on the
consolidated balance sheet contained in the most recent Checkmate SEC
Document;
(k) pay, discharge or satisfy any material Liabilities, other than the
payment, discharge or satisfaction, in the ordinary course of business and
consistent with past practice, of Liabilities reflected or reserved against
in the consolidated balance sheet contained in Checkmate's most recent SEC
Report or incurred in the ordinary course of business and consistent with
past practice;
51
<PAGE>
(l) modify, amend or terminate any Contracts, waive, release, relinquish
or assign any contract or other rights or claims or cancel or forgive any
indebtedness owed to it, other than in the ordinary course of business
consistent with past practice with respect to Contracts which are not
material to Checkmate and its subsidiaries taken as a whole;
(m) take or allow to be taken or fail or omit to take any act which
would jeopardize the treatment of the Transactions as a pooling of interests
for accounting purposes under GAAP; or
(n) take any action which would make any of the representations or
warranties of Checkmate contained in this Agreement untrue or incorrect in
any material respect or prevent Checkmate from performing or cause Checkmate
to perform its covenants hereunder or result in any of the conditions to the
Transactions set forth herein not being satisfied.
ARTICLE 11.00--CONDITIONS TO THE TRANSACTIONS
11.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE TRANSACTIONS
The respective obligations of each party to effect the Transactions shall be
subject to the satisfaction at or prior to the Effective Date of the following
conditions:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT/COURT APPROVAL
The Registration Statement shall have been declared effective by the SEC
under the Securities Act and shall cover the Newco Common Stock both to be
issued at or immediately after the Effective Date. No stop order suspending
the effectiveness of the Registration Statement, if any, shall have been
issued by the SEC and no Litigation for that purpose and no similar
proceeding in respect of either Proxy Statement shall have been initiated or
threatened by the SEC or the OSC. The final receipt from the OSC and other
provincial securities regulatory authorities for the Prospectus shall have
been obtained. The Court shall have issued its final order approving the
Arrangement in form and substance satisfactory to IVI and Checkmate (such
approvals not to be unreasonably withheld or delayed);
(b) SHAREHOLDER APPROVAL
This Agreement and the applicable Transaction shall have been approved
and adopted by the affirmative requisite vote of the shareholders of each of
IVI and Checkmate;
(c) HSR ACT
The waiting period applicable to the consummation of the Transactions
under the HSR Act shall have expired or been terminated;
(d) OSC, ETC.
All necessary rulings shall have been obtained from the OSC and other
relevant Canadian, provincial and state securities regulatory authorities in
connection with the Transactions. The applicable waiting periods and any
extensions thereof under Part IX of the COMPETITION ACT (Canada) shall have
expired or the parties shall have received an Advance Ruling Certificate
("ARC") pursuant to section 102 of the COMPETITION ACT (Canada) setting out
that the Director under such Act is satisfied he would not have sufficient
grounds on which to apply for an order in respect of the Transactions;
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY
No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of
the Transactions shall be in effect, nor shall any Litigation brought by any
governmental entity seeking any of the foregoing be pending; and there shall
not be any action taken, or any Law or Order applicable to the Transactions,
which makes the consummation of the Transactions illegal;
52
<PAGE>
(f) LISTING
The Newco Common Stock issued at or immediately after the Effective Date
and any additional shares issued as a result of the exercise of rights
attaching to the Exchangeable Shares shall have been approved for
(i) listing, subject to notice of issuance, on the TSE, and
(ii) quotation, subject to notice of issuance, on the Nasdaq National
Market. The Exchangeable Shares shall have been approved for listing,
subject to notice of issuance, on the TSE; and
(g) DISSENT RIGHTS
IVI and Checkmate shall not have received, on or prior to the Effective
Time, notice from the holders of, in IVI's case, IVI Common Shares, and, in
Checkmate's case, Checkmate Common Shares of their intention to exercise
their rights of dissent under Section 190 of the CBCA and Article 13 of the
Georgia Law, respectively, that in the aggregate, after taking into account
all other facts and circumstances of the parties, would prevent the
Transactions from being treated as a pooling of interests under GAAP.
11.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF IVI
The obligations of IVI to effect the Transactions are also subject to the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES
The representations and warranties of Checkmate contained in this
Agreement shall be true and correct in all material respects (except for
such representations and warranties which are qualified as to materiality
which shall be true and correct in all respects) on and as of the Effective
Date, except for
(i) changes contemplated by this Agreement, or
(ii) those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such
date), or
and IVI shall have received a certificate to such effect signed on
behalf of Checkmate by the Chief Executive Officer and the Chief Financial
Officer of Checkmate;
(b) AGREEMENTS AND COVENANTS
Checkmate, Newco and Merger Sub shall have performed or complied in all
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Date, and IVI
shall have received a certificate to such effect signed on behalf of
Checkmate by the Chief Executive Officer and the Chief Financial Officer of
Checkmate and with respect to Newco and Merger Sub, by a director or officer
of such corporation;
(c) CONSENTS OBTAINED
All material Approvals required to be obtained or made by Checkmate for
the authorization, execution and delivery of this Agreement and the
consummation by it of the transactions contemplated hereby shall have been
obtained and made by Checkmate;
(d) GOVERNMENTAL ACTIONS
There shall not have been instituted, pending or threatened any action
or proceeding (or any investigation or other inquiry that might result in
such an action or proceeding) by any governmental entity before any
governmental entity, nor shall there be in effect any Order of any
governmental entity, in either case, seeking to prohibit or limit IVI from
exercising all material rights and privileges pertaining to the ownership or
operation by IVI or any of its subsidiaries of all or a material portion of
53
<PAGE>
the business or properties of IVI or any of its subsidiaries, or seeking to
compel IVI or any of its subsidiaries to dispose of or hold separate all or
any material portion of the business or properties of IVI or any of its
subsidiaries, as a result of the Transactions;
(e) MATERIAL ADVERSE CHANGE
Since the date of this Agreement, there shall have been no change,
occurrence or circumstance in the business, results of operations or
financial condition of Checkmate or any subsidiary of Checkmate having a
Material Adverse Effect;
(f) ACCOUNTANTS' POOLING LETTERS
IVI shall have received a letter, dated as of the date hereof, in form
and substance reasonably acceptable to such party, from Coopers & Lybrand to
the effect that such firm is not aware of any matters relating to IVI and
its subsidiaries which would preclude the Transactions from qualifying for
pooling-of-interests accounting treatment. IVI also shall have received a
letter, dated as of the Effective Date in form and substance reasonably
acceptable to such party, from Coopers & Lybrand to the effect that the
Transactions qualify for pooling-of-interests accounting treatment;
(g) AFFILIATE AGREEMENTS
IVI shall have received from each person who is identified in the
Checkmate Affiliate Letter as an "affiliate" of Checkmate a Checkmate
Affiliate Agreement, and each such Checkmate Affiliate Agreement shall be in
full force and effect;
(h) OPINION OF CHECKMATE COUNSEL
IVI shall have received from Alston & Bird, counsel to Checkmate, an
opinion that the Merger is effective under Georgia Law, in form and
substance reasonably satisfactory to IVI and its counsel; and
(i) TAX OPINION
IVI shall have received an opinion in form and substance satisfactory to
IVI of Meighen Demers, counsel for IVI, to the effect that the Arrangement
will be generally treated for Canadian federal income tax purposes as a
reorganization of capital for those shareholders of IVI who hold their IVI
Common Shares as capital property for purposes of the ITA and an opinion in
form and substance satisfactory to IVI from Morgan, Lewis & Bockius, counsel
for IVI, to the effect that a Shareholder of IVI who exchanges IVI Common
Shares for Newco Common Stock should not recognize gain or loss under
Section 351 of the Code.
11.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF CHECKMATE
The obligations of Checkmate to effect the Transactions is also subject to
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES
The representations and warranties of IVI contained in this Agreement
shall be true and correct in all material respects (except for such
representations and warranties which are qualified as to materiality which
shall be true and correct in all respects) on and as of the Effective Date,
except for
(i) changes contemplated by this Agreement, or
(ii) those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such
date),
and Checkmate shall have received a certificate to such effect signed on
behalf of IVI by the Chief Executive Officer and the Chief Financial Officer
of IVI;
(b) AGREEMENTS AND COVENANTS
54
<PAGE>
IVI, Newco and Merger Sub shall have performed or complied in all
material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the
Effective Date, and Checkmate shall have received a certificate to such
effect signed by the Chief Executive Officer and the Chief Financial Officer
of IVI and with respect to Newco and Merger Sub, by a director or officer of
such corporations;
(c) CONSENTS OBTAINED
All material Approvals required to be obtained or made by IVI for the
authorization, execution and delivery of this Agreement and the consummation
by them of the transactions contemplated hereby shall have been obtained and
made by IVI;
(d) GOVERNMENTAL ACTIONS
There shall not have been instituted, pending or threatened any action
or proceeding (or any investigation or other inquiry that might result in
such an action or proceeding) by any governmental entity before any
governmental entity, nor shall there be in effect any Order of any
governmental entity, in either case, seeking to prohibit or limit Checkmate
from exercising all material rights and privileges pertaining to the
ownership or operation by Checkmate or any of its subsidiaries of all or a
material portion of the business or properties of Checkmate or any of its
subsidiaries, or seeking to compel Checkmate or any of its subsidiaries to
dispose of or hold separate all or any material portion of the business or
properties of Checkmate or any of its subsidiaries, as a result of the
Transactions;
(e) MATERIAL ADVERSE CHANGE
Since the date of this Agreement, there shall have been no change,
occurrence or circumstance in the business, results of operations or
financial condition of IVI or any subsidiary of IVI having a Material
Adverse Effect;
(f) ACCOUNTANTS' POOLING LETTERS
Checkmate shall have received a letter, dated as of the date hereof, in
form and substance reasonably acceptable to such party, from Ernst & Young
to the effect that such firm is not aware of any matters relating to
Checkmate and its subsidiaries which would preclude the Transactions from
qualifying for pooling-of-interests accounting treatment. Checkmate also
shall have received a letter, dated as of the Effective Date, in form and
substance reasonably acceptable to such party, from Coopers & Lybrand to the
effect that the Transactions qualify for pooling-of-interests accounting
treatment;
(g) AFFILIATE AGREEMENTS
Checkmate shall have received from each person who is identified in the
IVI Affiliate Letter as an "affiliate" of IVI an IVI Affiliate Agreement,
and each such IVI Affiliate Agreement shall be in full force and effect.
(h) OPINION OF IVI COUNSEL
Checkmate shall have received from Meighen Demers, counsel to IVI, an
opinion that the Arrangement is effective under Ontario Law, in form and
substance reasonably satisfactory to Checkmate and its counsel; and
(i) TAX OPINION
Checkmate shall have received an opinion in form and substance
satisfactory to Checkmate of Alston & Bird, counsel for Checkmate, to the
effect that the Merger will be generally treated for U.S. federal income tax
purposes as a tax-free reorganization under Section 368(a) of the Code.
