AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2001
REGISTRATION NO. 333-94623
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ALLIANCE DATA SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 7374 31-1429215
(State or Other Jurisdiction of (Primary standard (I.R.S. Employer
Incorporation or Organization) industrial classification Identification Number)
code number)
--------------------------
17655 WATERVIEW PARKWAY
DALLAS, TEXAS 75252
TELEPHONE: (972) 348-5100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
J. MICHAEL PARKS
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
17655 WATERVIEW PARKWAY
DALLAS, TEXAS 75252
TELEPHONE: (972) 348-5100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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WITH A COPY TO:
TERRY M. SCHPOK, P.C. KENNETH M. DORAN, ESQ.
Akin, Gump, Strauss, Hauer & Feld, L.L.P. Gibson, Dunn & Crutcher LLP
1700 Pacific Avenue, Suite 4100 333 South Grand Avenue
Dallas, Texas 75201 Los Angeles, California 90071
Telephone: (214) 969-2800 Telephone: (213) 229-7000
Facsimile: (214) 969-4343 Facsimile: (213) 229-7520
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE ON OR AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JANUARY 26, 2001
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
13,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
This is an initial public offering of 13,000,000 shares of our common stock. We
anticipate the initial public offering price will be between $12.00 and $14.00
per share. We are selling all the shares offered under this prospectus.
We are applying to have our common stock listed on the New York Stock Exchange
under the symbol "ADS".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
PER SHARE TOTAL
------------- -------------
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
The underwriters may purchase up to an additional 1,950,000 shares of our common
stock from us at the initial public offering price less the underwriting
discounts, solely to cover over-allotments.
The underwriters are severally underwriting the shares being offered. Bear,
Stearns & Co. Inc. expects to deliver the shares in New York, New York on
, 2001.
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BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
THE DATE OF THIS PROSPECTUS IS , 2001.
Inside front cover
- Half gatefold with a four colored schematic depicting a "multiple
transaction and communications points" process. The schematic
show's our client's customer; our client's distribution channel;
our process and our target markets including our logo.
The gatefold has the following test: "We provide electronic
transactions services, credit services and loyalty and database
marketing services. We help our clients manage their customer
relationships by:
- Facilitating transactions with their customers through multiple
channels including in-store, internet and catalog
- Assisting them in identifying and acquiring new customers
- Increasing both the loyalty and profitability of existing customers
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 1
Risk Factors......................... 9
Special Note Regarding
Forward-Looking Statements......... 21
Use of Proceeds...................... 22
Dividend Policy...................... 22
Dilution............................. 23
Capitalization....................... 24
Unaudited Pro Forma Consolidated
Financial Information.............. 25
Selected Historical Consolidated
Financial and Operating
Information........................ 30
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............. 33
Business............................. 54
Management........................... 70
PAGE
----
Principal Stockholders............... 81
Certain Relationships and Related
Transactions....................... 84
Description of Capital Stock......... 88
Shares Eligible for Future Sale...... 91
Underwriting......................... 92
Legal Matters........................ 94
Experts.............................. 94
Where You Can Find More Information.. 95
Index to Consolidated Financial
Statements......................... F-1
PROSPECTUS SUMMARY
THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THE OFFERING. BECAUSE
IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE RISK FACTORS AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO
THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS.
OUR COMPANY
We are a leading provider of electronic transaction services, credit
services and marketing services. We develop and execute programs designed to
help our clients target, acquire and retain loyal, profitable customers. We
create value for our clients by assisting them in managing their customer
relationships. Specifically we:
- assist our clients in identifying and acquiring new customers;
- facilitate transactions between our clients and their customers through
multiple channels including in-store, catalog and the Internet; and
- increase the loyalty and profitability of our clients' existing customers.
We had revenue of $583.1 million in 1999 and $501.0 million for the nine
months ended September 30, 2000. We have a client base in excess of 300
companies. Our five largest clients, based on their contribution to revenue for
2000, are:
- the retail affiliates of The Limited, including Limited Too, Victoria's
Secret, Express, Lane Bryant, Bath & Body Works, Lerner New York, Henri
Bendel and Structure;
- Brylane;
- Bank of Montreal;
- Equiva Services, LLC, which is the service provider to Shell-branded
locations in the U.S.; and
- CITGO.
The Limited, together with its retail affiliates, is our largest client,
representing approximately 25.3% of our 2000 revenue. Limited Commerce Corp., an
affiliate of The Limited, owns approximately 25.5% of our common stock, before
giving effect to this offering. After this offering, Limited Commerce Corp. will
have the right to designate up to two nominees for election to our board of
directors, depending on its percentage ownership of our common stock.
