<PAGE>
EXHIBIT 99.1
SUMMARY OF OUR BUSINESS
Recent Developments
Purchase of Merchant Acquiring Business and Ten-Year Marketing Alliance with
Canadian Imperial Bank of Commerce.
On November 9, 2000, we agreed to acquire certain net assets of the
merchant acquiring business of Canadian Imperial Bank of Commerce and to form
a 10-year marketing alliance with CIBC to offer VISA credit and debit card
payment products and services to merchants in Canada. The acquisition and the
related marketing alliance will significantly broaden our scope and presence
in North America and will provide merchants served by CIBC's merchant
acquiring business with a larger array of existing and new payment solutions.
We expect to close the acquisition after the distribution is completed,
subject to regulatory approvals.
The CIBC merchant acquiring business is largely comparable to our merchant
services offering. CIBC's service offerings include card processing services
consisting of credit and debit card authorization and the capture of related
transaction data, settlement and funding services, customer support services,
terminal deployment, merchant statements and risk management. During 1999,
this business processed approximately 800 million transactions from
approximately 140,000 merchant locations in Canada.
The revenues of the business are generated by approximately 140,000
merchant locations, which are marketed through a combination of a direct sales
force, referrals from CIBC's approximately 1,200 bank branch locations
comprising CIBC's branch network and an independent sales organization. The
merchants served by the business include leading North American grocers,
specialty retailers, home furnishings retailers, automotive service station
chains and department stores. For the 12 months ended October 31, 1999, CIBC's
merchant acquiring business reported revenues of $87 million (U.S.) and income
before taxes of $23 million (U.S.). For the nine months ended July 31, 2000,
CIBC's merchant acquiring business had revenues of $67 million (U.S.) and
income before taxes of $13 million (U.S.).
As part of our business strategy, we are focused upon internal and external
opportunities to expand our merchant services product offering. This
acquisition and our alliance with CIBC will provide us with a significant
presence in the Canadian market, for which we presently have a modest share.
Additionally, management believes this acquisition will allow us to better
leverage our fixed cost infrastructure and cross-sell both companies' value
added, end-to-end services in the United States and Canada.
<PAGE>
Summary Pro Forma Combined Financial Data (Unaudited)
The summary pro forma combined financial data reflects adjustments to the
historical combined balance sheet of Global Payments as if the distribution to
shareholders and the acquisition of CIBC's merchant acquiring business had
occurred on August 31, 2000 and to the historical combined income statements of
Global Payments as if the distribution and the acquisition had occurred on June
1, 1999. The summary pro forma combined financial data should be read in
conjunction with the Pro Forma Combined Financial Statements, including the
Notes thereto, included elsewhere in this information statement.
Summary Pro Forma Combined Financial Data(2)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
August 31, 2000 May 31, 2000
----------------------------------- -----------------------------------
Pro Pro Forma Pro Pro Forma
Historical Forma(3) As Adjusted(4) Historical Forma(3) As Adjusted(4)
---------- -------- -------------- ---------- -------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 87,191 $ 87,191 $112,928 $340,033 $340,033 $430,796
Operating expenses:
Cost of service........ 45,881 45,881 61,250 181,479 181,479 237,227
Sales, general and
administrative........ 24,728 25,051 27,591 95,342 99,039 110,018
-------- -------- -------- -------- -------- --------
Operating income........ 16,582 16,259 24,087 63,212 59,515 83,551
Other income (expense),
net.................... (2,518) (2,932) (4,778) (9,440) (10,073) (14,821)
-------- -------- -------- -------- -------- --------
Earnings before income
taxes.................. 14,064 13,327 19,309 53,772 49,442 68,730
Provision for income
taxes.................. 5,415 5,131 7,805 20,725 19,058 27,711
-------- -------- -------- -------- -------- --------
Net income.............. $ 8,649 $ 8,196 $ 11,504 $ 33,047 $ 30,384 $ 41,019
======== ======== ======== ======== ======== ========
Basic earnings per
share(1)............... $ 0.33 $ 0.31 $ 0.32(5) $ 1.24 $ 1.14 $ 1.14
Total assets............ $285,850 $285,850 $434,090 $287,946 $287,946
Due to NDC.............. $ 75,014 $ -- $ -- $ 96,125 $ --
Line of Credit.......... $ -- $ 75,014 $ 75,014 $ -- $ 96,125
Long-term obligations... $ 6,506 $ 6,506 $ 8,335 $ 7,232 $ 7,232
Total shareholders'
equity................. $132,690 $132,690 $269,536 $120,885 $120,885
</TABLE>
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(1) Using the distribution ratio of 0.8 of a share of Global Payments common
stock for each share of NDC common stock held. Weighted average shares
outstanding is computed by applying the distribution ratio to the
historical NDC weighted average shares outstanding for all periods
presented.
(2) For further detail of pro forma adjustments, see pages F-20 through F-25.
(3) Gives effect to the distribution as if it had occurred on June 1, 1999 for
the combined income statements and August 31, 2000 for the combined
balance sheet.
(4) Gives effect to the distribution and the acquisition of CIBC's merchant
acquiring business as if it had occurred on June 1, 1999 for the combined
income statements and August 31, 2000 for the combined balance sheet.
(5) As presented above, the acquisition is accretive to our basic earnings per
share, and management believes, assuming operating synergies can be
achieved following the acquisition, that the acquisition will continue to
be accretive in the future.
<PAGE>
RISK FACTORS
Risks Relating to Global Payments
The integration of the operations of CIBC's merchant acquiring business
could result in increased operating costs if the anticipated synergies of
operating both businesses as one are not achieved, a loss of strategic
opportunities if management is distracted by the integration process, and a
loss of customers if our service levels drop during or following the
integration process.
Following the distribution, we will complete the acquisition of the merchant
acquiring business of CIBC. The integration of CIBC's business with ours
presents several challenges, including the fact that it is almost
entirely based in Canada, where we currently have limited operations. If the
integration process does not proceed smoothly, the following factors could
reduce our revenues, increase our operating costs and result in a loss of the
projected synergies of operating the two businesses as one:
. if we are not successful in integrating the benefits plans, duties and
responsibilities, and other factors of interest to the management and
employees of the acquired business, we could lose employees to our
competitors in Canada, which could significantly affect our ability to
operate the business and complete the integration;
. if the integration process causes any delays with the delivery of our
services, or the quality of those services, we could lose customers to
our competitors; and
. completing the distribution, the acquisition and the related
integration, could divert the attention of our management from other
strategic matters including possible acquisitions and alliances, and
planning for new product development or expansion into new electronic
payments markets.
<PAGE>
Following the acquisition of 26.25% of our common stock by CIBC, certain U.S.
banking regulations will limit the types of business in which we can engage.
Following the acquisition of 26.25% of our common stock by CIBC, technically
we will be considered as though we were a subsidiary of CIBC for purposes of
certain U.S. banking regulations, and will be subject to the same restrictions
on our business activities as are applicable to CIBC. As a general matter, we
will be able to operate our merchant service and funds transfer businesses as
we have historically but our ability to expand into unrelated businesses may be
limited unless they are activities the act allows or the Federal Reserve Board
(the primary U.S. federal regulator for CIBC and its U.S.-based subsidiaries)
approves. The applicable regulations are interpreted to mean that a company will
be deemed a subsidiary of a bank holding company, and therefore subject to the
regulations, if the bank holding company owns 25% or more of the equity of a
company. These restrictions are contained in the Bank Holding Company Act, as
recently amended by the Gramm-Leach-Bliley Act. The restrictions on our business
activities would also apply to any investments or alliances that we might
consider.
The Bank Holding Company Act limits CIBC and its subsidiaries to activities
that are closely related to the business of banking. Under the Gramm-Leach-
Bliley amendments, certain well managed and well capitalized companies may
elect to be treated as "financial holding companies," and may thus also engage
in certain financial activities such as insurance and securities underwriting.
CIBC has elected to be a financial holding company. If CIBC ever fails to
maintain its status as a financial holding company, they and we would lose the
benefit of the expanded activities provided by the Gramm-Leach-Bliley
amendments and may have to divest of certain businesses or investments.
In being considered a subsidiary of CIBC for purposes of certain U.S.
banking regulations, we will be subject to supervision and examination by the
Federal Reserve Board. We and CIBC will be required to comply with the Federal
Reserve Board's regulatory requirements prior to commencing new activities,
engaging in acquisitions or making new investments. Should CIBC fail to be in
compliance with the Federal Reserve Board's regulatory requirements, it could
affect our ability to obtain necessary approvals or clearances. Such
limitations could impede our ability to compete with other companies not
subject to such restrictions. For a more complete discussion of the banking
regulations we are subject to please see "Business--Banking Regulations."
With the acquisition of CIBC's merchant acquiring business, we will be exposed
to foreign currency risks and risks from our variable rate credit facility
with CIBC that could reduce our earnings and significantly increase our cost
of capital.
After we acquire the assets of CIBC's merchant acquiring business, we will
have significant operations in Canada which will be denominated in Canadian
dollars. The repatriation of our earnings in Canada will subject
us to the risk that currency exchange rates between Canada and the United
States will fluctuate and we will lose some of our earnings when they are
exchanged into U.S. dollars. Additionally, our credit facility with CIBC will
carry an interest rate based on Canadian Dollar LIBOR (C$LIBOR). This rate
will fluctuate with market rates, and if it increases, our cost of capital will
also increase which will reduce our earnings from operations. The credit
facility will have an initial term of 364 days and is renewable only at the
consent of CIBC. CIBC may choose not to renew the credit facility at which
point we will have to find alternative financing or fund the Canadian
merchants ourselves. Alternative financing may carry a higher interest rate
which would reduce our earnings from operations. We may not have the cash flow
necessary to fund the Canadian merchants ourselves, and we may lose those
customers as a result.
After the acquisition, we will be dependent on CIBC to continue to provide
services to merchants under a transition agreement, and the failure of CIBC
to provide those services could result in our loss of the business of the
merchants we are receiving in the acquisition.
We will enter into a transition agreement with CIBC under which CIBC will
continue to provide some services to the merchants included in the merchant
acquiring business we are acquiring from CIBC. If CIBC does not provide those
services in a satisfactory manner we may not be able to perform such services
ourselves and may not be able to find other third party service providers. In
that instance, the merchants may terminate their contracts with us and move
their business to another electronic processing provider, which could have a
significant effect on our revenues and earnings.
<PAGE>
CAPITALIZATION
The following table sets forth our historical and pro forma combined debt
and capitalization at August 31, 2000. This data should be read in conjunction
with our historical combined balance sheet and the notes thereto, appearing
elsewhere in this information statement. The pro forma information set forth
below gives effect to the distribution as if it had occurred on August 31, 2000
and the pro forma, as adjusted, gives effect to the distribution as if it had
occurred on August 31, 2000 and the acquisition of CIBC's merchant acquiring
business as if it had occurred on August 31, 2000. This information may not
necessarily reflect the debt and capitalization of Global Payments in the
future or as it would have been had we been a separate, independent company at
August 31, 2000 or had the distribution and the acquisition actually been
effected on such date.