55
<PAGE>
ARTICLE 12.00--TERMINATION
12.1 TERMINATION
This Agreement may be terminated at any time prior to the Effective Date,
notwithstanding approval thereof by the shareholders of IVI or Checkmate:
(a) by mutual written consent duly authorized by the Boards of Directors
of IVI and Checkmate; or
(b) by either IVI or Checkmate if the Transactions shall not have been
consummated by July 31, 1998 (PROVIDED, THAT, the right to terminate this
Agreement under this Section 12.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Transactions to occur on or
before such date); or
(c) by either IVI or Checkmate if a court of competent jurisdiction or
other governmental entity shall have issued a non-appealable final Order or
taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Arrangement or the
Merger; or
(d) by either IVI or Checkmate, if, at either of the IVI Shareholders'
Meeting (including any adjournment or postponement thereof) or the Checkmate
Shareholders' Meeting (including, any adjournment or postponement thereof),
the requisite affirmative vote of the shareholders of IVI or Checkmate, as
the case may be, shall not have been obtained; or
(e) by either Company if
(i) the Board of Directors of the other Company shall withdraw,
modify or change its recommendation of this Agreement or the Transactions
in a manner adverse to the other party or shall have resolved to do so or
shall have failed by June 15 , 1998 to call the IVI Shareholders' Meeting
or the Checkmate Shareholders' Meeting, as the case may be; or
(ii) the Board of Directors of the other Company shall have taken a
"neutral" position with respect to (or shall have failed to reject as
inadequate, or shall have failed to reaffirm its recommendation of this
Agreement and the Transactions within 10 business days after the public
announcement or commencement of) an Acquisition Proposal; or
(f) by either IVI or Checkmate, upon a breach of any representation,
warranty, covenant or agreement on the part of Checkmate or IVI,
respectively, set forth in this Agreement or if any representation or
warranty of Checkmate or IVI, respectively, shall have become untrue, in
either case, such that the conditions set forth in Section 11.2(a) or
11.2(b), or Section 11.3(a) or 11.3(b), would not be satisfied (a
"Terminating Breach"),
PROVIDED, THAT, if such Terminating Breach is curable prior to the
expiration of 30 days from its occurrence (but in no event later than July
31, 1998) by Checkmate or IVI, as the case may be, through the exercise of
its reasonable best efforts and for so long as Checkmate or IVI, as the case
may be, continues to exercise such reasonable best efforts, neither
Checkmate nor IVI, respectively, may terminate this Agreement under this
Section 12.1(f) until the earlier of July 31, 1998 or the expiration of such
30-day period without such Terminating Breach having been cured; or
(g) Either Company may terminate this Agreement by written notice to the
other Company at any time prior to the Effective Time, provided that a
person has made a Superior Proposal to such Company, provided that the other
Company does not make, within five business days of the aforesaid notice, an
offer that the Board of Directors of the Company subject to such Superior
Proposal believes, in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation, taking into account
all the terms and conditions of the Superior Proposal, including any
break-up fees, expense reimbursement provisions and conditions to
consummation) is at least as favorable, from a financial point of view, to
the shareholders of such Company as such Superior
56
<PAGE>
Proposal and that the funds or other consideration necessary for such offer
are reasonably likely to be available; or
(h) Either Company may terminate this Agreement by written notice to the
other Company if prior to the Effective Time the Board of Directors of such
Company shall have withdrawn or modified or amended, in a manner adverse to
the other Company, its approval or recommendation of this Agreement, the
Arrangement or the Merger or its recommendation that the shareholders of
such Company adopt and approve this Agreement, the Arrangement or the Merger
in order to permit such Company to execute a definitive agreement providing
for the consummation of a Superior Proposal with respect to such Company,
provided that such Company shall be in compliance with the terms of Section
10.2.
12.2 EFFECT OF TERMINATION
In the event of the termination of this Agreement pursuant to Section 12.1,
this Agreement shall forthwith become void and there shall be no Liability on
the part of any party hereto or any of its affiliates, directors, officers or
shareholders except
(i) as set forth in Section 10.2, Section 12.3 and the second
sentence of Section 13.1 hereof, and
(ii) nothing herein shall relieve any party from Liability for any
willful breach hereof.
12.3 FEES AND EXPENSES
Except as otherwise set forth in Section 10.2, each of IVI and Checkmate
shall be responsible for the fees and expenses of its own legal counsel,
accountants, investment bankers and other professional advisors in connection
with this Agreement and the Transactions, including, without limitation, the
Registration Statement, Proxy Statement/Prospectus and the Prospectus. All fees
and expenses incurred in connection with this Agreement and the Transactions by
Newco and Merger Sub, including, without limitation, fees and expenses incurred
with respect to the incorporation and organization of each of them, registration
fees and filing fees paid with respect to the Registration Statement or the
Prospectus, and printing costs incurred with respect to the Registration
Statement, Proxy Statement/Prospectus and the Prospectus shall be shared on an
equal basis by IVI and Checkmate, whether or not the Transactions are
consummated.
ARTICLE 13.00--GENERAL PROVISIONS
13.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
Except as otherwise provided in this Section 13.1, the representations,
warranties and agreements of each party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any other party hereto, any person controlling any such party or any of their
officers or directors, whether prior to or after the execution of this
Agreement. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Date or upon the termination of this Agreement
pursuant to Section 12.1, as the case may be, except that the agreements set
forth in Sections 5.10, 5.12, 5.23 and 5.25 shall survive the Effective Date
indefinitely and those set forth in Sections 5.8, 10.2 and 12.3 shall survive
termination indefinitely. The Confidentiality/Standstill Agreement shall survive
termination of this Agreement as provided therein.
13.2 NOTICES
All notices and other communications given or made pursuant hereto shall be
in writing and shall be deemed to have been duly given or made as of the date
delivered, if delivered personally, three days after being sent by registered or
certified mail (postage prepaid, return receipt requested), one day after
dispatch by recognized overnight courier (provided delivery is confirmed by the
courier), and upon
57
<PAGE>
transmission by telecopy, confirmed received, to the parties at the following
addresses (or at such other address for a party as shall be specified by such
party in a notice pursuant to this Section 13.2):
(a) If to IVI:
<TABLE>
<S> <C>
International Verifact Inc.
79 Torbarrie Road
Toronto, Ontario M3L 1G5
Telecopier No.: (416) 245-9896
Attention: L. Barry Thomson
President and CEO
With a copy to:
Meighen Demers
Merrill Lynch Canada Tower
200 King Street West
Suite 1100
Toronto, Ontario
Canada M5H 3T4
Telecopier No.: (416) 977-5239
Attention: Mark A. Convery
And to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
46th Floor
New York, NY
U.S.A. 10178
Telecopier No.: (212) 309-6273
Attention: David G. Nichols, Jr.
</TABLE>
(a) If to Checkmate:
<TABLE>
<S> <C>
Checkmate Electronics, Inc.
1003 Mansell Road
Roswell, Georgia
U.S.A. 30076
Telecopier No.: (770) 594-6019
Attention: John C. Neubert
With a copy to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia
U.S.A. 3039-3424
Telecopier No.: (404) 881-4777
Attention: M. Hill Jeffries
</TABLE>
58
<PAGE>
13.3 AMENDMENT
This Agreement may be amended by the parties hereto by action taken by or on
behalf of their respective Boards of Directors at any time prior to the
Effective Date;
PROVIDED, HOWEVER, that, after approval of the matters put before the
shareholders of Checkmate or the shareholders of IVI, no amendment may be made
which by any Law requires further approval by such shareholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
13.4 WAIVER
At any time prior to the Effective Date, any party hereto may with respect
to any other party hereto
(a) extend the time for the performance of any of the obligations or
other acts,
(b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions contained
herein.
Any such extension or waiver shall be valid if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
13.5 HEADINGS
The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
13.6 SEVERABILITY
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the extent possible.
13.7 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement and supersedes all prior
agreements and undertakings (other than the Confidentiality/Standstill
Agreement), both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and, except as otherwise expressly provided
herein, is not intended to confer upon any other person any rights or remedies
hereunder.
13.8 ASSIGNMENT
None of the parties hereto may assign any of its rights or obligations
hereunder without the prior written consent of the other parties hereto.
13.9 PARTIES IN INTEREST
This Agreement shall be binding upon and enure solely to the benefit of each
party hereto, and nothing in this Agreement, express or implied, is intended to
or shall confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, other than
59
<PAGE>
Section 5.12 (which is intended to be for the benefit of the parties indemnified
therein and may be enforced by such parties).
13.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE
No failure or delay on the part of any party hereto in the exercise of any
right hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
13.11 GOVERNING LAW
This Agreement (for purposes of Section 13.16 or otherwise) shall be
governed by and construed in accordance with the laws of the Province of Ontario
and the federal laws of Canada applicable therein, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Subject to Section 13.16, each of the parties submits to the jurisdiction of the
courts of the Province of Ontario to hear all actions, suits and proceedings
arising in connection with this Agreement arising from the enforcement of
arbitration judgments made pursuant to Section 13.16. Checkmate hereby appoints
Cassels, Brock & Blackwell as its agent for service of process in respects of
all actions, suits and proceedings in the courts of Ontario in connection with
this Agreement.
13.12 COUNSEL FEE
In the event of any Litigation by any party against the other for specific
performance or damages for breach of this Agreement which results in a final
judgment not subject to further appeal by one of the parties, the party against
whom the judgment is entered shall pay to the party in whose favour the judgment
is entered (the "successful party") all of the successful party's counsel fees
and expenses in connection with the prosecution or defence of the action,
including in respect of investigations, depositions and discoveries in
connection therewith (and including, in connection with any litigation in a
Canadian court, costs on a solicitor and his own client basis).
13.13 COUNTERPARTS
This Agreement may be executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
13.14 WAIVER OF JURY TRIAL
Each of IVI and Checkmate hereby irrevocably waives, to the fullest extent
permitted by law, all rights to trial by jury in any action, proceeding, or
counterclaim (whether based upon contract, tort or otherwise) arising out of or
relating to this agreement or any of the transactions contemplated hereby.
13.15 U.S. CURRENCY
Except as otherwise expressly stated, all dollar amounts referred to in this
Agreement are in United States currency.
13.16 ARBITRATION
(a) In the event of any dispute, claim, question or difference arising
between IVI and Checkmate in respect of the provisions, the subject matter,
the interpretation, or the effect of this Agreement or any breach hereof,
the parties shall use their best endeavors to settle such dispute, claim,
question or
60
<PAGE>
difference. To this effect the party which raises the concern shall give
notice in writing to the other of the concern and the reasons therefor and
its proposal for resolution. Thereafter, they shall consult and negotiate
with each other, in good faith and understanding of their mutual interests,
to reach a just and equitable solution satisfactory to both parties.
