EHXIBIT 99.1
CIBC Merchant Acquiring Business
Financial Statements
October 31, 2000, 1999 and 1998
Together With Auditors' Report
Unaudited Financial Statements
January 31, 2001 and 2000
AUDITORS' REPORT
To the Board of Directors of
Canadian Imperial Bank of Commerce,
We have audited the balance sheets of CIBC MERCHANT ACQUIRING BUSINESS (the
"Business") as at October 31, 2000 and 1999 and the related statements of
income, cash flows and changes in CIBC's equity in the Business for each of the
years in the three year period ended October 31, 2000. These financial
statements are the responsibility of the Business' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada and the United States. Those standards require that we plan
and perform an 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, these financial statements present fairly, in all material
respects, the financial position of the Business as at October 31, 2000 and
1999 and the results of its operations and its cash flows for each of the years
in the three year period ended October 31, 2000 in accordance with accounting
principles generally accepted in the United States.
As disclosed in note 1, the Business has no separate legal status or
existence.
January 19, 2001
Toronto, Canada
F(a)-1
BALANCE SHEETS
CIBC MERCHANT ACQUIRING BUSINESS
(See Note 1 to Financial Statements)
(thousands of US dollars)
October 31
January 31, -----------------
2001 2000 1999
----------- -------- -------
(Unaudited)
ASSETS
Current assets:
VISA International / Canada receivable......... $35,270 $ 61,807 $31,977
Merchant processing receivable................. 29,154 28,337 24,650
Deferred income taxes.......................... 483 483 --
------- -------- -------
64,907 90,627 56,627
Property and equipment, net (Note 4)............ 18,281 18,772 20,963
Other........................................... -- -- 264
------- -------- -------
$83,188 $109,399 $77,854
======= ======== =======
LIABILITIES AND CIBC'S EQUITY IN THE BUSINESS
Current liabilities:
Income taxes payable........................... $ 2,767 $ 10,399 $10,167
Accounts payable and accrued liabilities (Note
5)............................................ 4,797 5,985 4,293
Obligations under capital lease................ 964 1,431 1,942
Deferred income taxes.......................... -- -- 256
IDP Merchant payable........................... -- -- 147
Other.......................................... 428 332 854
------- -------- -------
8,956 18,147 17,659
Obligations under capital lease................. -- 16 1,497
------- -------- -------
8,956 18,163 19,156
------- -------- -------
Commitments and contingencies (Note 9)
CIBC'S equity in the business (Note 8)
CIBC'S equity investment....................... 79,766 96,779 61,157
Cumulative translation adjustment.............. (5,534) (5,543) (2,459)
------- -------- -------
74,232 91,236 58,698
------- -------- -------
$83,188 $109,399 $77,854
======= ======== =======
The accompanying notes are an integral part of these financial statements.
F(a)-2
STATEMENTS OF INCOME
CIBC MERCHANT ACQUIRING BUSINESS
(See Note 1 to Financial Statements)
(thousands of U.S. dollars)
For the three
months ended
January 31 For the years ended October 31
--------------- --------------------------------
2001 2000 2000 1999 1998
------- ------- ---------- ---------- ----------
(Unaudited)
Revenues..................... $22,816 $22,061 $ 92,029 $ 86,622 $ 80,948
Operating expenses:
Cost of service............. 12,036 11,801 46,694 42,321 40,317
Sales, general and
administrative............. 3,293 4,780 17,149 16,622 15,839
------- ------- ---------- ---------- ----------
15,329 16,581 63,843 58,943 56,156
Operating income............. 7,487 5,480 28,186 27,679 24,792
------- ------- ---------- ---------- ----------
Other expenses:
Interest and other
expenses................... 1,299 1,439 5,416 4,405 4,216
------- ------- ---------- ----------
Income before income taxes... 6,188 4,041 22,770 23,274 20,576
Provision for income taxes
(Note 7).................... 2,723 1,778 9,980 10,241 9,054
------- ------- ---------- ---------- ----------
Net income.................. $ 3,465 $ 2,263 $ 12,790 $ 13,033 $ 11,522