Based upon the relative financial conditions, results of operations and
prospects of NDC and Global Payments, NDC determined that $96.1 million would
be an appropriate allocation to Global Payments of the existing NDC debt at May
31, 2000. For the three months ended August 31, 2000 Global Payments made net
repayments of $21.1 million, thereby reducing this $96.1 million due to NDC to
$75.0 million as of August 31, 2000. Accordingly Global Payments will make a
net cash payment to NDC at the time of the distribution equal to $75.0 million
adjusted for the net cash contributions of eCommerce operations between
September 1 and the actual date of the distribution. This will be the only cash
paid to NDC, except for final adjustments according to the distribution
agreement. We have a commitment for a $110 million revolving line of credit. It
will fund the cash due to NDC to reflect our share of NDC's pre-distribution
debt used to establish our initial capitalization. This line of credit will
also be used to meet our working capital and acquisition needs after the
distribution. Consistent with the allocation of NDC debt at May 31, 2000, NDC
utilized a rollback approach to allocate the anticipated portion of the NDC
consolidated groups debt for all historical periods. This treatment records the
current proposed debt allocation percentage for all historical periods.
<TABLE>
<CAPTION>
August 31, 2000
--------------------------------------
Pro Forma
Historical Pro Forma(1) As Adjusted(2)
---------- ------------ --------------
(In thousands except share data)
<S> <C> <C> <C>
Due to NDC........................... $ 75,014 -- --
Line of credit....................... -- $ 75,014 $ 75,014
Long-term debt, excluding current
portion............................. -- -- --
Shareholder's Equity:
NDC equity investment............... 133,004 -- --
Preferred stock, no par value,
5,000,000 authorized, none issued.. -- -- --
Common stock, no par value,
200,000,000 shares authorized, none
issued and outstanding (Historical)
and 26,279,708 issued and
outstanding (Pro Forma(1))
35,633,502 issued and outstanding
(Pro Forma, as adjusted(2))........ -- -- --
Paid in capital..................... -- 133,004 269,850
Cumulative translation adjustment... (314) (314) (314)
-------- -------- --------
Total Shareholder's Equity........... 132,690 132,690 269,536
-------- -------- --------
Total Capitalization................. $207,704 $207,704 $344,550
======== ======== ========
</TABLE>
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(1) Pro forma combined debt and capitalization at August 31, 2000 presents the
financial condition of Global Payments as if the distribution had occurred
on August 31, 2000 with adjustments made for the repayment of the amount
due to NDC with proceeds from a new bank line of credit and
reclassification of the NDC equity investment to paid in capital.
(2) Pro forma, as adjusted, combined debt and capitalization at August 31,
2000, presents the financial condition of Global Payments as if the
distribution and the acquisition of CIBC's merchant acquiring business had
occurred on August 31, 2000, with adjustments made for the repayment of
the amount due to NDC with proceeds from a new bank line of credit,
reclassification of the NDC equity investment to paid in capital and the
issuance of common shares in connection with the acquisition as an
increase to paid in capital.
<PAGE>
GLOBAL PAYMENTS' BUSINESS
Banking Regulations
Following our acquisition of CIBC's merchant acquiring business, CIBC will
own 26.25% of our common stock. As a result of CIBC's equity interest in our
company, we will be considered a subsidiary of CIBC for U.S. bank regulatory
purposes. CIBC is a Canadian Bank with operations in the United States.
Accordingly, CIBC is regulated as a bank holding company under provisions of
the Bank Holding Company Act. In being considered a subsidiary of CIBC, we will
be subject to those same regulations. As a general matter, we will be able to
operate our merchant service and funds transfer businesses as we have
historically but our ability to expand into unrelated businesses may be limited
unless they are activities the act allows or the Federal Reserve Board
approves.
Bank holding companies may engage in the business of banking, of managing
and controlling banks, and in other activities so closely related to managing
and controlling banks as to be a proper incident thereto. The Gramm-Leach-Bliley
legislation was enacted in 1999 and amended the Bank Holding Company Act to
allow greater operational flexibility for bank holding companies that are well
capitalized, well managed and meet certain other conditions. Such companies are
referred to as "financial holding companies." CIBC has elected to be a financial
holding company under the act. Financial holding companies may engage in
activities that are financial in nature, or that are incidental or complimentary
to financial activities. The legislation defines securities and insurance
activities as being permissible financial activities, allows certain merchant
banking activities, and establishes a procedure for the Federal Reserve to add
new activities. The Federal Reserve has taken a very cautious approach to adding
new financial activities to this list of permissible activities for financial
holding companies.
The Federal Reserve acts as umbrella supervisor for financial holding
companies and may establish consolidated capital requirements for such
companies. It has the right to examine all subsidiaries of financial holding
companies which will include our company following the acquisition. If a
financial holding company falls out of compliance with the well-managed, well-
capitalized, community reinvestment requirements, the holding company must
enter into an agreement with the Federal Reserve to rectify the situation. The
Federal Reserve may refuse to allow the financial holding company, which would
include its subsidiaries, to engage in new "financial" activities; may require
it to cease current "financial" activities; and may require it to divest its
bank.
The merchant services and funds transfer businesses that we conduct are
permissible activities for bank holding companies and we do not expect the
limitations described above to adversely affect our current operations. It is
possible, however, that these restrictions might limit out ability to enter
other businesses that we may wish to engage in at some time in the future. It
is also possible that these laws may be amended in the future, or new laws or
regulations adopted, that adversely affect our ability to engage in our current
or additional businesses.
<PAGE>
SUMMARY OF THE PURCHASE OF CIBC MERCHANT ACQUIRING BUSINESS
General
On November 9, 2000, we agreed to acquire certain net assets of the merchant
acquiring business of Canadian Imperial Bank of Commerce and to form a 10-year
marketing alliance with CIBC to offer VISA and debit card payment products and
services in Canada. Upon completion of the acquisition, CIBC will be our
largest shareholder and will be entitled to nominate two persons for election
to the board of directors.
The acquisition will be recorded using the purchase method of accounting. We
intend to operate the business in a manner consistent with CIBC's historical
operations. We will retain the major functions of sales, support and equipment
deployment in Canada and contract with CIBC for other key functions.
The acquisition is subject to completion of the distribution and customary
closing conditions, including obtaining all required regulatory approvals in
the United States and Canada. We anticipate closing within ten days after the
distribution is completed, subject to regulatory approval.
The following is a summary of each of the primary agreements involved in the
acquisition, the asset purchase agreement, the marketing alliance agreement,
the CIBC credit facility, the transition agreement and the investor rights
agreement. Copies of these agreements have been filed as exhibits to our
registration statement on Form 10. Please refer to "Where You Can Obtain
Additional Information" for information on how you can review these agreements.
Purchase Agreement
On November 9, 2000, we entered into an asset purchase agreement with CIBC
to purchase substantially all of the assets of their merchant acquiring
business. The assets comprise the business of accepting, processing and
settling credit and debit card transaction records for merchants. We have
agreed to pay CIBC approximately $137 million for the assets which they will in
turn immediately use to purchase 26.25% of the total number of shares of our
common stock outstanding or reserved for issuance upon exercise of outstanding
stock options on the closing date of the acquisition pursuant to a stock
purchase agreement.
The asset purchase agreement contains non-competition provisions for CIBC
and us. CIBC has agreed that it will not compete with us in the United States
or Canada by soliciting or accepting merchant acquiring business or acquire
control of a company with a merchant acquiring business for a period of time
ending the later of three years following the closing of the acquisition or one
year after any termination of the marketing alliance agreement, which has an
initial 10 year term and is described below. We have agreed that we will not
compete with CIBC by introducing or making available banking products to
merchants who are customers of CIBC.
The asset purchase agreement contains customary representations and
warranties from CIBC regarding the assets in the merchant acquiring business.
In addition to the customary conditions to the closing of the transaction, the
agreement requires the execution and delivery of a stock purchase agreement, a
transition agreement, a marketing alliance agreement, an investor rights
agreement, a trademark license agreement and a credit facility. There are also
regulatory approvals that must be satisfied prior to the closing. These include
approvals or waivers under the Canadian Competition Act, the Investment Canada
Act, the Bank Act (Canada), the Bank Holding Company Act (U.S.), the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (U.S.), and by the Office of
the Superintendent of Financial Institutions (Canada). The agreement also
requires that the distribution as contemplated in this information statement
must be completed prior to the closing of the acquisition.
The stock purchase agreement under which CIBC will purchase 26.25% of our
common stock calculated on a fully-diluted basis will contain customary
representations and warranties regarding our common stock and CIBC's investment
experience and investment intent.
<PAGE>
Under the terms of the asset purchase agreement and the stock purchase
agreement, CIBC agrees to indemnify us for breaches of their representations
and warranties and covenants and for liabilities other than those expressly
assumed by us. There will be no indemnity obligation by CIBC unless our losses
are greater than $500,000 and then only to the extent that the losses exceed
that amount. In addition, there is an overall indemnity cap that limits CIBC's
indemnity obligation to no more than C$150,000,000. We have agreed to indemnify
CIBC for breaches of our representations and warranties and covenants and for
the assumed liabilities, with the same indemnity limitations as CIBC's.
Marketing Alliance Agreement
As part of the acquisition, we will enter into a marketing alliance
agreement with CIBC. Under the marketing alliance,
. CIBC will refer all new merchant processing relationships exclusively to
us in exchange for a referral fee;
. we will encourage our new merchant customers who were initially targeted
by our joint marketing efforts to open merchant accounts with CIBC; and
. we will work together to develop emerging payment solutions.
The marketing alliance will be branded and advertised under the name "CIBC
MCS, an alliance with Global Payments Inc." Our use of the bank's name will be
covered by a separate trademark license agreement.
CIBC will also continue to provide the banking services required as part of
the merchant processing business and will provide us with access to VISA and
MasterCard clearing capabilities in the U.S. and VISA clearing capabilities in
Canada.
The marketing alliance agreement has an initial term of ten years, with
automatic renewals for successive one year terms unless either of us gives
notice of termination 270 days prior to the end of any term. If either of us
defaults on our obligations under the agreement, or become insolvent, the
agreement may be terminated by the non-defaulting party. In that circumstance,
the agreement would extend for 270 days beyond notice of the termination to
allow for an orderly transition of the business.
CIBC Credit Agreement
Canadian merchant acquiring businesses typically advance payment to
merchants for credit card transactions before receiving the interchange
reimbursement from the card issuing banks. This business model differs sharply
from the U.S. where merchant funding only occurs after we receive the funds
from the card issuing banks. CIBC has agreed to provide us with a revolving
credit facility which will be available to us to fund the approximate two day
interval between our payment of Canadian merchants and our receipt of the
interchange fee.
The credit facility will provide us with a line of credit of up to C$140
million with an additional overdraft facility available to cover larger
advances during periods of peak usage of credit and debit cards, and will carry
an interest rate based on Canadian Dollar LIBOR (C$LIBOR). It contains
customary covenants and events of default. The line of credit will be secured
by a first priority security interest in our accounts receivable from VISA
Canada/International, and will be guaranteed by us and our subsidiaries. This
guarantee will be subordinated to our primary credit facility. The CIBC credit
facility will have an initial term of 364 days from the date of the closing of
the acquisition. The credit facility is renewable annually at CIBC's option.
<PAGE>
Transition Agreement
At the closing of the acquisition, we will enter into a transition agreement
with CIBC under which CIBC will continue to provide some of the services
currently provided to the merchants until we can provide for an orderly
migration to our own services. The balance of the services will be provided by
us through our senior management team and the sales, customer support,
technology and terminal services acquired by us at closing. CIBC will agree to
perform their services in substantially the same manner as the services have
been performed by CIBC prior to the acquisition. We will reimburse CIBC for its
reasonable costs incurred in providing the services. The agreement will have a
term of up to 24 months. CIBC also will allow employees who will be hired by us
in connection with the acquisition to continue to occupy space at several CIBC
regional offices during the transition period.