(b) Except as is expressly otherwise provided in this Agreement, if the
parties do not reach a solution pursuant to Section 13.16(a) within a period
of 30 days from the written notice contemplated in Section 13.16(a), then
upon written notice by either party to the other, the dispute, claim,
question or difference shall be finally settled by arbitration in accordance
with the American Arbitration Association Rules for the conduct of
arbitrations in effect at the date of commencement of such arbitration,
based upon the following:
(i) the arbitration tribunal shall consist of one arbitrator
appointed by each of the parties who is qualified by education and
training to pass upon the particular matter to be decided, together with
a third arbitrator appointed by the first two-selected arbitrators;
(ii) the arbitrators shall be instructed that time is of the essence
in proceeding with their determination of any dispute, claim, question or
difference and, in any event, the arbitration award must be rendered
within 30 days of the submission of such dispute to arbitration;
(iii) the arbitration shall take place in the State of Delaware;
(iv) the arbitration award shall be given in writing and shall be
final and binding on the parties, not subject to any appeal, and shall
deal with the question of costs of arbitration and all matters related
thereto; and
(v) judgment upon the award rendered may be entered in any court
having jurisdiction, or, application may be made to such court for a
judicial recognition of the award or an order of enforcement thereof, as
the case may be.
61
<PAGE>
IN WITNESS WHEREOF, IVI, Checkmate, Newco and Merger Sub have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
<TABLE>
<S> <C> <C>
INTERNATIONAL VERIFACT INC.
Per: /s/ L. BARRY THOMSON
-----------------------------------------
Name: L. Barry Thomson
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
CHECKMATE ELECTRONICS, INC.
Per: /s/ J. STANFORD SPENCE
-----------------------------------------
Name: J. Stanford Spence
Title: CHAIRMAN AND CEO
IVI CHECKMATE CORP.
Per: /s/ L. BARRY THOMSON
-----------------------------------------
Name: L. Barry Thomson
Title: PRESIDENT AND CEO
FUTURE MERGER CORPORATION
Per: /s/ J. STANFORD SPENCE
-----------------------------------------
Name: J. Stanford Spence
Title: CHAIRMAN
</TABLE>
62
<PAGE>
SCHEDULE "A"
SCHEDULE OF CERTAIN DEFINITIONS
Where used in this Agreement, unless there is something in the context or
the subject matter inconsistent therewith, the following terms shall have the
following meanings, respectively:
<TABLE>
<S> <C>
(a) "Acquisition Proposals" shall bear the meaning ascribed to it in Section
10.2(a);
(b) "Affiliate Agreement" shall bear the meaning ascribed to it in Section 5.11;
(c) "Affiliate Letter" shall bear the meaning ascribed to it in Section 5.11;
(d) "affiliates" means a person that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with, the
first-mentioned person; including, without limitation, any partnership or joint
venture in which Checkmate or IVI, as the case may be, (either along, or through
or together with any other subsidiary) has, directly or indirectly, an equity
interest of 10 percent or more;
(e) "Agreement", "hereof", "herein", "hereunder", and similar expressions refer to
this Agreement and the schedules and exhibits hereto and not to any particular
article, section, paragraph, clause or other portion hereof and include any
agreement or instrument supplementary or ancillary hereto;
(f) "Approvals" shall bear the meaning ascribed to it in Section 6.1;
(g) "Arrangement" shall bear the meaning ascribed to it in the recitals;
(h) "business day" means any day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of Atlanta, Georgia and Toronto,
Ontario;
(i) "Call Rights" shall bear the meaning ascribed to it in the recitals;
(j) "CBCA" shall mean the CANADA BUSINESS CORPORATIONS ACT, as amended;
(k) "Checkmate Balance Sheet" shall bear the meaning ascribed to it in Section 7.9;
(l) "Checkmate Common Shares" shall bear the meaning ascribed to in the recitals;
(m) "Checkmate Disclosure Schedule" shall bear the meaning ascribed to it in Section
7.1;
(n) "Checkmate Dissenting Shares" shall bear the meaning ascribed to it in Section
3.8;
(o) "Checkmate Employee Plan" shall bear the meaning ascribed to it in Section 7.11;
(p) "Checkmate Exchange Ratio" shall bear the meaning ascribed to it in Section
3.4(a)(ii);
(q) "Checkmate Intellectual Property Rights" shall bear the meaning ascribed to it
in Section 7.20;
(r) "Checkmate Option" shall bear the meaning ascribed to it in Section 5.10(a);
(s) "Checkmate Proxy Statement" shall bear the meaning ascribed to it in Section
5.7(a);
(t) "Checkmate SEC Documents" shall bear the meaning ascribed to it in Section
7.7(a);
(u) "Checkmate Share" shall bear the meaning ascribed to it in the recitals;
(v) "Checkmate Shareholder Approval" shall bear the meaning ascribed to it in
Section 5.7(a);
(w) "Checkmate Shareholders' Meeting" shall bear the meaning ascribed to it in
Section 5.7(a);
(x) "Checkmate Stock Option Plans" shall bear the meaning ascribed to it in Section
5.10(a);
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(y) "Checkmate Third Party Intellectual Property Rights" shall bear the meaning
ascribed to it in Section 7.20;
(z) "Closing" shall bear the meaning ascribed to it in Section 5.1;
(aa) "Code" shall mean the United States Internal Revenue Code of 1986, as amended;
(bb) "Company" shall mean IVI or Checkmate;
(cc) "Confidentiality/Standstill Agreement" shall bear the meaning ascribed to it in
Section 5.8;
(dd) "Constituent Corporations" shall bear the meaning ascribed to it in Section 3.2;
(ee) "Contracts" means any written or oral agreement, arrangement, authorization,
commitment, contract, indenture, instrument, lease, note, bond, mortgage,
license, obligation, plan, practice, restriction, understanding or undertaking
of any kind or character, or other document to which any person is a party or
that is binding on any person or its equity securities (including capital
stock), properties or business;
(ff) "control" (including the terms "controlled by" and "under common control with")
means the possession, directly or indirectly or as trustee or executor, of the
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of stock, as trustee or executor, by
Contract or credit arrangement or otherwise;
(gg) "Court" shall bear the meaning ascribed to it in Section 2.1 of this Agreement;
(hh) "default or violation" means
(i) any breach, violation or default,
(ii) any occurrence of any event that with the passage of time or the giving
of notice or both would constitute a breach, violation or default, or
(iii) any occurrence of any event that with or without the passage of time
or the giving of notice would give rise to a right to terminate or revoke,
change the current terms, or renegotiate, or to accelerate, increase,
or impose any Liability;
(ii) "Delaware Law" means Delaware General Corporation Law, as amended;
(jj) "Director" means the director appointed under Section 260 of the CBCA;
(kk) "Effective Date" shall bear the meaning ascribed to it in Section 2.1;
(ll) "Effective Time" shall bear the meaning ascribed to it in Section 2.1;
(mm) "Environmental Laws" shall bear the meaning ascribed to it in Section 6.17;
(nn) "ERISA" shall mean the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, as
amended;
(oo) "Exchange Act" means the SECURITIES EXCHANGE ACT OF 1934, as amended;
(pp) "Exchange Agent" shall bear the meaning ascribed it in Section 3.6;
(qq) "Exchange Rights" shall bear the meaning ascribed to it in the recitals;
(rr) "Exchangeable Shares" shall bear the meaning ascribed to it in Section 2.1(a);
(ss) "Final Order" shall bear the meaning ascribed to it in Section 2.1;
(tt) "Form S-3" shall bear the meaning ascribed to it in Section 5.7(d);
(uu) "GAAP" shall bear the meaning ascribed to it in the recitals;
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
(vv) "Georgia Certificate of Merger" shall bear the meaning ascribed to it in Section
3.1(b);
(ww) "Georgia Law" means the Georgia Business Corporations Code, as amended;
(xx) "governmental entity" shall bear the meaning ascribed to it in Section 6.5(c);
(yy) "hazardous substances" shall bear the meaning ascribed to it in Section 6.17(d);
(zz) "HSR Act" means the HART-SCOTT-RODINO ANTI-TRUST IMPROVEMENTS ACT OF 1976, as
amended;
(aaa) "Indemnified Parties" shall bear the meaning ascribed to it in Section 5.12(b);
(bbb) "Ingenico" means Ingenico, S.A., a French corporation;
(ccc) "IVI Balance Sheet" shall bear the meaning ascribed to it in Section 6.9;
(ddd) "IVI Common Shares" shall bear the meaning ascribed to it in the recitals;
(eee) "IVI Disclosure Schedule" shall bear the meaning ascribed to it in Section 6.1;
(fff) "IVI Dissenting Shares" shall bear the meaning ascribed to it in Section 2.4;
(ggg) "IVI Employee Plan" shall bear the meaning ascribed to it in Section 6.11;
(hhh) "IVI Exchange Ratio" shall bear the meaning ascribed to it in the recitals;
(iii) "IVI Intellectual Property Rights" shall bear the meaning ascribed to it in
Section 6.20;
(jjj) "IVI Option" shall bear the meaning ascribed to it in Section 5.10(a);
(kkk) "IVI Option Plan" shall bear the meaning ascribed to it in Section 5.10(a);
(lll) "IVI OSC Reports" shall bear the meaning ascribed to it in Section 6.7(a);
(mmm) "IVI Proxy Statement" shall bear the meaning ascribed to it in Section 5.7(b);
(nnn) "IVI SEC Documents" shall bear the meaning ascribed to it in Section 6.7(b);
(ooo) "IVI Shareholders' Meeting" shall bear the meaning ascribed to it in Section
5.7(b);
(ppp) "IVI Third Party Intellectual Property Rights" shall bear the meaning ascribed
to it in Section 6.20;
(qqq) "Interim Order" shall bear the meaning ascribed to it in Section 2.1;
(rrr) "IRS" shall mean the United States Internal Revenue Service;
(sss) "ISOs" shall bear the meaning ascribed to it in Section 5.10(b);
(ttt) "ITA" shall mean the INCOME TAX ACT (Canada), as amended;
(uuu) "knowledge of Checkmate" or "Checkmate's knowledge" or like phrases shall mean
only the actual knowledge, information and belief of J. Stanford Spence, Gregory
A. Lewis and John C. Neubert, after, in all cases, reviewing all relevant
records and making due enquiries regarding the relevant matter;
(vvv) "knowledge of IVI" or "IVI's knowledge" or like phrases shall mean only the
actual knowledge, information and belief of George Whitton, L. Barry Thomson and
Peter Henry, after, in all cases, reviewing all relevant records and making due
enquiries regarding the relevant matter;
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
(www) "Law" means any code, law, ordinance, regulation, reporting or licensing
requirement, rule, statute or similar requirement applicable to a person or its
properties, Liabilities or business;
(xxx) "Liabilities" means any direct or indirect, primary or secondary, liability,
indebtedness, obligation, penalty, cost or expense (including costs of
investigation, collection and defence), claim, deficiency, guaranty or
endorsement of or by any person of any type, whether accrued, absolute or
contingent, liquidated or unliquidated, matured or unmatured, or otherwise;
(yyy) "Liens" means any conditional sale agreement, default of title, easement,
encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge,
reservation, restriction, security interest, title retention or other security
arrangement, or any adverse right or interest, charge, or claim of any nature