OUR MARKET OPPORTUNITY
Our services are applicable to the full spectrum of commerce opportunities
involving companies that sell products and services to individual consumers. We
currently target our service offerings to select market sectors, including
specialty retailers, petroleum retailers, supermarkets and financial services
providers, as well as companies in market sectors with rapidly evolving
electronic payment and customer management needs such as gas and electric
utilities, mass transit, tollways and parking.
Common challenges to our clients are the rapid development of new
competitors and sales channels, the intensifying competition for customers and
the erosion of consumer brand loyalty. The Internet has accelerated these trends
by providing consumers with almost instant access to a multitude of competing
products and services without traveling to an actual store location. As a
result, companies are looking for tools to facilitate transactions and improve
customer communications across all channels.
1
Companies increasingly seek services that compile and analyze customer
purchasing behavior, enabling them to more effectively communicate with their
customers. The continuing shift to electronic payment systems, namely credit,
debit, stored value and pre-paid cards, generates highly valuable information on
individual consumers and their purchasing preferences, while the dramatic
proliferation of computer technology has enabled companies to capture, access
and use this information easily and almost instantaneously. Many retailers,
however, lack the economies of scale and core competencies necessary to support
their own transaction processing infrastructure and credit card programs,
including the extension of credit. In addition, many retailers seek to outsource
the development and management of loyalty programs and database marketing
services. We believe we are well-positioned to provide these services to meet
the evolving needs of our clients and potential clients.
OUR PRODUCTS AND SERVICES
Our products and services are centered around three core
capabilities--Transaction Services, which represents 33.8% of our 1999 revenue,
Credit Services, which represents 42.5% of our 1999 revenue, and Marketing
Services, which represents 23.7% of our 1999 revenue.
TRANSACTION SERVICES CREDIT SERVICES MARKETING SERVICES
- --------------------------------- ---------------------------- ---------------------------------
- - Transaction Processing - Underwriting - Loyalty Programs
- Network Services - Risk Management - Air Miles-TM- reward program
- Bankcard Settlement - Private Label Cards
- - Account Processing and - One-to-One Loyalty
Servicing
- Card Processing - Database Marketing Services
- Billing and Payment - Direct Marketing
Processing
- Customer Care - Enhancement Services
We market and sell our services on both a stand-alone and bundled basis. By
providing services that span our three core offerings, we believe we can become
a key element in our clients' success.
TRANSACTION SERVICES
Providing flexible, convenient, rapid customer payment options is
fundamental to customer satisfaction and retention. Through our predecessor
company, we have provided these services since 1983. We facilitate and manage
transactions between our clients and their customers through multiple
distribution channels, including in-store, catalog and the Internet, through our
state-of-the-art, highly scalable processing systems. Our services include
instantaneous authorizations, efficient payment processing, billing services and
effective customer care.
We are a leading provider of electronic transaction services, processing
1.8 billion transactions in 1999 on a pro forma basis for acquisitions.
According to the Faulkner and Gray Card Industry 2000 report, this level of
activity ranked us fifth among U.S. payment processors in 1999, giving effect to
those acquisitions. According to the Nilson Report, there were approximately
27.7 billion electronic payment transactions in the U.S. in 1999, and that
number is projected to climb to 50 billion by 2005. By fully integrating our
transaction services with our loyalty and database marketing services, we are
able to execute more effective customer acquisition and retention strategies for
our clients. Our clients within this segment are made up primarily of specialty
retailers and petroleum retailers.
CREDIT SERVICES
We have demonstrated to many of our existing clients that a private label
credit card is one of the most effective loyalty and marketing tools available.
As part of our service, we offer our clients the experience and flexibility to
provide a funding vehicle for private label credit card receivables. Through our
predecessor company, we have owned and managed private label receivables since
1986. This service appeals to those clients that choose to focus their financial
and operational resources on their core operations and prefer a single-source
integrated solution. Clients who utilize this service are
2
predominantly specialty retailers. As part of this service, we currently provide
underwriting and risk management services to 44 of our 48 private label card
clients, representing approximately 54.5 million cardholders. We finance
substantially all our credit card receivables through asset securitization
transactions.
MARKETING SERVICES
Our clients are focused on targeting, acquiring and retaining loyal and
profitable customers. Since 1992 we have created and managed loyalty programs
that have successfully resulted in securing more frequent and sustained customer
purchasing. For example:
- in Canada, we have developed and operate the Air Miles reward program,
which we believe to be the largest loyalty marketing program in Canada.
The program has over 100 brand names represented by the program sponsors.
Based upon the most recent census data available, in 1999 our active
participants represented 58% of all Canadian households. We have issued
over seven billion Air Miles reward miles since the program's inception in
1992.
