-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GLygkyRwa9P1DnRZO4XQ2bc1Oy/f9pC2PozvuFKZTVPuGMAoxoAah7kmfSy6SIyN 5ihB+JyRhRz6HC7hprFwcw== 0001047469-98-012496.txt : 19980331 0001047469-98-012496.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012496 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKMATE ELECTRONICS INC CENTRAL INDEX KEY: 0000910320 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 880117097 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22370 FILM NUMBER: 98578956 BUSINESS ADDRESS: STREET 1: 1003 MANSELL RD STREET 2: STE C CITY: ROSWELL STATE: GA ZIP: 30076 BUSINESS PHONE: 4045946000 MAIL ADDRESS: STREET 2: 1003 MANSELL ROAD CITY: ROSWELL STATE: GA ZIP: 30076 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) GEORGIA 88-0117097 (State of incorporation) (I.R.S. Employer Identification Number)
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CHECKMATE ELECTRONICS, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER - --------- ----------- 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
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 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 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 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 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 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 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 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 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 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 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 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 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 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.
1997 HIGH LOW - -------------------------------------------------------------------------------------------- --------- --------- First Quarter............................................................................... $ 13.875 $ 11.500 Second Quarter.............................................................................. 13.500 8.000 Third Quarter............................................................................... 9.125 6.875 Fourth Quarter.............................................................................. 9.000 6.250
1996 HIGH LOW - -------------------------------------------------------------------------------------------- --------- --------- First Quarter............................................................................... $ 15.250 $ 11.250 Second Quarter.............................................................................. 15.750 11.750 Third Quarter............................................................................... 16.500 11.750 Fourth Quarter.............................................................................. 15.250 9.250
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 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.
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 --------- --------- --------- --------- ---------
AT DECEMBER 31 ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (IN THOUSANDS) 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
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 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 RESULTS OF OPERATIONS The following table sets forth certain items derived from Checkmate's statements of operations from 1995 to 1997:
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) 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% --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
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 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:
YEAR ENDED DECEMBER 31, ---------------------------------------- 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%
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 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 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 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 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 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 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 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 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 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 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 $100,000 or more and (c) any person for whom disclosure would have been provided pursuant to clause (b) but for the fact that the person did not serve as an executive officer at December 31, 1997 (collectively, the "Named Executive Officers"). For information regarding the various factors considered by the Compensation and Stock Option Committee of the Board of Directors in establishing the compensation of such persons for 1997, see "Compensation and Stock Option Committee Report on Executive Compensation" below. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------- ANNUAL COMPENSATION SECURITIES ALL OTHER NAME AND ----------------------- UNDERLYING COMPENSATION PRINCIPAL POSITION(1) YEAR SALARY($)(1) BONUS($) OPTIONS(#) ($)(2) - -------------------------------------------------- --------- ------------ --------- ------------- ------------- 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
- ------------------------ (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 $228,500 in 1997. Amounts denoted by an asterisk are below 10% of the total annual salary and bonus reported for the Named Executive Officer for the respective year. (3) The 1997 salary paid to Mr. Malec is for the period from January 1, 1997 through July 7, 1997 (effective date of termination). 28 STOCK OPTIONS OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES INDIVIDUAL GRANTS OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------- NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) - ----------------------------------------------- ------------- ----------------- ----------- ----------- --------- ---------- J. Stanford Spence............................. 10,000 1.4% $ 12.375 5/19/07 $ 75,565 $ 194,361 Jerry P. Malec................................. -- -- -- -- -- -- John J. Neubert................................ -- -- -- -- -- --
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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES ------------------------------------------------------- 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 -/ -
- ------------------------ (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 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 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 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 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]
9/28/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 --------- ----------- ----------- ----------- ----------- ----------- 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
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 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.
NUMBER PERCENT NAME OF BENEFICIAL OWNER OF SHARES OWNED(1) - --------------------------------------------------------------------------------------- ---------- ----------- 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%
- ------------------------ (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 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 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. 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).
36 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
37 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.