whatsoever of, on, or with respect to any property or property interest, other
than Liens for current property Taxes not yet due and payable;
(zzz) "Litigation" shall bear the meaning ascribed to it in Section 6.10;
(aaaa) "Merger" shall bear the meaning ascribed to it in the recitals;
(bbbb) "Merger Consideration" shall bear the meaning ascribed to it in Section 3.4(c);
(cccc) "NASD" means the National Association of Securities Dealers, Inc.;
(dddd) "Newco Common Stock" shall bear the meaning ascribed to it in the recitals;
(eeee) "Newco Preferred Stock" shall bear the meaning ascribed to it in Section 2.1(b);
(ffff) "Newco Special Voting Stock" means the preferred stock contemplated by Exhibit
C;
(gggg) "NTN" means National Transaction Network, Inc., a Delaware corporation;
(hhhh) "Order" means any administrative decision or award, decree, injunction,
judgment, order, quasi-judicial decision or award, ruling, or writ of any
governmental entity;
(iiii) "OSA" shall mean the SECURITIES ACT (Ontario);
(jjjj) "OSC" means the Ontario Securities Commission;
(kkkk) "Participation Right" shall bear the meaning ascribed to it in Section 6.3(iv);
(llll) "Person" means an individual, corporation, partnership, association, trust,
unincorporated organization, other entity or group (to the extent such group is
deemed a "person" under Section 13(d)(3) of the Exchange Act);
(mmmm) "Plan of Arrangement" shall bear the meaning ascribed to it in the recitals;
(nnnn) "properties" of Checkmate, IVI, Newco or any other person means all of the
assets, properties, businesses and rights of such person of every kind, nature,
character and description, whether real, personal or mixed, tangible or
intangible, accrued or contingent, or otherwise relating to or utilized in such
person's business, directly or indirectly, in whole or in part, whether or not
carried on the books and records of such person, and whether or not owned in the
name of such person or any affiliate of such person and wherever located;
(oooo) "Prospectus" shall bear the meaning ascribed to it in Section 5.7(e);
(pppp) "Proxy Statements" shall bear the meaning ascribed to it in Section 5.7(b);
(qqqq) "Proxy Statement/Prospectus" shall bear the meaning ascribed to it in Section
6.13(ii);
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
(rrrr) "Registration Statement" shall bear the meaning ascribed to it in Section
5.7(c);
(ssss) "Rights" means all arrangements, calls, commitments, Contracts, options, rights
to subscribe to, scrip, understandings, warrants, or other binding obligations
of any character whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of the capital stock or other types of equity
securities of a person (or an affiliate or successor of such person) or by which
a person is or may be bound to issue additional shares of its capital stock,
other types of equity securities or other Rights;
(tttt) "SEC" shall mean the United States Securities and Exchange Commission;
(uuuu) "Securities Act" means the SECURITIES ACT OF 1933, as amended;
(vvvv) "Series A Preferred Share" shall bear the meaning ascribed to it in Section
2.1(a);
(wwww) "Share" shall bear the meaning ascribed to it in Section 3.4(a)(ii);
(xxxx) "Shareholder Protection Rights Agreement" shall bear the meaning ascribed to it
in Section 5.22;
(yyyy) "State Takeover Laws" shall bear the meaning ascribed to it in Section 6.5(c);
(zzzz) "Stock Option Plans" shall bear the meaning ascribed to it in Section 5.10(a);
(aaaaa) "Subsequent Dividend" shall bear the meaning ascribed to it in Section 3.4(b);
(bbbbb) "subsidiary" or "subsidiaries" of Checkmate, IVI, Newco or any other person
means any corporation, partnership, joint venture or other legal entity of which
Checkmate, IVI, Newco or such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or indirectly,
more than 50% of the stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such corporation, partnership, joint venture or other legal
entity;
(ccccc) "Superior Proposal" shall bear the meaning ascribed to it in Section 10.2(c);
(ddddd) "Support Agreement" shall bear the meaning ascribed to it in Section 2.3;
(eeeee) "Surviving Corporation" shall bear the meaning ascribed to it in Section 3.1(a);
(fffff) "Tax" or "Taxes" shall bear the meaning ascribed to it in Section 6.16(a);
(eeeee) "Tax Returns" shall bear the meaning ascribed to it in Section 6.16(a);
(ggggg) "Terminating Breach" shall bear the meaning ascribed to it in Section 12.1(f);
(hhhhh) "Third Party" shall bear the meaning ascribed to it in Section 10.2(c);
(iiiii) "Transactions" shall mean the Arrangement and the Merger;
(jjjjj) "Trustee" shall bear the meaning ascribed to it in Section 2.2;
(kkkkk) "TSE" means The Toronto Stock Exchange;
(lllll) "Voting Rights" shall bear the meaning ascribed to it in the recitals;
(mmmmm) "Voting Trust Agreement" shall bear the meaning ascribed to it in Section 2.2;
(nnnnn) "Year 2000 Compliant" means that the product, software or system in question:
(i) will correctly and unambiguously process date information at all times,
including as the years 1999 and 2000 are approached and reached;
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
(ii) will not suffer any abends, aborts, improper operation or other
interruptions in operation as a result of the approach or reaching of any
particular date or the improper processing of any date. "Processing" of
date information includes, but is not limited to, accepting input of
dates without ambiguity, outputting all dates in an unambiguous form,
and performing calculations, comparisons or operations or taking
actions or making decisions using dates, portions of dates, or time
periods. The concept of Year 2000 Compliance includes all issues
relating to the handling of dates or time periods, including the
processing of the leap year that will occur in the year 2000.
</TABLE>
6
<PAGE>
Exhibit 10.1(e)
NINTH AMENDMENT TO LEASE AGREEMENT
THIS NINTH AMENDMENT TO LEASE AGREEMENT (hereinafter referred to as the
"Ninth Amendment") is made as of the 18th day of August 1997, by and between
WEEKS REALTY, L.P. (hereinafter referred to as "Landlord") and CHECKMATE
ELECTRONICS, INC. (hereinafter referred to as "Tenant").
WITNESSETH:
WHEREAS, ASC North Fulton Associates Joint Venture and Tenant entered into
that certain Lease Agreement dated July 17, 1990, as amended by that certain
First Amendment to Lease dated December 20, 1990, as amended by that certain
Second Amendment to Lease dated October 15, 1992, as amended by that certain
Third Amendment to Lease April 30, 1993, as amended by that certain Fourth
Amendment to Lease July 15, 1993, as amended by that certain Fifth Amendment to
Lease dated August 16, 1994, as amended by that certain Sixth Amendment to Lease
dated February 20, 1995, as amended by that certain Seventh Amendment to Lease
dated January 18, 1996, and as further amended by that certain Eighth Amendment
to Lease dated April 1, 1996 (hereinafter collectively referred to as the
"Agreement") for the lease of 49,168 square feet of office/warehouse space at
1003, 1009, and 1011 Mansell Road, Roswell, Georgia which is more particularly
described in the Agreement and certain easements, rights and privileges
appurtenant thereto (hereinafter referred to as the "Leased Premises"); and
WHEREAS, Weeks Realty, L.P. succeeded to the interest of the landlord under
the Agreement and is the Landlord with respect to the Leased Premises; and
WHEREAS, the Agreement will expire by its terms on September 30, 1997 and
Tenant desires to enter into this Ninth Amendment in order to exercise its
option to renew the term of the Agreement;
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid by
Landlord and Tenant to one another, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Landlord and Tenant, Landlord and Tenant amend the Agreement as follows:
1. The Agreement is hereby extended for an additional two (2) year term
effective October 1, 1997 and continuing until midnight on September 30, 1999 on
all of the same terms, covenants and conditions as the original Agreement with
the same base year except that the base rental shall be as set forth below:
1003 Mansell Road, Suite A-1 (4,200 Square Feet):
- -------------------------------------------------
October 1, 1997 - September 30, 1999 $2,782.50/month $33,390.00/year
1003 Mansell Road, Suite A-A (4,430 Square Feet):
- -------------------------------------------------
October 1, 1997 - September 30, 1999 $2,934.88/month $35,218.50/year
1009 Mansell Road, Suite D (11,200 Square Feet):
- ------------------------------------------------
October 1, 1997 - September 30, 1999 $7,420.00/month $89,040.00/year
1009 Mansell Road, Suite F (2,350 Square Feet):
- ------------------------------------------------
October 1, 1997 - September 30, 1999 $1,556.88/month $18,682.50/year
1009 Mansell Road, Suite G, J, K (11,466 Square Feet):
- -------------------------------------------------------
2
<PAGE>
October 1, 1997 - September 30, 1999 $7,596.23/month $91,154.70/year
1011 Mansell Road, Suite C (15,522 Square Feet):
- -------------------------------------------------
October 1, 1997 - September 30, 1999 $10,283.33/month $123,399.90/year
Such base rental shall be due on or before the first day of each calendar
month during the term together with any other additional rent as set forth in
the Agreement.
2. Tenant shall have the option to renew this Lease Agreement for one (1)
year term provided that Tenant gives written notice to Landlord of its intention
to renew at least one hundred eighty (180) days prior to the end of the then
current term thereof. Renewal shall be upon the same terms and conditions as
contained herein except that the annual base rental shall be the fair market
rental value (but in no event less than the current rental rate under the Lease)
which shall be determined as follows:
(a) Landlord and Tenant will have fifteen (15) days after Landlord
receives the renewal notice within which to agree on the then-fair market
rental value of the Leased Premises as defined in paragraph (c) below for
the renewal period. If they agree on the base monthly rent for the renewal
period within fifteen (15) days, they will amend this Lease by stating the
base monthly rental for the renewal period.
(b) If they are unable to agree on the base monthly rental for the renewal
period within fifteen (15) days, then the base monthly rental for the
renewal period will be the then-fair market rental value of the Leased
Premises as determined in accordance with paragraph (d) below.
(c) The "then-fair market rental value of the Leased Premises" means what
a Landlord under no compulsion to lease the Leased Premises and a Tenant
under no compulsion to lease the Leased Premises would determine as rents
for the renewal period, as of the commencement of the renewal period,
taking into consideration the uses permitted under this Lease, the quality,
size, design, and location of the Leased Premises, and the rent for
comparable buildings located in the vicinity of the Leased Premises. The
then-fair market rental value of the Leased Premises for the renewal period
will not be less than that provided during the initial term.
(d) Within seven (7) days after the expiration of the fifteen (15) day
period set forth in paragraph (b) above, Landlord and Tenant will each
appoint a real estate appraiser to appraise the then-fair market rental
value of the Leased Premises. The two appraisers will meet promptly and
attempt to set the then-fair market rental value of the Leased Premises.