======= ======= ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F(a)-3
STATEMENTS OF CASH FLOWS
CIBC MERCHANT ACQUIRING BUSINESS
(See Note 1 to Financial Statements)
(thousands of US dollars)
For the three
months ended
January 31 For the years ended October 31
------------------ ---------------------------------
2001 2000 2000 1999 1998
-------- -------- ---------- ---------- ----------
(Unaudited)
Operating activities:
Net income.............. $ 3,465 $ 2,263 $ 12,790 $ 13,033 $ 11,522
Adjustments to reconcile
net income to cash
provided by operating
activities before
changes in assets and
liabilities
Depreciation and
amortization.......... 1,892 1,963 7,955 7,559 5,752
Deferred income taxes.. -- -- (755) (301) (232)
-------- -------- ---------- --------- ---------
5,357 4,226 19,990 20,291 17,042
Changes in non-cash
working capital
Merchant processing
receivable............ (817) 798 (4,661) (5,168) (1,145)
VISA International /
Canada receivable..... 26,537 (13,234) (31,900) (6,852) (2,651)
Income taxes payable... (7,632) (8,368) 593 1,695 (1,109)
Accounts payable and
accrued liabilities... (1,188) 123 1,896 152 184
IDP Merchant payable... -- -- (147) 145 --
Other, net............. 96 382 (245) 805 (231)
-------- -------- ---------- --------- ---------
22,353 (16,073) (14,474) 11,068 12,090
-------- -------- ---------- --------- ---------
Investing activity:
Capital expenditures.... (1,400) (1,892) (6,421) (8,968) (6,729)
-------- -------- ---------- --------- ---------
Financing activities:
Investment by CIBC
during the year........ (20,470) 18,378 22,832 (391) (3,793)
Principal payments under
capital lease
arrangements........... (483) (413) (1,937) (1,709) (1,568)
-------- -------- ---------- --------- ---------
(20,953) 17,965 20,895 (2,100) (5,361)
-------- -------- ---------- --------- ---------
Increase (decrease) in
cash and cash
equivalents............. -- -- -- -- --
Cash, beginning of year.. -- -- -- -- --
-------- -------- ---------- --------- ---------
Cash, end of year........ $ -- $ -- $ -- $ -- $ --
======== ======== ========== ========= =========
The accompanying notes are an integral part of these financial statements.
F(a)-4
STATEMENTS OF CHANGES IN CIBC'S EQUITY IN THE BUSINESS
CIBC MERCHANT ACQUIRING BUSINESS
(See Note 1 to Financial Statements)
(thousands of US dollars)
For the years ended October 31
--------------------------------
Accumulated
CIBC's Other
Equity Comprehensive Total
Investment Income/(Loss) Equity
---------- ------------- -------
Balance at October 31, 1997................... $40,786 $(1,108) $39,678
------- ------- -------
Comprehensive income
Net income.................................. 11,522 11,522
Foreign currency translation adjustment..... (2,374) (2,374)
------- ------- -------
Total comprehensive income................... 9,148
Net investment during the period............. (3,793) (3,793)
------- ------- -------
Balance at October 31, 1998................... 48,515 (3,482) 45,033
------- ------- -------
Comprehensive income
Net income.................................. 13,033 13,033
Foreign currency translation adjustment..... 1,023 1,023
------- ------- -------
Total comprehensive income................... 14,056
Net investment during the period............. (391) (391)
------- ------- -------
Balance at October 31, 1999................... 61,157 (2,459) 58,698
------- ------- -------
Comprehensive income
Net income.................................. 12,790 12,790
Foreign currency translation adjustment..... (3,084) (3,084)
------- ------- -------
Total comprehensive income................... 9,706
Net investment during the period............. 22,832 22,832
------- ------- -------
Balance at October 31, 2000................... $96,779 $(5,543) $91,236
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F(a)-5
CIBC MERCHANT ACQUIRING BUSINESS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000, 1999 AND 1998
(thousands of US dollars)
1.Basis of Presentation
The Merchant Acquiring Business ("Merchant Acquiring" or the "Business") is
part of Canadian Imperial Bank of Commerce's ("CIBC") Card Products Division.