- as discussed above, a private label credit card is one of the most
effective loyalty and marketing tools available. We manage 48 distinct
marketing and services programs for specialty and petroleum retailers,
representing 70.0 million cardholders. Our private label programs can be
further enhanced by our ability to provide database marketing services,
which enable us to capture unique and proprietary item-level transaction
data and use it to target customers.
- we have also developed an on-line, electronic loyalty program that
recognizes, acknowledges and rewards customers at the point of sale. Using
the retailer's existing point-of-sale terminal or cash register and our
network services, we can capture points, communicate program status and
issue targeted awards at the point of sale.
Our loyalty programs provide our clients with tools to help drive customer
acquisitions and reward customer loyalty while providing us with the ability to
better understand the purchasing behavior of our clients' customers. As a result
of these programs and our marketing database programs, we have captured detailed
purchase information on approximately 72.0 million U.S. consumers and
6.5 million Canadian households. By combining massive amounts of detailed data
with our proprietary data mining algorithms and our experience in developing and
executing marketing campaigns, we provide our clients with highly successful and
sophisticated targeted marketing solutions. Our clients within this segment are
specialty retailers, petroleum retailers, supermarkets and financial service
providers.
CLIENT CASE STUDY
Victoria's Secret provides an example of our ability to integrate our
products and services to assist our clients in facilitating transactions and
communications with their customers, whether in stores, through catalogs or
through Web sites. We provide transaction services, credit services and database
marketing services to Victoria's Secret. The Victoria's Secret credit card that
we issue allows us to capture customer name and address as well as transaction
data in any channel the consumer chooses to shop. We deliver the information to
our marketing database, which is supplemented with additional data from
Victoria's Secret as well as from external sources. This gives us a detail-rich
database that we, together with Victoria's Secret, use in developing customer
acquisition strategies and managing customer relationships. We also utilize the
information we collect and manage for the credit card program to enhance the
transaction services we provide to Victoria's Secret, which include billing,
payment processing and customer care.
3
OUR STRATEGY
Our strategy is to become a critical component in our clients' success by
helping them build loyal customer relationships. We will do this by continuing
to build and enhance our consumer databases, marketing capabilities and
processing efficiencies. To execute this strategy we intend to:
- increase the penetration of products and services we provide to our
existing client base;
- expand our client base in our existing market sectors;
- continue to expand our services and capabilities to help our clients
succeed in multi-channel commerce--in-store, catalog and the Internet; and
- consider focused, strategic acquisitions and alliances to enhance our core
capabilities or increase our scale.
OUR HISTORY AND OWNERSHIP
We are the result of the 1996 merger of two entities acquired by Welsh,
Carson, Anderson & Stowe --J.C. Penney's transaction services business, BSI
Business Services, Inc., and The Limited's credit card bank operation, World
Financial Network National Bank. Since then, we have made the following
acquisitions, each accounted for as a purchase, with the results of operations
of the acquired businesses included from the respective closing dates:
- In November 1996, we acquired the private label portfolio of National City
Bank of Columbus, which consisted of approximately $370.0 million in
receivables and represented over 25 retailers in a broad range of
industries including soft goods, building materials, furniture and
electronics. We have securitized these receivables.
- In July 1998, we acquired Loyalty Management Group Canada Inc.
- In September 1998, we acquired Harmonic Systems Incorporated.
- In July 1999, we acquired the network services business of SPS Payment
Systems, Inc., a wholly-owned subsidiary of Associates First Capital
Corporation.
As of December 31, 2000, Welsh, Carson, Anderson & Stowe beneficially owned
74.3% of our common stock, and The Limited, through its wholly owned subsidiary
Limited Commerce Corp., beneficially owned approximately 25.5% of our common
stock. After this offering, Welsh Carson will have the right to designate up to
three nominees for election to our board of directors and Limited Commerce Corp.
will have the right to designate up to two nominees, depending on their
percentage ownership of our common stock.
------------------------
Our corporate headquarters are located at 17655 Waterview Parkway, Dallas,
Texas 75252, and our telephone number is 972-348-5100.
4
THE OFFERING
Common stock offered......................... 13,000,000 shares
Common stock to be outstanding after the
offering................................... 70,619,893 shares
Use of proceeds.............................. We intend to use approximately $92.9 million
of the net proceeds from the offering to
repay outstanding debt, and the balance for
general corporate purposes, including
potential acquisitions and working capital.
Proposed New York Stock Exchange symbol...... "ADS"
Unless otherwise indicated, all information in this prospectus:
- gives effect to the 1-for-9 reverse stock split of our common stock
effected on March 15, 2000; and
- assumes the conversion of all outstanding shares of our Series A
cumulative convertible preferred stock into common stock. As of
December 31, 2000, these shares of Series A preferred stock were
convertible into 10,074,524 shares of common stock, assuming an initial
public offering price of $13.00 per share.