If they are unable to agree within thirty (30) days, they will select a
third appraiser within ten (10) days to set the then fair market rental
value of the Leased Premises. Landlord and Tenant will bear one-half (1/2)
of the cost of appointing the third appraiser and of paying the third
appraiser's fee.
(e) Within thirty (30) days after the selection of the third appraiser, a
majority of the appraisers will set the then-fair market rental value of
the Leased Premises. If a majority of the appraisers are unable to set the
then-fair market rental value of the Leased Premises within thirty (30)
days after selection of the third appraiser, the three appraisals will be
averaged and the average will be the then-fair market rental value of the
Leased Premises.
(f) It is expressly understood that Tenant shall have no option to renew
this Lease for the renewal term if at the time of the attempted exercise of
such option or at the commencement of such renewal term this Lease is not
then in full force and effect or if Tenant is then in default of any terms
and conditions of this Lease.
3. Except as expressly modified by this Ninth Amendment, all provisions,
terms and conditions of the Agreement shall remain in full force and effect.
3
<PAGE>
4. In the event a provision of this Ninth Amendment conflicts with a
provision of the Agreement, the Ninth Amendment shall supersede and control.
5. All terms and phrases used herein shall have the same meaning as
assigned to them in the Agreement.
6. This Ninth Amendment shall not be of any legal effect or consequence
unless signed by Landlord and Tenant, and once signed by Landlord and Tenant it
shall be binding upon and inure to the benefit of Landlord, Tenant, and their
respective legal representatives, successors and assigns.
7. This Ninth Amendment has been executed and shall be construed under the
laws of the State of Georgia.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Ninth Amendment to be
executed under seal and delivered as of the day and year first above written.
LANDLORD:
Signed, sealed and delivered
in the presence of: WEEKS REALTY, L.P.,
a Georgia limited partnership
/s/ Kelly A. Kinneiry
- ---------------------
Witness By: Weeks GP Holdings, Inc.
a Georgia corporation,
/s/ Patricia L. Adams its sole general partner
- ---------------------
Notary Public
By: /s/ A. R. Weeks, Jr.
-------------------------
Name: A. R. Weeks, Jr.
------------------
Its: Chairman / CEO
-------------------
TENANT:
Signed, sealed and delivered CHECKMATE ELECTRONICS, INC.
in the presence of:
/s/ Brian Lane By: /s/ John J. Neubert
- --------------------- -------------------------
Witness Name: John J. Neubert
-----------------------
Its: COO / CFO / Senior Vice President
------------------------
/s/ Harold A. Clayton
- ---------------------
Notary Public
ATTEST:
By: /s/ Margaret Burkett
-------------------------
Name: Margaret Burkett
-------------------------
Its: Corporate Secretary
------------------------
(Corporate Seal)
5
<PAGE>
Exhibit 10.4(f)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
1st day of January, 1998, by and between Checkmate Electronics, Inc., a Georgia
corporation (hereinafter, the "Company"), and John J. Neubert (hereinafter,
"Executive").
BACKGROUND
The Company desires to engage Executive in the executive capacities set
forth herein, in accordance with the terms and conditions of this Agreement.
Executive is willing to serve as such in accordance with the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Effective Date. This Agreement is effective as of January 1, 1998
(the "Effective Date").
2. Employment. Executive is hereby employed on the Effective Date as
Executive Vice President and Chief Financial Officer of the Company.
Executive's responsibilities under this Agreement shall be in accordance with
the policies and objectives established by the Board of Directors of the Company
(the "Board") and shall be consistent with the responsibilities of similarly
situated executives of comparable companies in similar lines of business. In
his capacity as Executive Vice President and Chief Financial Officer of the
Company, Executive will report directly to the President and Chief Operating
Officer of the Company.
3. Employment Period. Unless earlier terminated herein in accordance
with Section 7 hereof, Executive's employment under this Agreement shall begin
on the Effective Date and extend for a period (the "Employment Period") ending
on the later of (i) the third anniversary of the Effective Date, or (ii) the
third anniversary of the effective date of that certain reorganization and
business combination among the Company, International Verifact, Inc. and IVI
Checkmate Corp. (the "Combination Transaction"); provided, however, that
commencing on the date two years after the Effective Date, and on each
anniversary of such date (such date and each anniversary thereof shall be
hereinafter referred to as the "Renewal Date"), unless previously terminated,
the Employment Period shall be automatically extended so as to terminate two
years from such Renewal Date, unless at least 30 days prior to the Renewal Date
the Company shall give notice to Executive that the Employment Period shall not
be so extended. Upon such notice, the Employment Period shall terminate upon
the expiration of the then-current term, including any prior extensions.
4. Extent of Service. During the Employment Period, and excluding any
periods of vacation and sick leave to which Executive is entitled, Executive
agrees to devote his business time, attention, skill and efforts exclusively to
the performance of his duties hereunder; provided, however, that it shall not be
a violation of this Agreement for Executive to (i) devote reasonable periods of
time to charitable and community activities, and/or (ii) manage personal
business interests and investments, so long as such activities do not interfere
with the performance of Executive's responsibilities under this Agreement.
6
<PAGE>
5. Compensation and Benefits.
(a) Base Salary. For calendar years 1998, 1999, and 2000,
respectively, the Company will pay to Executive a base salary in the amount of
$160,000, $175,000 and $190,000 per year ("Base Salary"), less normal
withholdings, payable in equal monthly or more frequent installments as are
customary under the Company's payroll practices from time to time. In each year
after the third year of the Employment Period, the Compensation Committee of the
Board shall review Executive's Base Salary annually and in its sole discretion,
subject to approval of the Board, may increase Executive's Base Salary from year
to year. The annual review of Executive's salary by the Board will consider,
among other things, Executive's own performance and the Company's performance.
(b) Performance Bonus. For calendar years 1998, 1999, and 2000, the
Chairman of the Board will establish and communicate to Executive certain
objectively determinable performance objectives for each quarter. Provided the
performance objectives are met in a given calendar quarter, the Company will pay
to Executive at the end of such quarter a performance bonus (the sum of such
quarterly bonuses being referred to herein as the "Annual Bonus") in the amount
of $15,000 (for calendar quarters in 1998), $15,000 (for calendar quarters in
1999), or $16,250 (for calendar quarters in 2000). In each subsequent year of
the Employment Period, the Compensation Committee of the Board shall review
Executive's Annual Bonus and in its sole discretion, subject to approval of the
Board, may increase Executive's Annual Bonus from year to year. The annual
review of Executive's bonus by the Board will consider, among other things,
Executive's own performance and the Company's performance.
(c) Incentive, Savings and Retirement Plans. During the Employment
Period, Executive shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable generally to
similarly situated officers of the Company and its affiliated companies, and on
the same basis as such other similarly situated officers.
(d) Welfare Benefit Plans. During the Employment Period, Executive
and Executive's family shall be eligible for participation in and shall receive
all benefits under welfare benefit plans, practices, policies and programs
provided by the Company and its affiliated companies (including, without
limitation, medical, disability, life, and accidental death insurance plans and
programs) to the extent applicable generally to similarly situated officers of
the Company and its affiliated companies.
(e) Expenses. During the Employment Period, Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
Executive in accordance with the policies, practices and procedures of the
Company and its affiliated companies to the extent applicable generally to other
similarly situated officers of the Company and its affiliated companies.
Without limiting the foregoing, Executive shall be entitled to reimbursement for
all reasonable travel and out-of-pocket expenses, including reasonable
operating, maintenance and insurance costs associated with one automobile to be
used in Company business-related purposes.
(f) Fringe Benefits. During the Employment Period, Executive shall
be entitled to fringe benefits in accordance with the plans, practices, programs
and policies of the Company and its affiliated companies in effect for similarly
situated officers of the Company and its affiliated companies. Without limiting
the foregoing, Executive shall be entitled to an automobile allowance of US $700
per month.
6. Change in Control. For the purposes of this Agreement, a "Change in
Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under
7
<PAGE>
the Exchange Act) of 25% or more of the combined voting power of the then
outstanding voting securities of the Company (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a Change of
Control: (A) any acquisition by a Person who is on the Effective Date the
beneficial owner of 25% or more of the Outstanding Company Voting
Securities, (B) any acquisition directly from the Company, (C) any
acquisition by the Company, (D) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (E) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A), (B)
and (C) of subsection (iii) of this definition; or
(ii) Individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the Effective Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and outstanding Company Voting Securities immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 25% or more of the combined voting power of the then
outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination, and (C) at least
a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination.
Notwithstanding the above definition, the Combination Transaction shall not
be deemed a Change in Control for purposes of this Agreement; provided, however,
that any stock options held by Executive on the date of the Combination
Transaction shall be governed by the terms of the applicable stock option
agreement(s) as to accelerated vesting related to the Combination Transaction.
After the effective date of the Combination Transaction, if any, the term "the
Company" as used in the above definition of Change in Control shall mean either
the Company or IVI Checkmate Corp.
7. Termination of Employment.
(a) Death, Retirement or Disability. Executive's employment shall
terminate automatically upon Executive's death or Retirement during the
Employment Period. For purposes of this Agreement, "Retirement" shall mean
normal retirement as defined in the Company's then-current
8
<PAGE>
retirement plan, or there is no such retirement plan, "Retirement" shall mean
voluntary termination after age 65 with ten years of service. If the Company
determines in good faith that the Disability of Executive has occurred during
the Employment Period (pursuant to the definition of Disability set forth
below), it may give to Executive written notice in accordance with this
Agreement of its intention to terminate Executive's employment. In such event,
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such written notice by Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, Executive shall
not have returned to full-time performance of Executive's duties. For purposes
of this Agreement, "Disability" shall mean a mental or physical disability as
determined by the Board in accordance with standards and procedures similar to
those under the Company's employee long-term disability plan, if any. At any
time that the Company does not maintain such a long-term disability plan,
Disability shall mean the inability of Executive, as determined by the Board, to
substantially perform the essential functions of his regular duties and
responsibilities due to a medically determinable physical or mental illness
which has lasted (or can reasonably be expected to last) for a period of six
consecutive months.