Investor Rights Agreement
At the closing of the acquisition, we will enter into an investor rights
agreement with CIBC which grants rights to and imposes restrictions on CIBC as
a shareholder, other than those shared by all of our shareholders.
The agreement will restrict CIBC's right to resell the shares of common
stock it will receive when we purchase CIBC's merchant acquiring business. CIBC
may sell these share at any time, if it has our prior written consent, if the
sale is to a CIBC subsidiary, or if it is required to do so by a regulatory
body. During the period starting two years after closing and ending on the
earlier of six months after termination of the marketing alliance agreement or
three years following the closing, CIBC may only sell its shares pursuant to
the limitations provided in Rule 144 under the Securities Act or pursuant to a
tender offer that has not been rejected by our board of directors.
The agreement also will restrict CIBC's ability to purchase additional
shares of our common stock until the earlier of five years after the closing of
the acquisition, or six months after the termination of the marketing alliance
agreement. Under this standstill, CIBC will agree that it will not purchase
more than 29.9% of our common stock during this period, unless an unaffiliated
third party has commenced a tender offer for 40% or more of our common stock
that our board does not reject or such third party acquires 35% or more of our
outstanding common stock. Furthermore, during the standstill period, CIBC may
not undertake to effect or participate in any acquisition of our voting
securities or a substantial portion of our assets through any merger,
recapitalization, tender or exchange offer or any other means, or seek to
exercise a controlling influence over our board of directors.
Three years after the closing of the acquisition, CIBC will be permitted to
participate in any of our registered public offerings of securities or they may
require us to register their shares of our common stock for sale to the public.
The investor rights agreement will limit CIBC's demand registration rights,
however, to one demand in any 12 month period if we are a Form S-1 registrant,
and three demands in any 12 month period if we are a Form S-3 registrant. In
addition, we will not be required to act on their demand registration unless
CIBC proposes to sell securities at an aggregate price to the public of at
least US$5,000,000. The registration rights are also subject to other customary
limitations.
At the closing of the acquisition, we will appoint two designees of CIBC to
our board. One designee will be appointed to a term ending not less than one
year after the closing and the other designee will be appointed to a term
ending not less than two years after the closing. Following the expiration of
their initial terms, we will nominate CIBC's directors for re-election for one
additional term and will use our best efforts to elect them to our board. We
will also appoint one of the designees to the audit and compensation committees
of our board as well as other key committees mutually agreed to by the parties.
The investor rights agreement will also limit our actions and business and
those of CIBC required by regulatory authorities. Specifically, we will agree
to limit our acquisitions of voting securities and assets of other companies
and businesses, and the types of businesses in which we engage, to comply with
the provisions of the Bank Holding Company Act (U.S.) and the Bank Act
(Canada). If we fail to comply with this provision, CIBC will no longer be
bound by the restrictions on transfer of their shares of our common stock and
will automatically be permitted to demand registration of their shares.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
NDC eCOMMERCE BUSINESS SEGMENT (To be reorganized as Global Payments Inc.)
Historical:
Report of Independent Public Accountants................................ F-2
Combined Statements of Income for the Three Months ended August 31, 2000
and 1999 (unaudited) and for the Years ended May 31, 2000, 1999, and
1998 .................................................................. F-3
Combined Balance Sheets as of May 31, 2000 and 1999 and August 31, 2000
(unaudited) ........................................................... F-4
Combined Statements of Cash Flows for the Three Months ended August 31,
2000 and 1999 (unaudited) and for the Years ended May 31, 2000, 1999,
and 1998 .............................................................. F-5
Combined Statements of Changes in Shareholder's Equity for the Years
ended May 31, 2000, 1999, and 1998 and for the Three Months ended
August 31, 2000 (unaudited) ........................................... F-6
Notes to Combined Financial Statements.................................. F-7
Report of Independent Public Accountants as to Schedule................. F-18
Combined Schedule II--Valuation and Qualifying Accounts................. F-19
Pro Forma (Unaudited)
Introduction to the Pro Forma Combined Financial Statements............. F-20
Pro Forma Combined Balance Sheet as of August 31, 2000.................. F-21
Pro Forma Combined Statements of Income for the Year ended May 31,
2000................................................................... F-22
Pro Forma Combined Statements of Income for the Three Months ended
August 31, 2000........................................................ F-23
Notes to Pro Forma Combined Financial Statements........................ F-24
CIBC MERCHANT ACQUIRING BUSINESS
Report of Independent Public Accountants................................. F-26
Balance Sheets as of July 31, 2000 and October 31, 1999.................. F-27
Statements of Income for the Nine Months ended July 31, 2000 and the
Years ended October 31, 1999 and 1998................................... F-28
Statements of Cash Flows for the Nine Months ended July 31, 2000 and the
Years ended October 31, 1999 and 1998................................... F-29
Statements of Changes in Shareholder's Equity for the Nine Months ended
July 31, 2000 and the Years ended October 31, 1999 and 1998............. F-30
Notes to Financial Statements............................................ F-31
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Data Corporation:
We have audited the accompanying combined balance sheets of the NDC
eCommerce business segment (to be reorganized as Global Payments Inc., a
Georgia corporation--Note 1) as of May 31, 2000 and May 31, 1999 and the
related combined statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended May 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits 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 the NDC eCommerce business
segment as of May 31, 2000 and May 31, 1999 and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 25, 2000
<PAGE>
COMBINED STATEMENTS OF INCOME
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.--Note 1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
August 31, Year Ended May 31,
---------------- ----------------------------
2000 1999 2000 1999 1998
------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues...................... $87,191 $89,828 $340,033 $330,051 $291,547
------- ------- -------- -------- --------
Operating expenses:
Cost of service.............. 45,881 46,022 181,479 169,805 153,518
Sales, general and
administrative.............. 24,728 23,267 95,342 83,571 80,055
------- ------- -------- -------- --------
70,609 69,289 276,821 253,376 233,573
------- ------- -------- -------- --------
Operating income.............. 16,582 20,539 63,212 76,675 57,974
------- ------- -------- -------- --------
Other income (expense):
Interest and other income.... 700 283 796 1,183 1,450
Interest and other expense... (1,791) (1,533) (6,119) (7,448) (6,190)
Minority interest in
earnings.................... (1,427) (1,071) (4,117) (3,809) (2,626)
------- ------- -------- -------- --------
(2,518) (2,321) (9,440) (10,074) (7,366)
------- ------- -------- -------- --------
Income before income taxes.... 14,064 18,218 53,772 66,601 50,608
Provision for income taxes.... 5,415 7,014 20,725 25,265 19,531
------- ------- -------- -------- --------
Net income................... $ 8,649 $11,204 $ 33,047 $ 41,336 $ 31,077
======= ======= ======== ======== ========
Basic weighted average shares
outstanding.................. 26,309 27,101 26,586 26,980 25,760
------- ------- -------- -------- --------
Basic earnings per share...... $ 0.33 $ 0.41 $ 1.24 $ 1.53 $ 1.21
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Combined Financial
Statements.
<PAGE>
COMBINED BALANCE SHEETS
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.--Note 1)
(In thousands)
<TABLE>
<CAPTION>
August 31, May 31, May 31,
2000 2000 1999
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 1,199 $ 2,766 $ 1,356
Billed accounts receivable.................... 38,019 35,176 38,779
Allowance for doubtful accounts............... (1,148) (1,231) (1,202)
-------- -------- --------
Accounts receivable, net..................... 36,871 33,945 37,577
-------- -------- --------
Merchant processing receivable................ 33,939 32,497 22,063
Income tax receivable......................... -- 980 5,340
Inventory..................................... 3,976 3,694 1,582
Deferred income taxes......................... -- -- 828
Prepaid expenses and other current assets..... 7,875 6,343 3,956
-------- -------- --------
Total current assets......................... 83,860 80,225 72,702
-------- -------- --------
Property and equipment, net.................... 24,290 28,665 31,769
Intangible assets, net......................... 171,181 173,726 184,074
Investments.................................... 5,000 5,000 --
Other.......................................... 1,519 330 1,122
-------- -------- --------
Total Assets................................. $285,850 $287,946 $289,667
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Due to NDC.................................... $ 75,014 $ 96,125 $ 89,375
Merchant processing payable................... 18,088 11,880 23,725
Current portion of long-term debt............. -- -- 6,000
Obligations under capital leases.............. 2,842 2,900 3,400
Accounts payable and accrued liabilities...... 21,341 25,249 27,792
Income taxes payable.......................... 3,823 -- --
Deferred income taxes......................... 410 410 --
-------- -------- --------
Total current liabilities.................... 121,518 136,564 150,292
-------- -------- --------
Obligations under capital leases............... 3,664 4,332 6,374
Deferred income taxes.......................... 5,403 5,403 4,855
Other long-term liabilities.................... 3,824 2,291 1,401
-------- -------- --------
Total liabilities............................ 134,409 148,590 162,922
-------- -------- --------
Commitments and contingencies
Minority interest in equity of subsidiaries.... 18,751 18,472 18,732
Shareholder's equity:
NDC equity investment......................... 133,004 121,250 108,178
Cumulative translation adjustment............. (314) (365) (165)
-------- -------- --------
Total shareholder's equity................... 132,690 120,885 108,013
-------- -------- --------
Total Liabilities and Shareholder's Equity..... $285,850 $287,946 $289,667
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Combined Financial
Statements.
<PAGE>
COMBINED STATEMENTS OF CASH FLOWS
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.--Note 1)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31, Year Ended May 31,
-------------------- ----------------------------
2000 1999 2000 1999 1998
--------- --------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................ $ 8,649 $ 11,204 $ 33,047 $ 41,336 $ 31,077
Adjustments to reconcile
net income to cash
provided by operating
activities before changes
in assets and
liabilities:
Depreciation and
amortization............ 2,450 2,528 9,688 9,438 8,650
Amortization of acquired
intangibles and
goodwill................ 2,546 2,601 10,340 10,515 9,806
Deferred income taxes.... -- -- 1,786 6,690 1,804
Minority interest in
earnings................ 1,427 1,071 4,117 3,809 2,626
Provision for bad debts.. 132 87 1,019 479 502
Other, net............... 394 441 1,500 1,909 1,884
Changes in assets and
liabilities which
provided (used) cash, net
of the effects of
acquisitions:
Accounts receivable,
net..................... (3,035) (9,335) 2,423 (4,843) (3,146)
Merchant processing...... 4,766 (7,073) (22,280) 1,488 (2,386)
Inventory................ (282) (612) (2,112) (739) 539
Prepaid expenses and
other assets............ (2,607) (5,069) (1,269) (54) (2,493)
Accounts payable and
accrued liabilities..... (2,486) 15,547 (999) (3,589) 1,769
Deferred income.......... 512 (134) (324) 150 (146)
Income taxes............. 4,803 10,199 4,360 (6,120) (4,688)
--------- --------- -------- -------- --------
Net cash provided by
operating activities..... 17,269 21,455 41,296 60,469 45,798
--------- --------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures...... (2,016) (1,878) (6,002) (12,528) (8,666)
Business acquisitions, net
of acquired cash......... -- -- -- (1,484) (16,966)
Increase in investments... -- -- (5,000) -- --
--------- --------- -------- -------- --------
Net cash used in investing
activities............... (2,016) (1,878) (11,002) (14,012) (25,632)
--------- --------- -------- -------- --------
Cash flows from financing
activities:
Net borrowings
(repayments) to (from)
NDC...................... (21,111) 500 6,750 (20,000) 37,500
Net increase (decrease) in
NDC equity investment.... 6,165 (11,324) (21,800) (18,596) (50,351)
Principal payments under
capital lease
arrangements and other
long-term debt........... (726) (6,891) (9,457) (3,552) (3,431)
Distributions to minority
interests................ (1,148) (1,194) (4,377) (4,080) (5,118)
--------- --------- -------- -------- --------
Net cash provided by (used
in) financing
activities............... (16,820) (18,909) (28,884) (46,228) (21,400)
--------- --------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents...... (1,567) 668 1,410 229 (1,234)
Cash and cash equivalents,
beginning of period....... 2,766 1,356 1,356 1,127 2,361
--------- --------- -------- -------- --------
Cash and cash equivalents,
end of period............. $ 1,199 $ 2,024 $ 2,766 $ 1,356 $ 1,127
========= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Combined Financial
Statements.