The Business operates within a single industry segment and is responsible for
the capture, routing and processing of credit card transactions and debit
consumer point-of-sale ("POS") transactions. Merchant Acquiring's operations
are provided predominantly in Canada. Management considers that this represents
one reportable segment--electronic transactions processing--therefore the
majority of the disclosures required by Statement of Financial Accounting
Standards No. 131 do not apply.
These financial statements represent the business operations identified as
the Merchant Acquiring Business of CIBC. Accordingly, there is no share capital
or retained earnings in the Business' accounts. CIBC's equity in the Business
represents the funding provided to the Business to carry out its activities.
The financial statements have been prepared on the historical cost basis in
accordance with accounting principles generally accepted in the United States,
and present Merchant Acquiring's financial position, results of operations, and
cash flows as derived from CIBC's historical financial statements. As further
described in Note 3, certain allocations of corporate and interest expenses
have been allocated to Merchant Acquiring. These allocations were based on an
estimate of the proportion of corporate expenses related to Merchant Acquiring,
utilizing such factors as revenues, number of employees, number of transactions
processed and other applicable factors.
2.Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Revenue
Revenue for processing services provided directly to merchants is recorded
net of interchange fees charged by credit card associations. Fees and rental
revenues are recognized when the service is provided. Reserves against
operational losses are established when the losses are probable and reasonably
estimatable.
Merchant processing receivable/payable
The merchant processing receivable/payable results from timing differences
in Merchant Acquirings' settlement process with merchants and credit card sales
processed.
Property and equipment
Property and equipment is stated at cost. Equipment under capital leases are
stated at the discounted cash flow value. Depreciation and amortization is
calculated using the straight-line method. Equipment is depreciated over 3 to 7
years, software over 1 to 5 years and furniture and fixtures over 15 years.
F(a)-6
CIBC MERCHANT ACQUIRING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
OCTOBER 31, 2000, 1999 AND 1998
(thousands of US dollars)
Leasehold improvements and equipment under capital leases are amortized over
the shorter of the useful life of the asset or the term of the lease.
Maintenance and repairs are charged to operations as incurred.
Deferred income taxes
Deferred income taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
laws and rates.
Fair value of financial instruments
Management considers that the carrying amounts of financial instruments,
including cash, receivables, accounts payable and accrued expenses,
approximates fair value.
Foreign currency translation
The assets and liabilities are translated at the period-end rate of
exchange, and income statement and cash flow items are translated at the
average rates prevailing during the period. The resulting translation
adjustment is recorded as a component of CIBC's equity in the Business. The
effect of foreign exchange gains and losses arising from these translations of
assets and liabilities are included as a component of other comprehensive
income.
3. Transactions with Related Parties
These financial statements reflect corporate allocations from CIBC for
services provided to the Business in the amount of $3,093, $3,827 and $3,516
for the years ended October 31, 2000, 1999 and 1998, respectively. These
allocations were based on the proportion of corporate expenses related to
Merchant Acquiring based on the percentage of the Business' direct operating
expenses as a proportion of CIBC's, a method of allocation management believes
to be reasonable. Merchant Acquiring utilized a rollback approach to allocate
the expenses for all historical periods presented. This treatment records the
current allocation percentage for all historical periods presented. These
amounts have been included in sales, general and administrative expenses.
These financial statements also reflect corporate allocations from CIBC Card
Products Division for expenses incurred in relation to activities of the
Business in the amounts of $2,270, $2,466 and $2,373 for the years ended
October 31, 2000, 1999 and 1998, respectively. These allocations were based on
an estimate of the proportion of expenses related to Merchant Acquiring,
utilizing such factors as estimated number of employees providing merchant card
service functions, number of transactions processed and other applicable
factors, a method of allocation management believes to be reasonable. These
amounts have been included in cost of service.