(b) Termination by the Company. The Company may terminate
Executive's employment during the Employment Period with or without Cause. For
purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of Executive to perform
substantially Executive's duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness, and specifically
excluding any failure by Executive, after reasonable efforts, to meet
performance expectations), after a written demand for substantial performance is
delivered to Executive by the Chief Executive Officer or the Board which
specifically identifies the manner in which such Board or the Chief Executive
Officer believes that Executive has not substantially performed Executive's
duties, or
(ii) the willful engaging by Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith or without reasonable belief that Executive's
action or omission was in the best interests of the Company. Any act, or
failure to act, based upon authority given pursuant to a resolution duly adopted
by the Board or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by Executive in good
faith and in the best interests of the Company. The termination of employment
of Executive shall not be deemed to be for Cause unless and until there shall
have been delivered to Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board of the Company (excluding Executive, if then a director) at a meeting of
such Board called and held for such purpose (after reasonable notice is provided
to Executive and Executive is given an opportunity, together with counsel, to be
heard before such Board), finding that, in the good faith opinion of such Board,
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(c) Termination by Executive. Executive's employment may be
terminated by Executive for Good Reason or no reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) without the written consent of Executive, the assignment to
Executive of any duties materially inconsistent with Executive's position
(including status, offices, titles and reporting requirements), authority,
duties or responsibilities as in effect on the Effective Date, or any other
action by the Company which results in a material diminution in such position,
authority, duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
Executive;
9
<PAGE>
(ii) a reduction by the Company in Executive's Base Salary,
Annual Bonus and benefits as in effect on the Effective Date or as the same may
be increased from time to time; or
(iii) any failure by the Company to comply with and satisfy
Section 13(b) of this Agreement; or
(d) Notice of Termination. Any termination by the Company for Cause,
or by Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with this Agreement. For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than 30 days after the giving
of such notice). The failure by Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of Executive or the Company,
respectively, hereunder or preclude Executive or the Company, respectively, from
asserting such fact or circumstance in enforcing Executive's or the Company's
rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
Executive's employment is terminated by the Company for Cause, or by Executive
for Good Reason, the date of receipt of the Notice of Termination or any later
date specified therein, as the case may be, (ii) if Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies Executive of such
termination and (iii) if Executive's employment is terminated by reason of
death, Retirement or Disability, the Date of Termination shall be the date of
death or Retirement of Executive or the Disability Effective Date, as the case
may be.
10
<PAGE>
8. Obligations of the Company upon Termination.
(a) Termination by Executive for Good Reason; Termination by the
Company Other Than for Cause, Death or Disability; Termination upon Expiration
of the Employment Term. If, during the Employment Period, the Company shall
terminate Executive's employment other than for Cause, death or Disability, or
Executive shall terminate employment for Good Reason within a period of 90 days
after the occurrence of the event giving rise to Good Reason, or if Executive's
employment terminates upon expiration of the Employment Term, then in
consideration of Executive's services rendered prior to such termination:
(i) the Company shall pay to Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) Executive's Base Salary through the Date
of Termination to the extent not theretofore paid, (2) the product of (x)
Executive's target Annual Bonus for the year in which the Date of
Termination occurs and (y) a fraction, the numerator of which is the number
of days in the current fiscal year through the Date of Termination, and the
denominator of which is 365, and (3) any compensation previously deferred
by Executive (together with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not theretofore paid
(the sum of the amounts described in clauses (1), (2) and (3) shall be
hereinafter referred to as the "Accrued Obligations"); and
B. the amount (the "Severance Payment") equal to the
present value (determined in accordance with Section 280G(d)(4) of the
Code) of the income stream represented by a continuation of Executive's
Base Salary and target Annual Bonus (in the progressive amounts for years
one, two and three of the Employment Period as scheduled in Sections 5(a)
and (b) hereof or as otherwise in effect for subsequent years) for a period
beginning on the Date of Termination and ending on the later of (1) the
last day of the scheduled Employment Period, or (2) twelve months from the
Date of Termination; provided, however, that if the Date of Termination
occurs within two years after a Change in Control, the minimum Severance
Payment shall be the amount equal to two times Executive's Base Salary and
Annual Bonus in effect for the year in which the Date of Termination
occurs; and
(ii) for three years after Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to Executive
and/or Executive's family at least equal to those which would have been provided
to them in accordance with the welfare plans, programs, practices and policies
described in Section 5(e) of this Agreement if Executive's employment had not
been terminated or, if more favorable to Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if Executive
becomes re-employed with another employer and is eligible to receive medical or
other welfare benefits under another employer provided plan, the medical and
other welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility ("Welfare
Benefits"); and
(iii) if the Date of Termination occurs within two years
after a Change in Control, then all Company stock options held by Executive on
the Date of Termination and not then vested shall become immediately vested and
exercisable as of the Date of Termination; and
(iv) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to Executive any other amounts or benefits required
to be paid or provided or which Executive is eligible to receive under any plan,
program, policy or practice or contract or agreement of the Company and its
affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits").
11
<PAGE>
(b) Death. If Executive's employment is terminated by reason of
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the date of death. With respect to the provision of Other Benefits,
the term Other Benefits as utilized in this Section 8(b) shall include, without
limitation, and Executive's estate and/or beneficiaries shall be entitled to
receive, benefits under such plans, programs, practices and policies relating to
death benefits, if any, as applicable generally to similarly situated officers
of the Company and its affiliated companies and their beneficiaries, and on the
same basis as such similarly situated officers and their beneficiaries.
(c) Disability. If Executive's employment is terminated by reason of
Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to Executive in a lump sum in cash within 30
days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 8(c) shall
include, without limitation, and Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits under such
plans, programs, practices and policies relating to disability, if any, as
applicable generally to similarly situated officers of the Company and its
affiliated companies and their families, and on the same basis as such similarly
situated officers and their families.
(d) Retirement. If Executive's employment is terminated by reason of
Executive's Retirement during the Employment Period, this Agreement shall
terminate without further obligations to Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to Executive in a lump sum in cash within 30
days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 8(d) shall
include, without limitation, and Executive shall be entitled after the Date of
Termination to receive, retirement and other benefits under such plans,
programs, practices and policies relating to retirement, if any, as applicable
generally to similarly situated officers of the Company and its affiliated
companies and their families, and on the same basis as such similarly situated
officers and their families.
(e) Cause or Voluntary Termination without Good Reason. If
Executive's employment shall be terminated for Cause during the Employment
Period, or if Executive voluntarily terminates employment during the Employment
Period without Good Reason, this Agreement shall terminate without further
obligations to Executive, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit Executive's continuing or Checkmate Electronics, Inc. participation in any
plan, program, policy or practice provided by the Company or any of its
affiliated companies and for which Executive may qualify, nor, subject to
Section 14(d), shall anything herein limit or otherwise affect such rights as
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which Executive
is otherwise entitled to receive under any plan, policy, practice or program of
or any contract or agreement with the Company or any of its affiliated companies
at or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
10. Limitation of Benefits in Certain Instances.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any benefit, payment or distribution by
the Company to or for the benefit of Executive (whether payable or distributable
pursuant to the terms of this Agreement or otherwise) (a "Payment") would, if
paid, be subject to the excise tax imposed by Section 4999 of the Code (the
"Excise Tax"), then
12
<PAGE>
the Payment shall be reduced to the extent necessary of avoid the imposition of
the Excise Tax. Executive may select the Payments to be limited or reduced.
(b) All determinations required to be made under this Section 10,
including whether an Excise Tax would otherwise be imposed and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm as may be designated by
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
receipt of notice from Executive that a Payment is due to be made, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting a Change of Control, Executive may appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any determination by the Accounting Firm shall be binding upon the
Company and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Payments hereunder will have been
unnecessarily limited by this Section 10 ("Underpayment"), consistent with the
calculations required to be made hereunder. The Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such Underpayment shall
be promptly paid by the Company to or for the benefit of Executive.
11. Costs of Enforcement. In any action taken in good faith relating to
the enforcement of this Agreement or any provision herein, Executive shall be
entitled to be paid any and all costs and expenses incurred by him in enforcing
or establishing his rights hereunder, including, without limitation, reasonable
attorneys' fees, whether suit be brought or not, and whether or not incurred in
trial, bankruptcy or appellate proceedings.
12. Representations and Warranties. Executive hereby represents and
warrants to the Company that Executive is not a party to, or otherwise subject
to, any covenant not to compete with any person or entity, and Executive's
execution of this Agreement and performance of his obligations hereunder will
not violate the terms or conditions of any contract or obligation, written or
oral, between Executive and any other person or entity.
13. Assignment and Successors.
(a) Executive. This Agreement is personal to Executive and without
the prior written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Executive's legal
representatives.
(b) The Company. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company (whether direct or indirect, by purchase, merger, consolidation
or otherwise) to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. As used in this Agreement, "the
Company" shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
14. Miscellaneous.
(a) Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the Checkmate Electronics,
13
<PAGE>
Inc. performance of any such term or condition or of any other term or condition
of this Agreement, unless such waiver is contained in a writing signed by the
party making the waiver.
(b) Severability. If any provision or covenant, or any part thereof,
of this Agreement should be held by any court to be invalid, illegal or
unenforceable, either in whole or in part, such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
the remaining provisions or covenants, or any part thereof, of this Agreement,
all of which shall remain in full force and effect.
(c) Other Agents. Nothing in this Agreement is to be interpreted as
limiting the Company from employing other personnel on such terms and conditions
as may be satisfactory to it.
(d) Entire Agreement. Except as provided herein, this Agreement
contains the entire agreement between the Company and Executive with respect to
the subject matter hereof, and it supersedes and invalidates any previous
agreements or contracts between them which relate to the subject matter hereof.
No representations, inducements, promises or agreements, oral or otherwise,
which are not embodied herein shall be of any force or effect.
(e) Governing Law. Except to the extent preempted by federal law,
and without regard to conflict of laws principles, the laws of the State of
Georgia shall govern this Agreement in all respects, whether as to its validity,
construction, capacity, performance or otherwise.
(f) Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or three days after mailing if mailed, first class,
certified mail, postage prepaid:
To Company: Checkmate Electronics, Inc.
1003 Mansell Road
Roswell, Georgia 30076
Facsimile No. (770) 594-6000
Attention: Chief Executive Officer
To Executive: John J. Neubert
1003 Mansell Road
Roswell, Georgia 30076
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
(g) Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto, which makes specific
reference to this Agreement; provided, however, that if, in the opinion of the
Corporation's accountants, any provision of this Agreement would preclude the
use of "pooling of interest" accounting treatment for a Change in Control
transaction that (1) would otherwise qualify for such accounting treatment, and
(2) is contingent upon qualifying for such accounting treatment, then Executive
and the Company agree to negotiate in good faith to amend this Agreement so that
it will not preclude the use of "pooling of interest" accounting treatment for
such Change in Control transaction.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Employment Agreement as of the date first above written.
CHECKMATE ELECTRONICS, INC.
By: /s/ J. Stanford Spence
----------------------
Title: Chairman of the Board
EXECUTIVE:
/s/ John J. Neubert
-------------------
John J. Neubert
15
<PAGE>
Exhibit 10.4(g)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
1st day of January, 1998, by and between Checkmate Electronics, Inc., a Georgia
corporation (hereinafter, the "Company"), and Gregory A. Lewis (hereinafter,
"Executive").
BACKGROUND
The Company desires to engage Executive in the executive capacities set
forth herein, in accordance with the terms and conditions of this Agreement.
Executive is willing to serve as such in accordance with the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Effective Date. This Agreement is effective as of January 1, 1998
(the "Effective Date").