<PAGE>
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
NDC eCOMMERCE BUSINESS SEQUENCE
(To be reorganized as Global Payments Inc.--Note 1)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
NDC Equity Comprehensive Total
Investment Loss Equity
---------- ------------- --------
<S> <C> <C> <C>
Balance at May 31, 1997..................... $104,027 $ 17 $104,044
-------- ----- --------
Comprehensive income
Net income................................ 31,077 31,077
Foreign currency translation adjustment... (141) (141)
--------
Total comprehensive income................. 30,936
--------
Net transactions with NDC.................. (13,264) (13,264)
Net distributions to NDC................... (36,820) (36,820)
-------- ----- --------
Balance at May 31, 1998..................... 85,020 (124) 84,896
-------- ----- --------
Comprehensive income
Net income................................ 41,336 41,336
Foreign currency translation adjustment... (41) (41)
--------
Total comprehensive income................. 41,295
--------
Net transactions with NDC.................. (13,224) (13,224)
Net distributions to NDC................... (4,954) (4,954)
-------- ----- --------
Balance at May 31, 1999..................... 108,178 (165) 108,013
-------- ----- --------
Comprehensive income
Net income................................ 33,047 33,047
Foreign currency translation adjustment... (200) (200)
--------
Total comprehensive income................. 32,847
--------
Net transactions with NDC.................. (12,718) (12,718)
Net distributions to NDC................... (7,257) (7,257)
-------- ----- --------
Balance at May 31, 2000..................... 121,250 (365) 120,885
-------- ----- --------
Comprehensive income (unaudited)...........
Net income (unaudited).................... 8,649 8,649
Foreign currency translation adjustment
(unaudited).............................. 51 51
--------
Total comprehensive income (unaudited)..... 8,700
--------
Net transactions with NDC (unaudited)...... (6,051) (6,051)
Net distributions to NDC (unaudited)....... 9,156 9,156
-------- ----- --------
Balance at August 31, 2000 (unaudited)...... $133,004 $(314) $132,690
======== ===== ========
</TABLE>
The accompanying notes are an integral part of these Combined Financial
Statements.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1--Spin off and Basis of Presentation
In December 1999, National Data Corporation announced its intent to spin-off
the NDC eCommerce business segment into a separate publicly traded company with
its own management and Board of Directors. This Distribution is expected to
occur on , 2000 (the "Distribution Date") and will be accomplished
by forming Global Payments Inc. ("Global Payments"), transferring the stock of
the companies which comprise the NDC eCommerce business segment to Global
Payments and then distributing all of the shares of common stock of Global
Payments to NDC's stockholders. NDC stockholders will receive 0.8 share of
Global Payments for each NDC share held as of the Distribution Date. After the
Distribution, Global Payments and NDC will be two separate public companies.
Global Payments was incorporated on September 1, 2000 and will not have any
operations, assets or liabilities until immediately prior to the Distribution.
These combined financial statements include the accounts of the subsidiaries
of NDC that comprise its eCommerce business segment (collectively referred to
as "the Company"). The Company is an integrated provider of high volume
electronic transaction processing and value-added end-to-end information
services and systems to merchants, multinational corporations, financial
institutions, and government agencies. These services are marketed to customers
within the merchant services and the funds transfer business through various
sales channels. The Company's operations are provided in the United States,
Canada, and Europe.
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosure About Segments of an Enterprise and Related
Information." Accordingly, the Company's chief operating decision making group
currently operates as one reportable segment--electronic transaction
processing--therefore the majority of the disclosures required by SFAS 131 do
not apply to the Company. The Company's results of operations and its financial
condition are not significantly reliant upon any single customer or foreign
operations. Revenues from external customers from the Company's two service
offerings are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Merchant services................................. $318,262 $307,317 $268,752
Funds transfer.................................... 21,771 22,734 22,795
-------- -------- --------
$340,033 $330,051 $291,547
======== ======== ========
</TABLE>
The combined financial statements have been prepared on the historical cost
basis in accordance with accounting principles generally accepted in the United
States, and present the Company's financial position, results of operations,
and cash flows as derived from NDC's historical financial statements.
Significant intercompany transactions have been eliminated in consolidation. As
further described in Note 4, certain allocations of corporate and interest
expenses have been allocated that were previously not allocated to NDC's
eCommerce business segment. These allocations were based on an estimate of the
proportion of corporate expenses related to the Company, utilizing such factors
as revenues, number of employees, number of transactions processed and other
applicable factors. In the opinion of management, these allocations have been
made on a reasonable basis. The costs of these services charged to the Company
may not reflect the actual costs the Company would have incurred for similar
services as a stand-alone company.
In conjunction with the separation of their businesses, the Company and NDC
will enter into various agreements that address the allocation of assets and
liabilities between them and that define their relationship after the
Distribution, including the Distribution Agreement, the Tax Sharing and
Indemnification Agreement, the Employee Benefits Agreement, the Lease Agreement
for Office Headquarters, the Intercompany Systems/Network Services Agreement,
the Batch Processing Agreement and the Transition Support Agreement.
Note 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
<PAGE>
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 related to information and transaction processing services
provided is recognized as such services are performed. Revenue for processing
services provided directly to merchants is recorded net of certain costs not
controlled by the Company (primarily interchange fees charged by credit card
associations).
Cash and cash equivalents--Cash and cash equivalents include cash on hand
and all liquid investments with an initial maturity of three months or less
when purchased.
Inventory--Inventory, which includes microcomputer hardware and peripheral
equipment, and electronic point-of-sale terminals, is stated at the lower of
cost or market. Cost is determined by using the average cost method.
Merchant processing receivable/payable--The merchant processing
receivable/payable results from timing differences in the Company's settlement
process with merchants and credit card sales processed.
Property and equipment--Property and equipment, including equipment under
capital leases, is stated at cost. Depreciation and amortization are calculated
using the straight-line method. Equipment is depreciated over 2 to 5 year
lives. Leasehold improvements and property acquired under capital leases are
amortized over the shorter of the useful life of the asset or the term of the
lease. The costs of purchased and internally developed software used to provide
services to customers or internal administrative services are capitalized and
amortized on a straight-line basis over their estimated useful lives, not to
exceed 5 years. Maintenance and repairs are charged to operations as incurred.
Intangible assets--Intangible assets primarily represent goodwill, customer
base and trademarks associated with acquisitions. For significant acquisitions,
the Company obtains an independent valuation to determine the fair value and
related useful lives of customer base, trademarks, goodwill and other
identifiable intangibles. Customer base and trademarks acquired are amortized
using the straight-line method over their estimated useful lives, which
approximates the legal lives when applicable, of 10 to 40 years. Goodwill
represents the excess of the cost of acquired businesses over the fair market
value of their identifiable net assets. Goodwill is being amortized on a
straight-line basis over periods ranging from 7 to 40 years.
Impairment of long-lived assets--The Company regularly evaluates whether
events and circumstances have occurred that indicate the carrying amount of
property and equipment or goodwill and other intangibles may warrant revision
or may not be recoverable. When factors indicate that long-lived assets should
be evaluated for possible impairment, the Company assesses the recoverability
of long-lived assets by determining whether the carrying value of such long-
lived assets will be recovered through the future undiscounted cash flows
expected from use of the asset and its eventual disposition. In management's
opinion, the long-lived assets, including property and equipment and intangible
assets, are appropriately valued at May 31, 2000 and May 31, 1999.
Investments--The Company holds an investment in eCharge Corporation, a
private company that offers Internet users secure and convenient ways to make
purchases over the Internet. This investment is recorded at its historical cost
of $5.0 million. Although the market value is not readily determinable,
management believes the fair value of this investment approximates its carrying
amount.
Income taxes--Deferred income taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax laws and rates (see Note 10).
<PAGE>
Fair value of financial instruments--Management considers that the carrying
amounts of financial instruments, including cash, receivables, accounts payable
and accrued expenses, and current maturities of long-term obligations,
approximates fair value.
Foreign currency translation--The Company has a foreign subsidiary in Canada
and the United Kingdom, whose functional currency is their local currency.
Gains and losses on transactions denominated in currencies other than the
functional currencies are included in determining net income for the period in
which exchange rates change. The assets and liabilities of foreign subsidiaries
are translated at the year-end rate of exchange, and income statement items are
translated at the average rates prevailing during the year. The resulting
translation adjustment is recorded as a component of shareholders' equity.
Translation gains and losses on intercompany balances of a long-term investment
nature are also recorded as a component of shareholders' equity. The effects of
foreign currency gains and losses arising from these translations of assets and
liabilities are included as a component of other comprehensive income.
Earnings Per Share--Basic earnings per share is computed by dividing
reported earnings available to common shareholders by weighted average shares
outstanding during the period. Earnings available to common shareholders is the
same as reported net income for all periods presented. Weighted average shares
outstanding is computed by applying the distribution ratio of 0.8 of a share of
the Company for each NDC share held to the historical NDC weighted average
shares outstanding for the same periods presented.
Diluted earnings per share is computed by dividing reported earnings
available to common shareholders by weighted average shares outstanding during
the period and the impact of securities that, if exercised, would have a
dilutive effect on earnings per share. All options with an exercise price less
than the average market share price for the period generally are assumed to
have a dilutive effect on earnings per share. Diluted earnings per share is not
presented in these financial statements, as there are no historical market
share prices for the Company, as public trading will not commence until the
distribution occurs. Accordingly, the dilutive effect of stock options cannot
be determined.
Unaudited interim financial information--The accompanying interim combined
financial statements have been prepared by the Company in accordance with
accounting principles generally accepted in the United States. In the opinion
of management of the Company, these combined financial statements contain all
adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the interim periods. Results of operations
for interim periods presented herein are not necessarily indicative of results
of operations for the entire year.
Note 3--Business Acquisition
In May 1998, the Company acquired certain assets of CheckRite International,
Inc. This acquisition has been recorded using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair value as
of the date of acquisition. The operating results are included in the Company's
combined statements of income from the date of the acquisition.
The aggregate price paid for this acquisition and final adjustments to prior
period acquisitions consisted of $17.0 million; liabilities were assumed as
follows:
<TABLE>
<CAPTION>
1998
--------------
(In thousands)
<S> <C>
Fair value of assets acquired................................. $19,814
Cash acquired................................................. (1,124)
Liabilities assumed........................................... (1,724)
-------
Cash paid for acquisitions.................................... $16,966
=======
</TABLE>
The excess of cost over tangible assets acquired of $16.3 million was
allocated to goodwill and other intangible assets. The depreciable and
intangible assets are being amortized over periods ranging from 2 to 20 years
(see Note 7).