Merchant Acquiring is funded by CIBC. As such, the Business has applied a
cost of funds on the net book value of property and equipment and an average
days outstanding receivable based on a 5.8% rate (internal cost of funding).
Interest expense recorded by Merchant Acquiring related to this funding was
$3,717, $3,277 and $3,016 for the years ended October 31, 2000, 1999 and 1998,
respectively and is included in interest and other expense.
Merchant Acquiring outsources its back office operations to Intria Items
Inc. and utilizes Intria HP for systems and systems support. Both Intria Items
Inc. and Intria HP are joint ventures owned 51% by CIBC and 49% by third
parties. Expenses are based upon established service level agreements. The
Business incurred
F(a)-7
CIBC MERCHANT ACQUIRING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
OCTOBER 31, 2000, 1999 AND 1998
(thousands of US dollars)
costs of $24,517, $21,749 and $22,876 for the years ended October 31, 2000,
1999 and 1998, respectively. Of these amounts 60% are included in cost of
service and 40% are included in sales, general and administrative expenses.
The Business has amounts payable of $1,979 and $1,845 to Intria Items Inc.
and Intria HP as at October 31, 2000 and 1999, respectively. Amounts payable to
CIBC are included in CIBC's equity in the Business.
4. Property and Equipment
As of October 31, 2000 and 1999, property and equipment consisted of the
following:
2000 1999
------- -------
Equipment under capital lease............................... $ 8,236 $ 8,523
Equipment................................................... 36,757 31,599
Software.................................................... 216 224
Leasehold improvements...................................... 1,600 1,654
Furniture and fixtures...................................... 1,590 1,645
------- -------
48,399 43,645
Less: Accumulated depreciation and amortization............. 29,627 22,682
------- -------
$18,772 $20,963
======= =======
5. Accounts Payable and Accrued Liabilities
As of October 31, 2000 and 1999, accounts payable and accrued liabilities
consisted of the following:
2000 1999
------ ------
Operating expenses payable.................................... $1,016 $ 963
Accrued compensation and benefits............................. 1,207 457
Accrued pension and retirement benefits....................... 708 312
Other accrued liabilities..................................... 1,074 716
System support fees payable................................... 1,980 1,845
------ ------
$5,985 $4,293
====== ======
Certain of these payables are due to other related parties within the CIBC
group and are settled through CIBC group clearing accounts. Certain assumptions
have been made regarding the settlement periods in order to present the
information above.
6. Pension and Retirement Benefits
Merchant Acquiring participates in the CIBC non-contributory defined benefit
pension plan (the "plan"). Management has estimated the pension and other post
retirement benefits expense based upon the employees as a percentage of the
total employees participating in the plan. Expenses estimated for pension and
other post retirement benefits were $708, $682 and $693 for the years ended
October 31, 2000, 1999 and 1998, respectively.
F(a)-8
CIBC MERCHANT ACQUIRING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
OCTOBER 31, 2000, 1999 AND 1998
(thousands of US dollars)
7. Income Taxes
Merchant Acquiring is not a separate legal entity for purposes of remitting
taxes and filing income tax returns. Income taxes for the Business are reported
in CIBC's income tax returns and paid by CIBC. Accordingly, income taxes have
been calculated on these financial statements based on an effective tax rate of
44% on Canadian dollar net income.
The provision for income taxes as at October 31, 2000, 1999 and 1998
includes:
2000 1999 1998
------- ------- ------
Current tax expense................................. $10,734 $ 9,989 $8,487
Deferred tax expense................................ (754) 252 567
------- ------- ------
Total............................................... $ 9,980 $10,241 $9,054
======= ======= ======
Merchant Acquiring incurred $1,437, $672 and $553 of capital tax expense for
the years ended October 31, 2000, 1999 and 1998, respectively. The amounts are
included in interest and other expenses on the statements of income.
CIBC is subject to capital taxes, which have been reflected in "interest and
other expenses" in the statements of income.