2. Employment. Executive is hereby employed on the Effective Date as
President and Chief Operating Officer of the Company. Executive's
responsibilities under this Agreement shall be in accordance with the policies
and objectives established by the Board of Directors of the Company (the
"Board") and shall be consistent with the responsibilities of similarly situated
executives of comparable companies in similar lines of business. In his
capacity as President and Chief Operating Officer of the Company, Executive will
report directly to the Chairman and Chief Executive Officer of the Company.
3. Employment Period. Unless earlier terminated herein in accordance
with Section 7 hereof, Executive's employment under this Agreement shall begin
on the Effective Date and extend for a period (the "Employment Period") ending
on the later of (i) the third anniversary of the Effective Date, or (ii) the
third anniversary of the effective date of that certain reorganization and
business combination among the Company, International Verifact, Inc. and IVI
Checkmate Corp. (the "Combination Transaction"); provided, however, that
commencing on the date two years after the Effective Date, and on each
anniversary of such date (such date and each anniversary thereof shall be
hereinafter referred to as the "Renewal Date"), unless previously terminated,
the Employment Period shall be automatically extended so as to terminate two
years from such Renewal Date, unless at least 30 days prior to the Renewal Date
the Company shall give notice to Executive that the Employment Period shall not
be so extended. Upon such notice, the Employment Period shall terminate upon
the expiration of the then-current term, including any prior extensions.
4. Extent of Service. During the Employment Period, and excluding any
periods of vacation and sick leave to which Executive is entitled, Executive
agrees to devote his business time, attention, skill and efforts exclusively to
the performance of his duties hereunder; provided, however, that it shall not be
a violation of this Agreement for Executive to (i) devote reasonable periods of
time to charitable and community activities, and/or (ii) manage personal
business interests and investments, so long as such activities do not interfere
with the performance of Executive's responsibilities under this Agreement.
1
<PAGE>
5. Compensation and Benefits.
(a) Base Salary. For calendar years 1998, 1999, and 2000,
respectively, the Company will pay to Executive a base salary in the amount
of $240,000, $264,000 and $290,000 per year ("Base Salary"), less normal
withholdings, payable in equal monthly or more frequent installments as are
customary under the Company's payroll practices from time to time. In each
year after the third year of the Employment Period, the Compensation
Committee of the Board shall review Executive's Base Salary annually and in
its sole discretion, subject to approval of the Board, may increase
Executive's Base Salary from year to year. The annual review of Executive's
salary by the Board will consider, among other things, Executive's own
performance and the Company's performance.
(b) Performance Bonus. For calendar years 1998, 1999, and 2000, the
Chairman of the Board will establish and communicate to Executive certain
objectively determinable performance objectives for each quarter. Provided the
performance objectives are met in a given calendar quarter, the Company will pay
to Executive at the end of such quarter a performance bonus (the sum of such
quarterly bonuses being referred to herein as the "Annual Bonus") in the amount
of $15,000 (for calendar quarters in 1998), $15,250 (for calendar quarters in
1999), or $15,000 (for calendar quarters in 2000). In each subsequent year of
the Employment Period, the Compensation Committee of the Board shall review
Executive's Annual Bonus and in its sole discretion, subject to approval of the
Board, may increase Executive's Annual Bonus from year to year. The annual
review of Executive's bonus by the Board will consider, among other things,
Executive's own performance and the Company's performance.
(c) Incentive, Savings and Retirement Plans. During the Employment
Period, Executive shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable generally to
similarly situated officers of the Company and its affiliated companies, and on
the same basis as such other similarly situated officers.
(d) Welfare Benefit Plans. During the Employment Period, Executive
and Executive's family shall be eligible for participation in and shall receive
all benefits under welfare benefit plans, practices, policies and programs
provided by the Company and its affiliated companies (including, without
limitation, medical, disability, life, and accidental death insurance plans and
programs) to the extent applicable generally to similarly situated officers of
the Company and its affiliated companies.
(e) Expenses. During the Employment Period, Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
Executive in accordance with the policies, practices and procedures of the
Company and its affiliated companies to the extent applicable generally to other
similarly situated officers of the Company and its affiliated companies.
Without limiting the foregoing, Executive shall be entitled to reimbursement for
all reasonable travel and out-of-pocket expenses, including reasonable
operating, maintenance and insurance costs associated with one automobile to be
used in Company business-related purposes.
(f) Fringe Benefits. During the Employment Period, Executive shall
be entitled to fringe benefits in accordance with the plans, practices, programs
and policies of the Company and its affiliated companies in effect for similarly
situated officers of the Company and its affiliated companies. Without limiting
the foregoing, Executive shall be entitled to an automobile allowance of US $850
per month.
6. Change in Control. For the purposes of this Agreement, a "Change in
Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
25% or more of the combined voting power of the then outstanding voting
securities of the
2
<PAGE>
Company (the "Outstanding Company Voting Securities"); provided, however,
that for purposes of this subsection (i), the following acquisitions shall
not constitute a Change of Control: (A) any acquisition by a Person who is
on the Effective Date the beneficial owner of 25% or more of the
Outstanding Company Voting Securities, (B) any acquisition directly from
the Company, (C) any acquisition by the Company, (D) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company, or (E) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) of this definition; or
(ii) Individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the Effective Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and outstanding Company Voting Securities immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 25% or more of the combined voting power of the then
outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination, and (C) at least
a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination.
Notwithstanding the above definition, the Combination Transaction shall not
be deemed a Change in Control for purposes of this Agreement; provided, however,
that any stock options held by Executive on the date of the Combination
Transaction shall be governed by the terms of the applicable stock option
agreement(s) as to accelerated vesting related to the Combination Transaction.
After the effective date of the Combination Transaction, if any, the term "the
Company" as used in the above definition of Change in Control shall mean either
the Company or IVI Checkmate Corp.
7. Termination of Employment.
(a) Death, Retirement or Disability. Executive's employment shall
terminate automatically upon Executive's death or Retirement during the
Employment Period. For purposes of this Agreement, "Retirement" shall mean
normal retirement as defined in the Company's then-current retirement plan, or
there is no such retirement plan, "Retirement" shall mean voluntary termination
after age 65 with ten years of service. If the
3
<PAGE>
Company determines in good faith that the Disability of Executive has occurred
during the Employment Period (pursuant to the definition of Disability set forth
below), it may give to Executive written notice in accordance with this
Agreement of its intention to terminate Executive's employment. In such event,
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such written notice by Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, Executive shall
not have returned to full-time performance of Executive's duties. For purposes
of this Agreement, "Disability" shall mean a mental or physical disability as
determined by the Board in accordance with standards and procedures similar to
those under the Company's employee long-term disability plan, if any. At any
time that the Company does not maintain such a long-term disability plan,
Disability shall mean the inability of Executive, as determined by the Board, to
substantially perform the essential functions of his regular duties and
responsibilities due to a medically determinable physical or mental illness
which has lasted (or can reasonably be expected to last) for a period of six
consecutive months.
(b) Termination by the Company. The Company may terminate
Executive's employment during the Employment Period with or without Cause.
For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of Executive to perform
substantially Executive's duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness, and specifically
excluding any failure by Executive, after reasonable efforts, to meet
performance expectations), after a written demand for substantial performance is
delivered to Executive by the Chief Executive Officer or the Board which
specifically identifies the manner in which such Board or the Chief Executive
Officer believes that Executive has not substantially performed Executive's
duties, or
(ii) the willful engaging by Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith or without reasonable belief that Executive's
action or omission was in the best interests of the Company. Any act, or
failure to act, based upon authority given pursuant to a resolution duly adopted
by the Board or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by Executive in good
faith and in the best interests of the Company. The termination of employment
of Executive shall not be deemed to be for Cause unless and until there shall
have been delivered to Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board of the Company (excluding Executive, if then a director) at a meeting of
such Board called and held for such purpose (after reasonable notice is provided
to Executive and Executive is given an opportunity, together with counsel, to be
heard before such Board), finding that, in the good faith opinion of such Board,
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(c) Termination by Executive. Executive's employment may be
terminated by Executive for Good Reason or no reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) without the written consent of Executive, the assignment to
Executive of any duties materially inconsistent with Executive's position
(including status, offices, titles and reporting requirements), authority,
duties or responsibilities as in effect on the Effective Date, or any other
action by the Company which results in a material diminution in such position,
authority, duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
Executive;
(ii) a reduction by the Company in Executive's Base Salary,
Annual Bonus and benefits as in effect on the Effective Date or as the same may
be increased from time to time; or
4
<PAGE>
(iii) any failure by the Company to comply with and satisfy
Section 13(b) of this Agreement; or
(d) Notice of Termination. Any termination by the Company for Cause,
or by Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with this Agreement. For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than 30 days after the giving
of such notice). The failure by Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of Executive or the Company,
respectively, hereunder or preclude Executive or the Company, respectively, from
asserting such fact or circumstance in enforcing Executive's or the Company's
rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
Executive's employment is terminated by the Company for Cause, or by Executive
for Good Reason, the date of receipt of the Notice of Termination or any later
date specified therein, as the case may be, (ii) if Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies Executive of such
termination and (iii) if Executive's employment is terminated by reason of
death, Retirement or Disability, the Date of Termination shall be the date of
death or Retirement of Executive or the Disability Effective Date, as the case
may be.
8. Obligations of the Company upon Termination.
(a) Termination by Executive for Good Reason; Termination by the
Company Other Than for Cause, Death or Disability; Termination upon Expiration
of the Employment Term. If, during the Employment Period, the Company shall
terminate Executive's employment other than for Cause, death or Disability, or
Executive shall terminate employment for Good Reason within a period of 90 days
after the occurrence of the event giving rise to Good Reason, or if Executive's
employment terminates upon expiration of the Employment Term, then in
consideration of Executive's services rendered prior to such termination:
(i) the Company shall pay to Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) Executive's Base Salary through the Date
of Termination to the extent not theretofore paid, (2) the product of (x)
Executive's target Annual Bonus for the year in which the Date of
Termination occurs and (y) a fraction, the numerator of which is the number
of days in the current fiscal year through the Date of Termination, and the
denominator of which is 365, and (3) any compensation previously deferred
by Executive (together with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not theretofore paid
(the sum of the amounts described in clauses (1), (2) and (3) shall be
hereinafter referred to as the "Accrued Obligations"); and
B. the amount (the "Severance Payment") equal to the
present value (determined in accordance with Section 280G(d)(4) of the
Code) of the income stream represented by a continuation of Executive's
Base Salary and target Annual Bonus (in the progressive amounts for years
one, two and three of the Employment Period as scheduled in Sections 5(a)
and (b) hereof or as otherwise in effect for subsequent years) for a period
beginning on the Date of Termination and ending on the later of (1) the
last day of the scheduled Employment Period, or (2) twelve months from the
Date of Termination; provided, however, that if the Date of Termination
occurs within two years after a Change in Control, the
5
<PAGE>
minimum Severance Payment shall be the amount equal to two times
Executive's Base Salary and Annual Bonus in effect for the year in which
the Date of Termination occurs; and
(ii) for three years after Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to Executive
and/or Executive's family at least equal to those which would have been provided
to them in accordance with the welfare plans, programs, practices and policies
described in Section 5(e) of this Agreement if Executive's employment had not
been terminated or, if more favorable to Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if Executive
becomes re-employed with another employer and is eligible to receive medical or
other welfare benefits under another employer provided plan, the medical and
other welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility ("Welfare
Benefits"); and
(iii) if the Date of Termination occurs within two years
after a Change in Control, then all Company stock options held by Executive on
the Date of Termination and not then vested shall become immediately vested and
exercisable as of the Date of Termination; and
(iv) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to Executive any other amounts or benefits required
to be paid or provided or which Executive is eligible to receive under any plan,
program, policy or practice or contract or agreement of the Company and its
affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits").