<PAGE>
Note 4--Transactions with NDC
There were no material intercompany purchase or sales transactions between
NDC and the Company. The Company was charged with incremental corporate costs
in the amount of $5.0 million in fiscal 2000, $3.2 million in fiscal 1999, and
$6.6 million in fiscal 1998. These allocations were based on an estimate of the
proportion of corporate expenses related to the Company, utilizing such factors
as revenues, number of employees, number of transactions processed and other
applicable factors.
The Company was also charged corporate interest expense based on the
anticipated corporate debt allocations of NDC to the Company at the
Distribution Date. The Company utilized a rollback approach to allocate the
anticipated portion of the NDC consolidated group's debt and interest expense
for all historical periods presented. This treatment records the current
proposed debt allocation percentage for all historical periods presented. The
allocated portion of the consolidated group's debt is presented as due to NDC
on the accompanying combined balance sheets. Interest expense recorded by the
Company related to this debt was $4.6 million in fiscal 2000, $5.0 million in
fiscal 1999, and $2.8 million in fiscal 1998 and is included in interest and
other expense.
Note 5--Property and Equipment
As of May 31, 2000 and May 31, 1999, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Property under capital leases............................... $11,838 $14,738
Equipment................................................... 30,647 36,421
Software.................................................... 19,594 20,147
Leasehold improvements...................................... 6,410 7,338
Furniture and fixtures...................................... 3,002 4,974
Work in progress............................................ 2,532 1,852
------- -------
74,023 85,470
Less: accumulated depreciation and amortization............. 45,358 53,701
------- -------
$28,665 $31,769
======= =======
</TABLE>
Note 6--Software Costs
The following table sets forth information regarding the Company's costs
associated with software development for the years ended May 31, 2000, May 31,
1999 and May 31, 1998. These amounts exclude other expenditures for product
improvements, customer requested enhancements, maintenance and Year 2000
remediation.
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Total costs associated with software development...... $2,623 $1,774 $1,822
Less: capitalization of internally developed
software............................................. 884 625 122
------ ------ ------
Net research and development expense.................. $1,739 $1,149 $1,700
====== ====== ======
</TABLE>
The Company capitalizes costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization is computed on an individual product
basis and has been recognized for those products available for market based on
the products' estimated economic lives, not to exceed five years.
<PAGE>
Additionally, the Company capitalizes costs related to the development of
computer software developed or obtained for internal use in accordance with the
AICPA SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Costs incurred in the application development phase
are capitalized and amortized over the useful life, not to exceed five years.
Total unamortized capitalized software costs (purchased and internally
developed) were approximately $7.9 million and $10.3 million as of May 31, 2000
and May 31, 1999, respectively. Total software amortization expense was
approximately $2.6 million, $1.9 million and $2.0 million in fiscal 2000, 1999
and 1998, respectively.
Note 7--Intangible Assets
As of May 31, 2000 and May 31, 1999, intangible assets consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Customer base............................................. $102,475 $102,483
Trademarks................................................ 28,273 28,273
Goodwill and other intangibles............................ 120,199 120,199
-------- --------
250,947 250,955
Less: accumulated amortization............................ 77,221 66,881
-------- --------
$173,726 $184,074
======== ========
</TABLE>
The Company had expanded its focus on acquisition opportunities and
alliances with other companies to increase its market penetration,
technological capabilities, product offerings and distribution capabilities to
support its business strategy. Since fiscal 1996, the Company has completed
seven acquisitions accounted for under the purchase method.
In 1996, the Company acquired the Merchant Automated Point-of-Sale Program
("MAPP") from MasterCard International Incorporated ("MasterCard"). The net
assets of MAPP consisted primarily of tangible personal property, leased
personal and real property, customer contracts, assembled workforce and the
goodwill of the business. The Company paid $110 million plus the granting of a
7.5% membership interest in one of the Company's subsidiaries (Global Payment
Systems LLC) to MasterCard. The total consideration paid for the MAPP business,
was $131.6 million, and resulted in an excess cost over tangible assets of
$127.2 million. The aggregate estimated life of these intangible assets is 35
years.
Note 8--Accounts Payable and Accrued Liabilities
As of May 31, 2000 and May 31, 1999, accounts payable and accrued
liabilities consisted of the following:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Trade accounts payable...................................... $ 7,209 $ 6,230
Accrued compensation and benefits........................... 8,043 6,843
Accrued pensions............................................ 372 524
Other accrued liabilities................................... 9,625 14,063
------- -------
$25,249 $27,660
======= =======
</TABLE>
Note 9--Retirement Benefits
Historically, the Company has participated in the NDC noncontributory
defined benefit pension plan (the "Plan") covering substantially all of its
United States employees who have met the eligibility provisions of the plan as
of May 31, 1998. NDC closed the defined benefit pension plan to new
participants beginning
<PAGE>
June 1, 1998. Benefits are based on years of service and the employee's
compensation during the highest five consecutive years of earnings of the last
ten years of service. Plan provisions and funding meet the requirements of the
Employee Retirement Income Security Act of 1974, as amended. The expenses for
the plan are allocated to the Company based on the relative projected benefit
obligations for all the Company's employees compared with the obligations for
all participants. In the opinion of management, the expenses have been
allocated on a reasonable basis and, for fiscal 2000, were actuarially
allocated to approximate the expense Global Payments would have incurred had it
been operating on a stand-alone basis.
The following table provides a reconciliation of the changes in the Plan's
benefit obligations and fair value of assets over the one-year period ending
May 31, 2000 and a statement of funded status:
Changes in benefit obligations
<TABLE>
<CAPTION>
2000
--------------
(In thousands)
<S> <C>
Balance at beginning of year.................................. $6,268
Service cost.................................................. --
Interest cost................................................. 453
Benefits paid................................................. (219)
Actuarial gain................................................ (383)
------
Balance at end of year........................................ $6,119
======
</TABLE>
Changes in plan assets
<TABLE>
<CAPTION>
2000
--------------
(In thousands)
<S> <C>
Balance at beginning of year.................................. $5,763
Actual return on plan assets.................................. 642
Employer contributions........................................ --
Benefits paid................................................. (219)
------
Balance at end of year........................................ $6,186
======
</TABLE>
The accrued pension costs recognized in the Consolidated Balance Sheets were
as follows:
<TABLE>
<CAPTION>
2000
--------------
(In thousands)
<S> <C>
Funded status............................................... $ 67
Unrecognized net (gain) loss................................ (391)
Unrecognized prior service cost............................. 42
Unrecognized net asset at June 1, 1985, being amortized over
17 years................................................... (90)
-----
Accrued pension cost........................................ $(372)
=====
</TABLE>
Net pension expense (income) included the following components for the
fiscal year ending May 31:
<TABLE>
<CAPTION>
2000
--------------
(In thousands)
<S> <C>
Service cost-benefits earned during the Period................ $ --
Interest cost on projected benefit obligation................. 453
Expected return on plan assets................................ (576)
Net amortization and deferral................................. (30)
-----
Net pension expense (income).................................. $(153)
=====
</TABLE>
<PAGE>
Significant assumptions used in determining net pension expense and related
obligations were as follows:
<TABLE>
<CAPTION>
2000
-----
<S> <C>
Discount rate......................................................... 7.75%
Rate of increase in compensation levels............................... 4.33%
Expected long-term rate of return on assets........................... 10.00%
</TABLE>
Information relating to accumulated benefits and plan assets as they may be
allocable to the Company's participants at May 31, 1999 and 1998 is not
available. The pension expense allocated to the Company for fiscal 1999 and
1998 was $0.1 million and $1.1 million, respectively.
Historically, the Company has participated in the NDC deferred compensation
401(k) plan that is available to substantially all employees with three months
of service. Expenses of $.6 million, $.9 million, and $.8 million were
allocated to the Company in proportion to total payroll for fiscal 2000, 1999,
and 1998, respectively. The Company intends to establish its own 401(k) with
substantially the same terms as the existing NDC plan with the matching
contribution in the form of Global Payments' common stock.
Note 10--Income Taxes
Historically, the Company has been included in the consolidated federal
income tax return of NDC. Tax provisions are settled through the intercompany
account and NDC made income tax payments on behalf of the Company (see Note
15). The Company's provision for income taxes in the accompanying consolidated
statements of income reflects federal and state income taxes calculated on the
Company's separate income.
The provision for income taxes includes:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
Federal............................................. $16,266 $20,146 $16,182
State............................................... 780 1,481 1,545
------- ------- -------
17,046 21,627 17,727
------- ------- -------
Deferred tax expense:
Federal............................................. 3,389 3,366 1,677
State............................................... 290 272 127
------- ------- -------
3,679 3,638 1,804
------- ------- -------
Total................................................ $20,725 $25,265 $19,531
======= ======= =======
</TABLE>
The Company's effective tax rates differ from federal statutory rates as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................ 35.0 % 35.0 % 35.0 %
State income taxes, net of federal income tax
benefit.............................................. 1.3 % 1.7 % 2.2 %
Non-deductible amortization and write-off of
intangible assets.................................... 1.6 % 1.3 % 2.2 %
Tax credits........................................... (0.5)% (0.3)% (0.2)%
Other................................................. 1.1 % 0.2 % (0.6)%
---- ---- ----
Total................................................ 38.5 % 37.9 % 38.6 %
==== ==== ====
</TABLE>
<PAGE>
Deferred income taxes as of May 31, 2000 and May 31, 1999 reflect the impact
of temporary differences between the amounts of assets and liabilities for
financial accounting and income tax purposes. As of May 31, 2000 and May 31,
1999, principal components of deferred tax items were as follows:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ -- $ 183
Accrued expenses......................................... 368 958
------- -------
368 1,141
------- -------
Deferred tax liabilities:
Property and equipment................................... 1,692 3,654
Acquired intangibles..................................... 3,903 506
Prepaid expenses......................................... 386 418
Other.................................................... 200 590
------- -------
6,181 5,168
------- -------
Net deferred tax liability................................ (5,813) (4,027)
Less: Current deferred tax (liability) asset.............. (410) 828
------- -------
Non-current deferred tax liability........................ $(5,403) $(4,855)
======= =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Realization of
the operating loss carry-forwards is not considered by management to be
uncertain. The Company has not established valuation allowances for these tax
assets. Net operating loss carry-forwards expire between the fiscal years 2001
and 2007.
Note 11--Long-Term Debt
As of May 31, 1999, long-term debt classified as current portion consisted
of a promissory note issued to Electronic Data Systems Corporation in the
amount of $6.0 million. This note was settled on June 30, 1999. This note was
issued in consideration for the Company's acquisition of their multi-client
bank card processing business in January 1997.
Note 12--Shareholder's Equity
NDC equity investment--NDC's equity investment includes the original
investment in the Company, accumulated income of the Company, and the dividend
to NDC arising from the forgiveness of the net intercompany receivable due from
NDC reflecting transactions described in Note 4. The NDC equity investment as
of May 31, 2000 and May 31, 1999 was $121.3 million and $108.2 million,
respectively.
Stock Options--NDC has certain Stock Option Plans (the "Plans") under which
incentive stock options and non-qualified stock options have been granted to
officers, key employees and directors of NDC. In connection with the separation
of the Company from NDC, stock options under the Plans held by employees of the
Company that are not exercised prior to the date of the Distribution will be
replaced with options of Global Payments. In accordance with the provisions of
EITF 90-9, NDC stock options will be replaced with Global Payments stock
options in amounts and at exercise prices intended to preserve the economic
benefit of the NDC stock options at such time. No compensation expense is
expected to result from the replacement of the options. The number of shares of
NDC common stock subject to options held by option holders expected to become
Global Payments employees at May 31, 2000 was 639,366 shares. The exercise
price of such options range from $6.67 to $37.56. The ultimate number of stock
options to be held by Global Payments employees and the number and exercise
price of the Global Payments stock options to be issued, subject to the above
calculation, cannot yet be determined.