(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 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 INDEX TO FINANCIAL STATEMENTS 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
F-1 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 CHECKMATE ELECTRONICS, INC. BALANCE SHEETS (IN THOUSANDS OF US DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
DECEMBER 31, -------------------- 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 --------- --------- --------- ---------
SEE ACCOMPANYING NOTES. F-3 CHECKMATE ELECTRONICS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------- 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
SEE ACCOMPANYING NOTES. F-4 CHECKMATE ELECTRONICS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
COMMON STOCK $.01 PAR VALUE ADDITIONAL TOTAL ------------------------ PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ----------- ----------- ----------- ----------- ------------- 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 ----- ----- ----------- ----------- ------------- ----- ----- ----------- ----------- -------------
SEE ACCOMPANYING NOTES. F-5 CHECKMATE ELECTRONICS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 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 --------- ---------- ---------- --------- ---------- ----------
SEE ACCOMPANYING NOTES. F-6 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 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 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 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:
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----- ----- ----- Company A................................................................ 17% 15% -- Company B................................................................ 10% -- 22% Company C................................................................ -- 13% -- -- -- -- 27% 28% 22% -- -- -- -- -- --
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:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Note payable to a major shareholder and director.............................. $ 203 $ 349 Less current portion.......................................................... 162 146 --------- --------- $ 41 $ 203 --------- --------- --------- ---------
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 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:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Equipment.................................................................... $ 262 $ 262 Furniture and fixtures....................................................... 45 45 --------- --------- 307 307 Less accumulated amortization................................................ (307) (284) --------- --------- $ -- $ 23 --------- --------- --------- ---------
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 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: 1998............................................................ $ 534 1999............................................................ 440 2000............................................................ 151 2001............................................................ 156 2002............................................................ 26 --------- Total minimum lease payments.................................... $ 1,307 --------- ---------
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 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:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE ----------- ----------- 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
The following table summarizes information concerning options outstanding and exercisable at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - -------------- ------------- --------------- ----------- --------------- ----------- $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 ----- --- ----- ---
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 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:
YEAR ENDED DECEMBER 31, ------------------------------- 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
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 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:
YEAR ENDED DECEMBER 31, ---------------------------------------- 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 ------------ ------------ ------------ ------------ ------------ ------------
A reconciliation of the provision for income taxes to the Federal statutory rate of 34% is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 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 ----------- ------------ ------------ ----------- ------------ ------------
F-15 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:
DECEMBER 31, ---------------------------- 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) ------------- ------------- ------------- -------------
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 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:
YEAR ENDED DECEMBER 31, ------------------------------- 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 --------- --------- --------- --------- --------- ---------
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:
QUARTER ------------------------------------------ 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
QUARTER ------------------------------------------ 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
F-17 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 EXHIBIT INDEX 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).
E-1 (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.
E-2 EX-2 2 EXHIBIT 2 ANNEX A COMBINATION AGREEMENT 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 TABLE OF CONTENTS 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
i 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
ii 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
iii 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; 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 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 (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 (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 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 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 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 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 (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 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 ("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 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 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 (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 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 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 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 (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 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 (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 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 (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 (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 (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 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 (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 (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 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 (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 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 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 (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 (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 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 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 (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 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 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 (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 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 (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 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 (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 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 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 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 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 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 (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 (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 (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 (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 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 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 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 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 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: 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.
(a) If to Checkmate: 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
58 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 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 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 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. 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
62 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: (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);
(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;
2 (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;
3 (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);
4 (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;
5 (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.
6 EX-10.1(E) 3 EXHIBIT 10.1(E) 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 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 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 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 EX-10.4(F) 4 EXHIBIT 10.4(F) 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 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 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 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 (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 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 (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 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 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 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 EX-10.4(G) 5 EXHIBIT 10.4(G) 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 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 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 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 (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 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 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 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 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 EX-21 6 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT IVI Checkmate Corp. Future Merger Corporation EX-23 7 EXHIBIT 23 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 EX-27.1 8 EXHIBIT 27.1
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 269 3,572 11,210 162 11,271 28,094 10,120 4,201 37,251 5,447 203 0 0 54 29,785 37,251 33,526 33,526 20,879 20,879 0 44 46 (198) (69) (129) 0 0 0 (129) (0.02) (0.02)
EX-27.2 9 EXHIBIT 27.2
5 1,000 YEAR 6-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 JUN-30-1996 SEP-30-1996 2,204 1,525 1,897 6,970 6,989 7,023 6,640 10,337 6,782 187 216 236 7,870 7,683 10,643 27,434 27,352 27,193 7,037 6,090 6,563 2,787 2,289 2,548 33,892 33,384 33,401 4,099 5,568 4,945 363 448 405 0 0 0 0 0 0 52 52 52 28,253 26,319 27,089 33,892 33,384 33,401 35,104 18,589 25,610 35,104 18,589 25,610 20,572 10,972 15,091 20,752 10,972 15,091 0 0 0 80 32 55 61 31 45 4,008 2,730 2,997 1,453 1,010 1,109 2,565 1,720 1,888 0 0 0 0 0 0 0 0 0 2,555 1,720 1,888 0.50 0.33 0.36 0.46 0.31 0.34
EX-27.3 10 EXHIBIT 27.3
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 2,385 1,734 473 6,057 5,992 5,066 10,987 7,057 8,990 197 188 170 9,393 13,656 14,082 30,222 29,385 29,546 7,739 9,017 9,505 3,063 3,479 3,836 37,281 37,589 36,155 6,170 7,153 7,345 320 278 247 0 0 0 0 0 0 53 54 54 29,606 24,224 24,471 37,281 37,589 38,155 9,506 5,076 8,831 9,506 5,075 8,831 5,513 3,242 5,638 5,513 3,242 5,638 0 0 0 12 16 0 11 10 16 1,001 (1,734) 232 340 (595) 81 661 (1,139) 151 0 0 0 0 0 0 0 0 0 661 (1,139) 151 0.13 (0.21) 0.03 0.12 (0.21) 0.03
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