(b) Death. If Executive's employment is terminated by reason of
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the date of death. With respect to the provision of Other Benefits,
the term Other Benefits as utilized in this Section 8(b) shall include, without
limitation, and Executive's estate and/or beneficiaries shall be entitled to
receive, benefits under such plans, programs, practices and policies relating to
death benefits, if any, as applicable generally to similarly situated officers
of the Company and its affiliated companies and their beneficiaries, and on the
same basis as such similarly situated officers and their beneficiaries.
(c) Disability. If Executive's employment is terminated by reason of
Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to Executive in a lump sum in cash within 30
days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 8(c) shall
include, without limitation, and Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits under such
plans, programs, practices and policies relating to disability, if any, as
applicable generally to similarly situated officers of the Company and its
affiliated companies and their families, and on the same basis as such similarly
situated officers and their families.
(d) Retirement. If Executive's employment is terminated by reason of
Executive's Retirement during the Employment Period, this Agreement shall
terminate without further obligations to Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to Executive in a lump sum in cash within 30
days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 8(d) shall
include, without limitation, and Executive shall be entitled after the Date of
Termination to receive, retirement and other benefits under such plans,
programs, practices and policies relating to retirement, if any, as applicable
generally to
6
<PAGE>
similarly situated officers of the Company and its affiliated companies and
their families, and on the same basis as such similarly situated officers and
their families.
(e) Cause or Voluntary Termination without Good Reason. If
Executive's employment shall be terminated for Cause during the Employment
Period, or if Executive voluntarily terminates employment during the Employment
Period without Good Reason, this Agreement shall terminate without further
obligations to Executive, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which Executive may qualify, nor, subject to Section 14(d), shall
anything herein limit or otherwise affect such rights as Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
10. Limitation of Benefits in Certain Instances.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any benefit, payment or distribution by
the Company to or for the benefit of Executive (whether payable or distributable
pursuant to the terms of this Agreement or otherwise) (a "Payment") would, if
paid, be subject to the excise tax imposed by Section 4999 of the Code (the
"Excise Tax"), then the Payment shall be reduced to the extent necessary of
avoid the imposition of the Excise Tax. Executive may select the Payments to be
limited or reduced.
(b) All determinations required to be made under this Section 10,
including whether an Excise Tax would otherwise be imposed and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm as may be designated by
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
receipt of notice from Executive that a Payment is due to be made, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting a Change of Control, Executive may appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any determination by the Accounting Firm shall be binding upon the
Company and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Payments hereunder will have been
unnecessarily limited by this Section 10 ("Underpayment"), consistent with the
calculations required to be made hereunder. The Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such Underpayment shall
be promptly paid by the Company to or for the benefit of Executive.
11. Costs of Enforcement. In any action taken in good faith relating to
the enforcement of this Agreement or any provision herein, Executive shall be
entitled to be paid any and all costs and expenses incurred by him in enforcing
or establishing his rights hereunder, including, without limitation, reasonable
attorneys' fees, whether suit be brought or not, and whether or not incurred in
trial, bankruptcy or appellate proceedings.
12. Representations and Warranties. Executive hereby represents and
warrants to the Company that Executive is not a party to, or otherwise subject
to, any covenant not to compete with any person or entity, and Executive's
execution of this Agreement and performance of his obligations hereunder will
not violate the terms or conditions of any contract or obligation, written or
oral, between Executive and any other person or entity.
7
<PAGE>
13. Assignment and Successors.
(a) Executive. This Agreement is personal to Executive and without
the prior written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Executive's legal
representatives.
(b) The Company. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company (whether direct or indirect, by purchase, merger, consolidation
or otherwise) to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. As used in this Agreement, "the
Company" shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
14. Miscellaneous.
(a) Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the future performance of any such
term or condition or of any other term or condition of this Agreement, unless
such waiver is contained in a writing signed by the party making the waiver.
(b) Severability. If any provision or covenant, or any part thereof,
of this Agreement should be held by any court to be invalid, illegal or
unenforceable, either in whole or in part, such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
the remaining provisions or covenants, or any part thereof, of this Agreement,
all of which shall remain in full force and effect.
(c) Other Agents. Nothing in this Agreement is to be interpreted as
limiting the Company from employing other personnel on such terms and conditions
as may be satisfactory to it.
(d) Entire Agreement. Except as provided herein, this Agreement
contains the entire agreement between the Company and Executive with respect to
the subject matter hereof, and it supersedes and invalidates any previous
agreements or contracts between them which relate to the subject matter hereof.
No representations, inducements, promises or agreements, oral or otherwise,
which are not embodied herein shall be of any force or effect.
(e) Governing Law. Except to the extent preempted by federal law,
and without regard to conflict of laws principles, the laws of the State of
Georgia shall govern this Agreement in all respects, whether as to its validity,
construction, capacity, performance or otherwise.
(f) Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or three days after mailing if mailed, first class,
certified mail, postage prepaid:
To Company: Checkmate Electronics, Inc.
1003 Mansell Road
Roswell, Georgia 30076
Facsimile No. (770) 594-6000
8
<PAGE>
Attention: Chief Executive Officer
To Executive: Gregory A. Lewis
1003 Mansell Road
Roswell, Georgia 30076
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
(g) Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto, which makes specific
reference to this Agreement; provided, however, that if, in the opinion of the
Corporation's accountants, any provision of this Agreement would preclude the
use of "pooling of interest" accounting treatment for a Change in Control
transaction that (1) would otherwise qualify for such accounting treatment, and
(2) is contingent upon qualifying for such accounting treatment, then Executive
and the Company agree to negotiate in good faith to amend this Agreement so that
it will not preclude the use of "pooling of interest" accounting treatment for
such Change in Control transaction.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Employment Agreement as of the date first above written.
CHECKMATE ELECTRONICS, INC.
By: /s/ J. Stanford Spence
------------------------
Title: Chairman of the Board
EXECUTIVE:
/s/ Gregory A. Lewis
---------------------
Gregory A. Lewis
9
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
IVI Checkmate Corp.
Future Merger Corporation
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Selected Financial
Data" and to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-74646) pertaining to the Checkmate Electronics, Inc.
Employee Incentive Stock Option Plan and the Checkmate Electronics, Inc. 1993
Stock Option Plan and in the Registration Statement (Form S-8 No. 33-93520)
pertaining to the Checkmate Electronics, Inc. 1994 Directors' Stock Option
Plan and the Checkmate Electronics, Inc. Non-Incentive Stock Option
Agreement of our report dated February 18, 1998, with respect to the
financial statements of Checkmate Electronics, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Atlanta, Georgia March 26, 1998
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 269
<SECURITIES> 3,572
<RECEIVABLES> 11,210
<ALLOWANCES> 162
<INVENTORY> 11,271
<CURRENT-ASSETS> 28,094
<PP&E> 10,120
<DEPRECIATION> 4,201
<TOTAL-ASSETS> 37,251
<CURRENT-LIABILITIES> 5,447
<BONDS> 203
0
0
<COMMON> 54
<OTHER-SE> 29,785
<TOTAL-LIABILITY-AND-EQUITY> 37,251
<SALES> 33,526
<TOTAL-REVENUES> 33,526
<CGS> 20,879
<TOTAL-COSTS> 20,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 44
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (198)
<INCOME-TAX> (69)
<INCOME-CONTINUING> (129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (129)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 2,204 1,525 1,897
<SECURITIES> 6,970 6,989 7,023
<RECEIVABLES> 6,640 10,337 6,782
<ALLOWANCES> 187 216 236
<INVENTORY> 7,870 7,683 10,643
<CURRENT-ASSETS> 27,434 27,352 27,193
<PP&E> 7,037 6,090 6,563
<DEPRECIATION> 2,787 2,289 2,548
<TOTAL-ASSETS> 33,892 33,384 33,401
<CURRENT-LIABILITIES> 4,099 5,568 4,945
<BONDS> 363 448 405
0 0 0
0 0 0
<COMMON> 52 52 52
<OTHER-SE> 28,253 26,319 27,089
<TOTAL-LIABILITY-AND-EQUITY> 33,892 33,384 33,401
<SALES> 35,104 18,589 25,610
<TOTAL-REVENUES> 35,104 18,589 25,610
<CGS> 20,572 10,972 15,091
<TOTAL-COSTS> 20,752 10,972 15,091
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 80 32 55
<INTEREST-EXPENSE> 61 31 45
<INCOME-PRETAX> 4,008 2,730 2,997
<INCOME-TAX> 1,453 1,010 1,109
<INCOME-CONTINUING> 2,565 1,720 1,888
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,555 1,720 1,888
<EPS-PRIMARY> 0.50 0.33 0.36
<EPS-DILUTED> 0.46 0.31 0.34
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 2,385 1,734 473
<SECURITIES> 6,057 5,992 5,066
<RECEIVABLES> 10,987 7,057 8,990
<ALLOWANCES> 197 188 170
<INVENTORY> 9,393 13,656 14,082
<CURRENT-ASSETS> 30,222 29,385 29,546
<PP&E> 7,739 9,017 9,505
<DEPRECIATION> 3,063 3,479 3,836
<TOTAL-ASSETS> 37,281 37,589 36,155
<CURRENT-LIABILITIES> 6,170 7,153 7,345
<BONDS> 320 278 247
0 0 0
0 0 0
<COMMON> 53 54 54
<OTHER-SE> 29,606 24,224 24,471
<TOTAL-LIABILITY-AND-EQUITY> 37,281 37,589 38,155
<SALES> 9,506 5,076 8,831
<TOTAL-REVENUES> 9,506 5,075 8,831
<CGS> 5,513 3,242 5,638
<TOTAL-COSTS> 5,513 3,242 5,638
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 12 16 0
<INTEREST-EXPENSE> 11 10 16
<INCOME-PRETAX> 1,001 (1,734) 232
<INCOME-TAX> 340 (595) 81
<INCOME-CONTINUING> 661 (1,139) 151
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 661 (1,139) 151
<EPS-PRIMARY> 0.13 (0.21) 0.03
<EPS-DILUTED> 0.12 (0.21) 0.03
</TABLE>