<PAGE>
Note 13--Related Party Transactions
In connection with the fiscal 1996 purchase of Merchant Automated Point of
Sale Program ("MAPP") from MasterCard International Incorporated, MasterCard
holds a 7.5% minority interest in Global Payment Systems, LLC, a partnership
with MasterCard International Incorporated. MasterCard provides certain
services for the MAPP business unit. The original service agreement was for a
period of three years and ended on March 31, 1999. The services agreement was
then amended to allow certain services to be provided through April 1, 2000.
The Company now performs the services formerly provided by MasterCard under
this service agreement internally. For the years ended May 31, 2000, May 31,
1999 and May 31, 1998 the Company incurred expenses of approximately $.2
million, $3.0 million and $6.8 million respectively, related to these services.
Also, during fiscal 1996, the Company formed an alliance with Comerica Bank
and purchased 51% ownership interest in NDPS Comerica Alliance, LLC. There are
agreements in place for the Company to reimburse Comerica Bank for any expenses
incurred on behalf of the alliance. For the years ended May 31, 2000, May 31,
1999 and May 31, 1998 the Company incurred expenses of approximately $.9
million, $.6 million and $.6 million, respectively, related to these services.
Note 14--Commitments and Contingencies
The Company conducts a major part of its operations using leased facilities
and equipment. Many of these leases have renewal and purchase options and
provide that the Company pay the cost of property taxes, insurance and
maintenance.
Rent expense on all operating leases for fiscal 2000, 1999 and 1998 was
approximately $5.8 million, $6.3 million and $6.9 million, respectively.
Future minimum lease payments for all noncancelable leases at May 31, 2000
were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In thousands)
<S> <C> <C>
2001..................................................... $3,489 $ 4,685
2002..................................................... 2,671 3,703
2003..................................................... 1,722 2,974
2004..................................................... 386 2,179
2005..................................................... -- 1,590
Thereafter............................................... -- 3,846
------ -------
Total future minimum lease payments...................... 8,268 $18,977
=======
Less: amount representing interest....................... 1,036
------
Present value of net minimum lease payments.............. 7,232
Less: current portion.................................... 2,900
------
Long-term obligations under capital leases at May 31,
2000.................................................... $4,332
======
</TABLE>
The Company is party to a number of claims and lawsuits incidental to its
business. In the opinion of management, the ultimate outcome of such matters,
individually or in the aggregate, will not have a material adverse impact on
the Company's financial position, liquidity or results of operations.
Subsequent to the date of the auditor's report, the Company obtained a
commitment for a $110 million revolving line of credit. It will fund the
payment of the cash due to NDC to reflect our share of NDC's pre-distribution
debt used to establish the Company's initial capitalization. This line of
credit will also be used to meet working capital and acquisition needs after
the Distribution. This line has a variable interest rate based on
<PAGE>
market rates. The credit agreement contains certain financial and non-financial
covenants customary for financings of this nature. Final maturity will be three
years from the Distribution. As indicated in Note 4, the Company utilized a
"rollback" approach to allocate the anticipated portion of the NDC consolidated
group's debt and interest expense. Accordingly, as of May 31, 2000 and May 31,
1999, there was $96.1 million and $89.4 million respectively, allocated and
outstanding as due to NDC.
The Company processes credit card transactions for direct merchant
locations. The Company's merchant customers have the liability for any charges
properly reversed by the cardholder. In the event, however, that the Company is
not able to collect such amount from the merchants, due to merchant fraud,
insolvency, bankruptcy or another reason, the Company may be liable for any
such reversed charges. The Company requires cash deposits and other types of
collateral by certain merchants to minimize any such contingent liability. The
Company also utilizes a number of systems and procedures to manage merchant
risk. In addition, the Company believes that the diversification of its
merchant portfolio among industries and geographic regions minimizes its risk
of loss.
The Company recognizes revenue based on a percentage of the gross amount
charged and has a potential liability for the full amount of the charge. The
Company establishes reserves for operational losses based on historical and
projected experiences concerning such charges. In the opinion of management,
such reserves for losses are adequate. Expenses of $3.0 million, $2.4 million
and $2.4 million were recorded for fiscal 2000, 1999 and 1998, respectively,
for these reserves.
The Company also has a check guarantee business. Similar to the credit card
business, the Company charges its merchants a percentage of the gross amount of
the check and guarantees payment of the check to the merchant in the event the
check is not honored by the checkwriter's bank. As a result, the Company incurs
operational charges in this line of business. The Company has the right to
collect the full amount of the check from the checkwriter but has not
historically recovered 100% of the guaranteed checks. The Company establishes
reserves for this activity based on historical and projected loss experiences.
Expenses of $10.1 million, $8.5 million and $8.8 million were recorded for
fiscal 2000, 1999 and 1998, respectively, for these reserves.
In connection with the Company's acquisition of merchant credit card
operations of banks, the Company has also entered into depository and
processing agreements (the "Agreements") with certain of the banks. These
Agreements allow the Company to use the banks' "Bank Identification Number"
("BIN") to clear credit card transactions through VISA and MasterCard. Certain
agreements contain financial covenants, and the Company was in compliance with
all such covenants as of May 31, 2000 or had obtained a verbal waiver of such
covenants. In management's opinion, the Company would be able to obtain
alternative BIN agreements without material impact to the Company in the event
of the termination of these Agreements.
Effective April 1, 2000, MasterCard may put to the Company ("Put Right") all
or any portion of its membership interest in Global Payment Systems LLC.
MasterCard's Put Right shall be exercised by providing Global Payment Systems
LLC with notice specifying the percentage of its membership interest to be put,
the date on which the proposed put price is to be paid, and the proposed put
price. The proposed put price shall be based on the fair market value of Global
Payment Systems LLC on a stand-alone basis. As an alternative to purchasing
MasterCard's membership interest in the event of the exercise of the put right,
Global Payment Systems LLC may elect to dissolve the partnership with
MasterCard receiving a share of the net liquidation proceeds, in proportion to
their membership interest.
Note 15--Supplemental Cash Flow Information
Historically, the Company's cash flow had been calculated with and included
in the NDC consolidated group's Supplemental Cash Flows. The Company's payments
for income taxes have been calculated on the Company's separate income and
reflect federal and state income tax payment allocations as if the Company had
been operating on a stand-alone basis (Note 10). The Company has utilized a
"rollback" approach to allocate the portion of the consolidated group's
interest payments for all historical periods presented (Note 4).
<PAGE>
Supplemental cash flow disclosures and non-cash investing and financing
activities for the years ended May 31, 2000, May 31, 1999 and May 31, 1998 are
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Supplemental cash flow information:
Income taxes paid, net of refunds.................. $5,816 $28,134 $20,375
Interest paid...................................... 8,506 7,070 5,712
Supplemental non-cash investing and financing
activities:
Capital leases entered into in exchange for
property and equipment............................ 915 6,710 4,815
</TABLE>
Note 16--Quarterly Combined Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------
August 31 November 30 February 29 May 31
--------- ----------- ----------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal Year 2000
Revenue.............................. $89,828 $84,174 $81,827 $84,204
Operating income..................... 20,539 15,275 13,420 13,978
Net income........................... 11,204 8,023 6,930 6,890
Basic earnings per share(1).......... $ 0.41 $ 0.30 $ 0.26 $ 0.26
Fiscal Year 1999
Revenue.............................. $82,397 $79,319 $81,782 $86,553
Operating income..................... 20,393 15,926 17,691 22,665
Net income........................... 11,158 8,694 9,502 11,982
Basic earnings per share(1).......... $ 0.41 $ 0.32 $ 0.35 $ 0.44
</TABLE>
--------
(1) Using the distribution ratio of 0.8 share of Global Payments Inc. common
stock for each share of NDC common stock held. Weighted average shares
outstanding is computed by applying the distribution ratio to the
historical NDC weighted average shares outstanding for all periods
presented.
Note 17--Event Subsequent to Auditor's Report (Unaudited)
On November 9, 2000, the Company entered into certain definitive agreements
to purchase the Canadian Imperial Bank of Commerce ("CIBC") Merchant Acquiring
or Merchant Card Services ("MCS") business and to form a ten-year marketing
alliance to jointly provide payment related products and services in Canada.
Under the terms of the purchase agreement, the Company will issue an amount of
its common stock after the distribution, whereby CIBC will own 26.25% or
approximately 9,354,000 shares, of the outstanding common stock of Global
Payments, in consideration for certain net assets of CIBC-MCS. The net assets
to be acquired consist of accounts receivable, inventory, tangible personal
property, customer contracts, assembled workforce and the goodwill of the
business, net of certain accrued expenses. The acquisition will be recorded for
using the purchase method of accounting. The acquisition is expected to close
after the distribution if completed, subject to regulatory approvals. The
Company intends to operate the business in a manner consistent with CIBC's
historical operations. The Company will retain the major functions of sales,
customer support and service, and equipment warehousing, repair and deployment
in Canada and contract with CIBC for other key functions, such as funds
transfer and daily settlement services.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of the NDC eCommerce business
segment (to be reorganized as Global Payments Inc., a Georgia corporation--See
Note 1) included in this information statement on Form 10, and have issued our
report thereon dated August 25, 2000. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index on page F-1 is the responsibility of Global Payments' management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 25, 2000
<PAGE>
NDC eCOMMERCE BUSINESS SEGMENT
COMBINED SCHEDULE II
Valuation & Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- ------------------- ------------- ----------
1 2
Balance at Charged to Uncollectible Balance at
Beginning Costs and Acquired Accounts End
Description of Period Expenses Balances Write-Off of Period
----------- ---------- ---------- -------- ------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Trade Receivable
Allowances
May 31, 1998............ $ 609 $ 1,304 $343 $ 870 $1,386
May 31, 1999............ 1,386 1,473 -- 1,657 1,202
May 31, 2000............ 1,202 1,345 -- 1,316 1,231
Reserves for operational
losses--Merchant card
processing and check
guarantee processing(1)
May 31, 1998............ $3,330 $11,256 $677 $11,022 $4,241
May 31, 1999............ 4,241 10,891 -- 10,539 4,593
May 31, 2000............ 4,593 13,074 -- 13,537 4,130
</TABLE>
--------
(1) Included in Merchant processing payable.
<PAGE>
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.)
Pro Forma Combined Financial Statements
(Unaudited)
On , 2000, NDC's Board of Directors declared a pro rata
distribution payable to the holders of record of NDC common stock at the close
of business on , 2000, of 0.8 of a share of common stock of Global
Payments Inc. for every share of NDC common stock outstanding on the record
date. The board of directors of NDC believes that the distribution is in the
best interests of NDC's stockholders.
On November 9, 2000, the Company entered into certain definitive agreements
to purchase the Canadian Imperial Bank of Commerce ("CIBC") Merchant Acquiring
or Merchant Card Services ("MCS") business and to form a ten-year marketing
alliance to jointly provide payment related products and services in Canada.