8. CIBC's Equity in the Business
CIBC's equity in the business
CIBC's equity includes the accumulated income of Merchant Acquiring, the
funding for assets employed in the Business and the net intercompany
receivable/payable reflecting transactions described in Note 3.
Stock options
CIBC has certain Stock Option Plans under which incentive stock options and
non-qualified stock options have been granted to officers, key employees and
directors of CIBC. Stock options are granted at market.
9. Commitments and Contingencies
The long term capital lease payable as of October 31, 2000 was $16 and is
due in 2002.
Expenses for premises are included as a corporate allocation in cost of
service (see Note 3).
Merchant Acquiring is party to a number of claims and lawsuits incidental to
its business. In the opinion of management, the ultimate outcome of such
matters, in the aggregate, will not have a material adverse impact on Merchant
Acquirings' financial position, liquidity or results of operations.
Negotiations with Visa relating to the interpretation of the regulations
surrounding interchange fees were settled during the year. VISA has assessed a
higher interchange rate for certain industry segments that will impact a
limited number of existing MCS customers. The impact of this decision will
result in CIBC indemnifying Global Payments Inc. (see Note 12) for any loss of
revenue over the course of these customer contracts and as a result, this will
not have any negative impact to future revenue growth.
Merchant Acquiring processes credit card transactions for direct merchant
locations. Merchant Acquiring's merchant customers have the liability for any
charges properly reversed by the cardholder. In the event that
F(a)-9
CIBC MERCHANT ACQUIRING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
OCTOBER 31, 2000, 1999 AND 1998
(thousands of US dollars)
Merchant Acquiring is not able to collect such amounts from the merchants, due
to merchant fraud, insolvency, bankruptcy or another reason, Merchant Acquiring
may be liable for any such reversed charges. Merchant Acquiring requires
pledged funds from certain merchants to minimize any such contingent liability.
Pledged funds as of October 31, 2000 are $5,692. Merchant Acquiring also
utilizes a number of systems and procedures to manage merchant risk. In
addition, Merchant Acquiring believes that the diversification of its merchant
portfolio among industries and geographic regions minimizes its risk of loss.
Merchant Acquiring recognizes revenue based on a percentage of the gross amount
charged and has a potential liability for the full amount of the charge.
10. Supplemental Cash Flow Information
Merchant Acquiring does not maintain cash accounts. All cash flows are
included in CIBC's consolidated cash flows. Accordingly, there is insufficient
information to separately disclose Merchant Acquiring's supplemental cash flows
relating to interest and income taxes paid.
11. Quarterly Financial Information (Unaudited)
Quarter Ended
-------------------------------------
April
January 31 30 July 31 October 31
---------- ------- ------- ----------
Fiscal Year 2000
Revenue................................... $21,972 $20,762 $24,547 $24,748
Operating income.......................... 5,458 4,849 7,092 10,787
Net income................................ 2,254 1,912 3,168 5,456
Fiscal Year 1999
Revenue................................... $20,378 $19,593 $23,060 $23,591
Operating income.......................... 6,335 5,631 8,633 7,080
Net income................................ 2,931 2,537 4,217 3,348
12. Subsequent Event
On November 9, 2000, CIBC and National Data Corporation ("NDC") of Atlanta,
Georgia, announced that they have agreed to form a ten-year marketing alliance
to enhance and expand their merchant products and services in the North
American marketplace.
NDC's current payment processing line of business, NDC eCommerce, is
expected to spin-off from the parent company to form a new public company
called Global Payments Inc., pending regulatory approvals. CIBC Merchant Card
Services will be integrated into Global Payments Inc. at that time. Under this
agreement, CIBC will market Global Payments Inc.'s merchant services in the
Canadian marketplace through its extensive national network of branches, and
account managers for small business, mid-market and large corporate customers.
Under the terms of the agreement, CIBC will sell its merchant acquiring
business and purchase a 26.25 per cent equity stake in Global Payments Inc. The
agreement is contingent upon obtaining regulatory approvals in both countries.
13. Prior Year Comparatives
Certain prior year balances have been re-classified to conform with current
year presentation.
F(a)-10