Under the terms of the purchase agreements, the Company will issue an amount of
its common stock after the distribution, whereby CIBC will own 26.25% or
approximately 9,354,000 shares, of the outstanding common stock of Global
Payments, in consideration for certain net assets of CIBC-MCS. The net assets
to be acquired consist of accounts receivable, inventory, tangible personal
property, customer contracts, assembled workforce and the goodwill of the
business, net of certain accrued expenses. The acquisition will be recorded for
using the purchase method of accounting. The acquisition is expected to close
after the distribution if completed, subject to regulatory approvals. The
Company intends to operate the business in a manner consistent with CIBC's
historical operations. The Company will retain the major functions of sales,
customer support and service, and equipment warehousing, repair and deployment
in Canada and contract with CIBC for other key functions, such as funds
transfer and daily settlement services.
Under the terms of the marketing alliance, CIBC is required to refer all new
merchant processing relationships exclusively to Global Payments. In addition,
the Company will jointly develop emerging payment solutions for distribution
and marketing in the Company's North American customer base. The alliance will
significantly broaden the Company's scope and presence in North America. This
transaction will provide MCS' existing distribution channel with a larger array
of existing and new payment solutions. After the acquisition is completed, the
alliance will be branded under the name "CIBC MCS, a Global Payment alliance".
Any adjustments to the purchase price allocations are not expected to be
material to the pro forma combined financial statements taken as a whole.
The following pro forma combined financial statements have been prepared as
if the acquisition and the distribution had taken place on August 31, 2000 for
the pro forma combined balance sheet and June 1, 1999 for the pro forma
combined income statements. The Company has a fiscal year end of May 31st.
CIBC-MCS has a fiscal year end of October 31st. For purposes of the pro forma
combined financial statements, CIBC-MCS information is presented using the same
fiscal year end of the Company.
The unaudited pro forma financial statements are not necessarily indicative
of the results that would have occurred if the acquisition and the distribution
had occurred on the dates indicated or the expected financial position or
results of operations in the future. The unaudited pro forma combined financial
statements should be read in conjunction with the separate historical financial
statements and notes there to of the Company, as well as the historical
financial statements and notes thereto of CIBC-MCS contained elsewhere herein,
and in conjunction with the related notes to these unaudited pro forma combined
financial statements.
<PAGE>
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.)
PRO FORMA COMBINED BALANCE SHEET
August 31, 2000
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Pro
NDC eCommerce Forma As
Business Segment Pro Forma Pro Forma CIBC-MCS Pro Forma Adjusted
Historical Adjustments(A) Combined Historical Adjustments(B) Combined
---------------- -------------- --------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 1,199 $ -- $ 1,199 $ -- $ -- $ 1,199
Billed accounts
receivable............ 38,019 -- 38,019 -- -- 38,019
Allowance for doubtful
accounts.............. (1,148) -- (1,148) -- -- (1,148)
-------- --------- -------- ------- -------- --------
Accounts receivable,
net................... 36,871 -- 36,871 -- -- 36,871
-------- --------- -------- ------- -------- --------
Merchant processing
receivable............ 33,939 -- 33,939 78,849 -- 112,788
Inventory.............. 3,976 -- 3,976 -- -- 3,976
Prepaid expenses and
other current assets.. 7,875 -- 7,875 -- -- 7,875
-------- --------- -------- ------- -------- --------
Total current assets... 83,860 -- 83,860 78,849 -- 162,709
-------- --------- -------- ------- -------- --------
Property and equipment,
net................... 24,290 -- 24,290 18,302 -- 42,592
Intangible assets,
net................... 171,181 -- 171,181 -- 51,089 (e) 222,270
Investments............ 5,000 -- 5,000 -- -- 5,000
Other.................. 1,519 -- 1,519 -- -- 1,519
-------- --------- -------- ------- -------- --------
Total Assets........... $285,850 $ -- $285,850 $97,151 $ 51,089 $434,090
======== ========= ======== ======= ======== ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
Current liabilities:
Due to NDC............. $ 75,014 $ (75,014)(a) $ -- $ -- $ -- $ --
Line of credit......... 75,014 (a) 75,014 -- 75,014
Merchant processing
payable............... 18,088 -- 18,088 2,144 -- 20,232
Obligations under
capital leases........ 2,842 -- 2,842 1,737 -- 4,579
Accounts payable and
accrued liabilities... 21,341 -- 21,341 3,421 4,000 (f) 28,762
Income taxes payable... 3,823 -- 3,823 2,969 (2,969)(g) 3,823
Deferred income taxes.. 410 -- 410 1,198 (1,198)(g) 410
-------- --------- -------- ------- -------- --------
Total current
liabilities........... 121,518 -- 121,518 11,469 (167) 132,820
-------- --------- -------- ------- -------- --------
Obligations under
capital leases......... 3,664 -- 3,664 92 -- 3,756
Deferred income taxes... 5,403 -- 5,403 -- -- 5,403
Other long-term
liabilities............ 3,824 -- 3,824 -- -- 3,824
-------- --------- -------- ------- -------- --------
Total liabilities...... 134,409 -- 134,409 11,561 (167) 145,803
-------- --------- -------- ------- -------- --------
Commitments and
contingencies
Minority interest in
equity of
subsidiaries........... 18,751 -- 18,751 -- -- 18,751
Shareholders' equity:
NDC equity investment.. 133,004 (133,004)(a) -- -- -- --
CIBC equity
investment............ -- -- -- 86,716 (86,716)(h) --
Preferred stock........ -- -- -- -- -- --
Common stock, no par... -- -- -- -- -- --
Paid in capital........ -- 133,004 (a) 133,004 -- 136,846 (f) 269,850
Cumulative translation
adjustment............ (314) -- (314) (1,126) 1,126 (h) (314)
-------- --------- -------- ------- -------- --------
Total shareholders'
equity................ 132,690 -- 132,690 85,590 51,256 269,536
-------- --------- -------- ------- -------- --------
Total Liabilities and
Shareholders' Equity... $285,850 $ -- $285,850 $97,151 $ 51,089 $434,090
======== ========= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited Pro Forma
Combined Balance Sheet.
<PAGE>
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.)
PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 2000
Unaudited
(In thousands, except per share data)
<TABLE>
<CAPTION>
NDC eCommerce
Business Pro Forma
Segment Pro Forma Pro Forma CIBC-MCS Pro Forma As Adjusted
Historical Adjustments(A) Combined Historical Adjustments(B) Combined
------------- -------------- --------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $340,033 $ -- $340,033 $90,763 $ -- $430,796
-------- ------- -------- ------- ------- --------
Operating expenses:
Cost of service........ 181,479 -- 181,479 52,726 3,022 (i) 237,227
Sales, general and
administrative........ 95,342 3,697 (b) 99,039 10,979 -- 110,018
-------- ------- -------- ------- ------- --------
276,821 3,697 280,518 63,705 3,022 347,245
-------- ------- -------- ------- ------- --------
Operating income........ 63,212 (3,697) 59,515 27,058 (3,022) 83,551
-------- ------- -------- ------- ------- --------
Other income (expense):
Interest and other
income................ 796 -- 796 -- -- 796
Interest and other
expense............... (6,119) (633)(c) (6,752) (4,748) -- (11,500)
Minority interest in
earnings.............. (4,117) -- (4117) -- -- (4,117)
-------- ------- -------- ------- ------- --------
(9,440) (633) (10,073) (4,748) -- (14,821)
-------- ------- -------- ------- ------- --------
Income (loss) before
income taxes........... 53,772 (4,330) 49,442 22,310 (3,022) 68,730
Provision for income
taxes.................. 20,725 (1,667)(d) 19,058 9,817 (1,164)(j) 27,711
-------- ------- -------- ------- ------- --------
Net income (loss)...... $ 33,047 $(2,663) $ 30,384 $12,493 $(1,858) $ 41,019
======== ======= ======== ======= ======= ========
Number of common and
common equivalent
shares................. 26,586 26,586 9,354 (k) 35,940
======== ======== ======= ========
Earnings per share...... $ 1.24 $ 1.14 $ 1.14
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited Pro Forma
Combined Income Statement.
<PAGE>
NDC eCOMMERCE BUSINESS SEGMENT
(To be reorganized as Global Payments Inc.)
PRO FORMA COMBINED INCOME STATEMENT
For the Three Months Ended August 31, 2000
Unaudited
(In thousands, except per share data)
<TABLE>
<CAPTION>
NDC
eCommerce Pro
Business Pro Forma As
Segment Pro Forma Forma CIBC-MCS Pro Forma Adjusted
Historical Adjustments(A) Combined Historical Adjustments(B) Combined
---------- -------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $87,191 $ -- $87,191 $25,737 $ -- $112,928
------- ----- ------- ------- ----- --------
Operating expenses:
Cost of service........ 45,881 -- 45,881 14,613 756 (i) 61,250
Sales, general and
administrative........ 24,728 323 (b) 25,051 2,540 -- 27,591
------- ----- ------- ------- ----- --------
70,609 323 70,932 17,153 756 88,841
------- ----- ------- ------- ----- --------
Operating income........ 16,582 (323) 16,259 8,584 (756) 24,087
------- ----- ------- ------- ----- --------
Other income (expense):
Interest and other
income................ 700 -- 700 -- -- 700
Interest and other
expense............... (1,791) (414)(c) (2,205) (1,846) -- (4,051)
Minority interest in
earnings.............. (1,427) -- (1,427) -- -- (1,427)
------- ----- ------- ------- ----- --------
(2,518) (414) (2,932) (1,846) -- (4,778)
------- ----- ------- ------- ----- --------
Income (loss) before
income taxes........... 14,064 (737) 13,327 6,738 (756) 19,309
Provision for income
taxes.................. 5,415 (284)(d) 5,131 2,965 (291)(j) 7,805
------- ----- ------- ------- ----- --------
Net income (loss)...... $ 8,649 $(453) $ 8,196 $ 3,773 $(465) $ 11,504
======= ===== ======= ======= ===== ========
Number of common and
common equivalent
shares................. 26,309 26,309 9,354 (k) 35,663
======= ======= ===== ========
Earnings per share...... $ 0.33 $ 0.31 $ 0.32
======= ======= ========
</TABLE>
The accompanying notes are an integral part of this unaudited Pro Forma
Combined Income Statement.
<PAGE>
NDC eCommerce Business Segment
(To be reorganized as Global Payments Inc.)
Notes to Unaudited Pro Forma Combined Financial Statements
(In thousands, except share data)
A. DISTRIBUTION PRO FORMA ADJUSTMENTS
1. Pro Forma Combined Balance Sheet Adjustments
The following pro forma adjustments were made to the historical combined
balance sheets of the Company to reflect the distribution as if it had occurred
on August 31, 2000.
a. To reflect the repayment of the amount Due to NDC with the proceeds from
a line of credit and the reclassification of the NDC equity investment,
in conjunction with the distribution.
2. Pro Forma Combined Income Statement Adjustments
The following pro forma adjustments were made to the historical combined
income statements of the Company for the three months ended August 31, 2000 and
the year ended May 31, 2000 to reflect the distribution as if it had occurred
on June 1, 1999.
b. To reflect additional sales, general and administrative expenses
expected to be incurred as a separate independent public company.
c. To reflect an increase in interest expense as a result of the difference
in the interest rate under the terms of the new line of credit versus
the amounts that have been historically allocated.
d. To reflect the income tax benefit on the pro forma adjustments using the
Company's effective rates for those periods.
B. ACQUISITION PRO FORMA ADJUSTMENTS
1. Pro Forma Combined Balance Sheet Adjustments
The following pro forma adjustments were made to the historical combined
balance sheets of the Company and CIBC-MCS to reflect the acquisition and
distribution as if they had occurred on August 31, 2000.
e. To reflect the increase in goodwill and other intangibles associated
with the acquisition of CIBC-MCS. The amount is calculated as follows:
<TABLE>
<S> <C>
Purchase price ................................................ $140,846
Less: Net assets of CIBC-MCS .................................. (85,590)
Liabilities of CIBC-MCS not assumed............................ (4,167)
--------
$ 51,089
========
</TABLE>
The purchase price was determined based upon the determination of value
of the common stock issued to CIBC as of the date of signing the
purchase and sale agreement plus direct costs of the acquisition.
f. To reflect the purchase price in the form of issuing approximately
9,354,000 shares of common stock with a fair value of $136,846 and
direct costs of the acquisition of approximately $4,000 in conjunction
with the acquisition.
<PAGE>
g. To reflect liabilities of CIBC-MCS not being assumed in the acquisition.
h. To reflect the elimination of the book equity of CIBC-MCS in conjunction
with the acquisition.
2. Pro Forma Combined Income Statement Adjustments
The following pro forma adjustments were made to the historical combined
income statements of the Company and CIBC-MCS for the three months ended August
31, 2000 and the year ended May 31, 2000 to reflect the acquisition and
distribution as if they had occurred on June 1, 1999.
i. To reflect the increase of amortization expense related to the goodwill
and other intangibles associated with the acquisition, over a weighted-
average life of 17.5 years.
j. To reflect the income tax benefit on the pro forma adjustments using the
Company's effective rates for those periods.
k. To reflect the shares of common stock issued in conjunction with the
acquisition.
<PAGE>
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 of July 31, 2000 and October 31, 1999 and the related statements
of income, cash flows and changes in CIBC's equity in division for the nine
month period ended July 31, 2000 and the years ended October 31, 1999 and 1998.
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. 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Division as of July 31, 2000 and
October 31, 1999 and the results of its operations and its cash flows for the
nine month period ended July 31, 2000 and the years ended October 31, 1999 and
1998 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.
/s/ Arthur Andersen LLP
October 10, 2000
Toronto, Canada
<PAGE>
CIBC MERCHANT ACQUIRING BUSINESS
BALANCE SHEETS
JULY 31, 2000 AND OCTOBER 31, 1999
(See Note 1 to Financial Statements)
(thousands of US dollars)
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
-------- -----------
<S> <C> <C>
ASSETS
Current Assets
VISA International / Canada receivable................... $ 58,075 $31,863
Merchant processing receivable........................... 28,512 24,650
-------- -------
86,587 56,513
Property and equipment, net (note 4)...................... 18,539 20,963
Other..................................................... 34 264
-------- -------
Total assets.............................................. $105,160 $77,740
======== =======
LIABILITIES AND CIBC'S EQUITY IN DIVISION
Current Liabilities
Income taxes payable..................................... $ 4,494 $10,167
Accounts payable and accrued liabilities (Note 5)........ 4,248 4,293
Obligations under capital lease.......................... 1,820 1,942
Deferred income taxes.................................... 1,198 256
Merchant payable......................................... 931 1,015
IDP Merchant payable..................................... 467 147
Other.................................................... 956 854
-------- -------
Total current liabilities................................. 14,114 18,674
Obligations under capital lease........................... 162 1,497
-------- -------
Total liabilities......................................... 14,276 20,171
-------- -------
Commitments and contingencies (note 9)
CIBC'S equity in division (note 8)
CIBC'S equity investment................................. 94,489 60,048
Cumulative translation adjustment........................ (3,605) (2,479)
-------- -------
90,884 57,569
-------- -------
Total liabilities and CIBC'S equity in division........... $105,160 $77,740
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CIBC MERCHANT ACQUIRING BUSINESS
STATEMENTS OF INCOME
FOR THE NINE MONTH PERIOD ENDED JULY 31, 2000
AND THE YEARS ENDED OCTOBER 31, 1999 AND 1998
(See Note 1 to Financial Statements)
(thousands of US dollars)
<TABLE>
<CAPTION>
July 31, October 31, October 31,
2000 1999 1998
-------- ----------- -----------
<S> <C> <C> <C>
Revenues....................................... $67,245 $86,622 $80,948
------- ------- -------
Operating Expenses
Cost of service............................... 35,533 42,321 40,317
Sales, general and administrative............. 14,313 16,622 15,839
------- ------- -------
49,846 58,943 56,156
------- ------- -------
Operating Income............................... 17,399 27,679 24,792
------- ------- -------
Other Expenses
Interest and other expenses................... 4,302 4,405 4,216
------- ------- -------
Income Before Income Taxes..................... 13,097 23,274 20,576
Provision For Income Taxes (note 7)............ 5,763 10,241 9,054
------- ------- -------
Net Income..................................... $ 7,334 $13,033 $11,522
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CIBC MERCHANT ACQUIRING BUSINESS
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED JULY 31, 2000
AND THE YEARS ENDED OCTOBER 31, 1999 AND 1998
(See Note 1 to Financial Statements)
(thousands of US dollars)
<TABLE>
<CAPTION>
July 31, October 31, October 31,
2000 1999 1998
-------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 7,334 $13,033 $11,522
Adjustments to reconcile net income to cash
provided by operating activities before
changes in assets and liabilities
Depreciation and amortization............... 5,864 7,559 5,752
Deferred income taxes....................... 956 (301) (232)
------- ------- -------
14,154 20,291 17,042
Changes in non-cash working capital:
Merchant processing receivable.............. (4,173) (5,168) (1,145)
VISA Canada receivable...................... (26,878) (6,394) (2,834)
Income taxes payable........................ (5,635) 1,695 (1,109)
Accounts payable and accrued liabilities.... 1 152 184
Obligations under capital lease............. (1,437) (1,709) (1,568)
Merchant payable............................ (74) 651 183
IDP Merchant payable........................ 325 145 --
Other, net.................................. 342 805 (231)
------- ------- -------
Net cash (used in) provided by operating
activities.................................. (23,375) 10,468 10,522
------- ------- -------
Cash flows from investing activities:
Capital expenditures......................... (3,732) (8,968) (6,729)
------- ------- -------
Net cash used in investing activities........ (3,732) (8,968) (6,729)
------- ------- -------
Cash flows from financing activities
Investment by CIBC during the year........... 27,107 (1,500) (3,793)
------- ------- -------
Net cash provided by (used in) financing
activities.................................. 27,107 (1,500) (3,793)
------- ------- -------
Increase (decrease) in cash and cash
equivalents:
Cash, beginning of period..................... -- -- --
------- ------- -------
Cash, end of period........................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CIBC MERCHANT ACQUIRING BUSINESS
STATEMENTS OF CHANGES IN CIBC'S EQUITY IN DIVISION
FOR THE NINE MONTH PERIOD ENDED JULY 31, 2000
AND THE YEARS ENDED OCTOBER 31, 1999 AND 1998
(See Note 1 to Financial Statements)
(thousands of US dollars)
<TABLE>
<CAPTION>
Accumulated
CIBC's Other
Equity Comprehensive Total
Investment Income/(Loss) Equity
---------- ------------- -------
<S> <C> <C> <C>
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..... 1,003 1,003
------- ------- -------
Total comprehensive income................... 14,036
Net investment during the period............. (1,500) (1,500)
------- ------- -------
Balance at October 31, 1999................... 60,048 (2,479) 57,569
------- ------- -------
Comprehensive income
Net income.................................. 7,334 7,334
Foreign currency translation adjustment..... (1,126) (1,126)
------- ------- -------
Total comprehensive income................... 6,208
Net investment during the period............. 27,107 27,107
------- ------- -------
Balance at July 31, 2000...................... $94,489 $(3,605) $90,884
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CIBC MERCHANT ACQUIRING BUSINESS
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000, OCTOBER 31, 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 division
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 certain costs not controlled by Merchant Acquiring (primarily
interchange fees charged by credit card associations). Fees and rental revenues
are recognized as earned.
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, including equipment under capital leases, is stated
at cost. 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. Leasehold improvements and equipment
under
<PAGE>
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 division. 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 divisional financial statements reflect corporate allocations from
CIBC for services provided to the Business in the amount of $3,261 for the nine
month period ending July 31, 2000 and $3,827 and $3,516 for the years ended
October 31, 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 divisional 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 $1,819 for the nine month period
ending July 31, 2000 and $2,466 and $2,373 for the years ended October 31, 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 a one day
average of outstanding receivables based on a 5.8% rate (internal cost of
funding). Interest expense recorded by Merchant Acquiring related to this
funding was $2,969 for the nine month period ended July 31, 2000 and $3,277 and
$3,016 for the years ended October 31, 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 costs of $18,768 for the nine month period ending July 31,
2000 and $21,749 and $22,876 for the years ended October 31, 1999 and 1998,
respectively. These amounts are included in sales, general and administrative
expenses.
<PAGE>
The Business has amounts payable of $2,060 and $1,845 to Intria Items Inc.
and Intria HP as at July 31, 2000 and October 31, 1999, respectively. Amounts
payable to CIBC are included in CIBC's equity in the division.
4. Property and Equipment
As of July 31, 2000 and October 31, 1999, property and equipment consisted
of the following:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
-------- -----------
<S> <C> <C>
Equipment under capital lease........................... $ 8,433 $ 8,523
Equipment............................................... 34,855 31,599
Software................................................ 221 224
Leasehold improvements.................................. 1,637 1,654
Furniture and fixtures.................................. 1,628 1,645
------- -------
46,774 43,645
Less: Accumulated depreciation and amortization......... 28,235 22,682
------- -------
$18,539 $20,963
======= =======
</TABLE>
5. Accounts Payable and Accrued Liabilities
As of July 31, 2000 and October 31, 1999, accounts payable and accrued
liabilities consisted of the following:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
-------- -----------
<S> <C> <C>
Operating expenses payable.............................. $1,141 $ 963
Accrued compensation and benefits....................... 546 457
Accrued pension and retirement benefits................. 241 312
Other accrued liabilities............................... 260 716
System support fees payable............................. 2,060 1,845
------ ------
$4,248 $4,293
====== ======
</TABLE>
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 has participated 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 $584 for the nine month period
ended July 31, 2000 and $682 and $693 for the years ended October 31, 1999 and
1998, respectively.
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 divisional statements based on an effective tax rate
of 44% on Canadian dollar net income.
<PAGE>
The provision for income taxes includes:
<TABLE>
<CAPTION>
July 31, October 31, October 31,
2000 1999 1998
-------- ----------- -----------
<S> <C> <C> <C>
Current tax expense......................... $4,550 $ 9,989 $8,487
Deferred tax expense........................ 1,213 252 567
------ ------- ------
Total....................................... $5,763 $10,241 $9,054
====== ======= ======
</TABLE>
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.
9. Commitments and Contingencies
The long term capital lease payable as of July 31, 2000 was $162 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
Acquiring's financial position, liquidity or results of operations.
Merchant Acquiring is currently in negotiations with VISA relating to the
interpretation of the regulations surrounding interchange fees. Management
believes it is premature to determine the impact, if any, on the business in
the future.
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, however, that
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 July 31, 2000 are $5,890. 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.
Merchant Acquiring does not establish reserves for operational losses but
expenses these as they are incurred. In the opinion of management, such
reserves would be immaterial.
<PAGE>
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)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------
January 31 April 30 July 31 October 31
---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Fiscal Year 2000
Revenue.................................. $21,972 $20,762 $24,547 $ --
Operating income......................... 5,458 4,849 7,092 --
Net income............................... 2,254 1,912 3,168 --
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
</TABLE>