The number of shares of common stock described as being outstanding after
this offering excludes the following:
- 4,882,626 shares that we may issue upon the exercise of stock options
outstanding as of December 31, 2000 at a weighted average exercise price
of $12.45 per share;
- 2,905,755 additional shares that we may issue under our stock option and
restricted stock plan; and
- up to 1,950,000 additional shares that we may issue upon exercise of the
underwriters' over-allotment option.
5
SUMMARY UNAUDITED CALENDAR YEAR AND PRO FORMA CONSOLIDATED FINANCIAL AND
OPERATING INFORMATION
Prior to December 31, 1998, our fiscal year was based on a 52/53-week fiscal
year ending on the Saturday closest to January 31. We have since changed our
fiscal year end to December 31. In order to provide a better basis of
comparison, we have recast our historical operating results to a calendar year
basis for the years ended December 31, 1997 and 1998. In our opinion, these
recast historical financial statements reflect all normal recurring adjustments
necessary for a fair presentation of such financial statements. The information
presented herein has been restated from amounts previously reported to reduce
the life on premium on purchased credit card portfolios from 15 years to three
years and to correct the reporting of revenues from our loyalty program and
related redemption obligation. See Note 22 to the consolidated financial
statements included in this prospectus.
The selected consolidated financial data for the nine months ended
September 30, 1999 and 2000 have been derived from our unaudited consolidated
financial statements, which are included in this prospectus and which, in our
opinion, reflect all adjustments, consisting only of adjustments of a normal and
recurring nature, necessary for a fair presentation. Results for the nine months
ended September 30, 2000 are not necessarily indicative of results for the full
year.
We have also included the following unaudited pro forma information, which
we derived from our unaudited pro forma consolidated financial information
included in this prospectus. The data contained in the pro forma columns give
effect to the following completed acquisitions as if those acquisitions had been
consummated on January 1, 1998:
- the acquisition of Loyalty Management Group Canada Inc. on July 24, 1998;
- the acquisition of Harmonic Systems Incorporated on September 15, 1998;
and
- the acquisition of the network transaction processing business of SPS
Payment Systems, Inc., a wholly-owned subsidiary of Associates First
Capital Corporation, on July 1, 1999.
The supplemental pro forma loss per share data give effect to the conversion
of all outstanding shares of our Series A preferred stock and the exercise of
all outstanding warrants as if the conversion and the exercise had occurred at
the beginning of the period. The pro forma as adjusted data give effect to this
offering as if it occurred on September 30, 2000. The unaudited pro forma data
do not purport to present what our results of operations or financial position
would actually have been, or to project our results of operations or financial
position for any future period. You should read the following pro forma
information along with the information contained throughout this prospectus,
including the financial statements and the related notes that are included in
this prospectus.
The other financial data include operating EBITDA, which is equal to
operating income plus depreciation and amortization and the change in deferred
revenue less the change in redemption settlement assets. We have presented
operating EBITDA because we use it as an integral part of our internal reporting
and performance evaluation for senior management. In addition, operating EBITDA
eliminates the uneven effect across all segments of considerable amounts of
non-cash amortization of purchased intangibles recognized in business
combinations accounted for under the purchase method. We use operating EBITDA to
monitor compliance with the financial covenants in our amended credit agreement
and to measure the performance and liquidity of our reportable segments.
Operating EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating income
or net income as an indicator of operating performance, or to the statement of
cash flows as a measure of liquidity. In addition, operating EBITDA is not
intended to represent funds available for dividends, reinvestment or other
discretionary uses, and should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles. The operating EBITDA measure presented in this prospectus
may not be comparable to similarly titled measures presented by other companies.
6
PRO FORMA
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FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- FOR THE FOR THE YEARS FOR THE
NINE MONTHS ENDED ENDED NINE MONTHS ENDED
RECAST SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------------- ----------------------- ----------------------
1997 1998 1999 1999 2000 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Total revenue...... $ 339,824 $ 451,537 $ 583,082 $ 428,216 $ 501,043 $ 552,180 $ 607,404 $ 452,538 $ 501,043
Cost of
operations....... 248,061 344,369 456,908 332,480 384,576 443,029 477,036 352,608 384,576
General and
administrative... 30,659 39,870 45,919 32,042 44,216 39,870 45,919 32,042 44,216
Depreciation and
other
amortization..... 8,904 8,782 16,183 10,219 19,099 10,035 16,183 10,219 19,099
Amortization of
purchased
intangibles...... 26,050 46,977 61,617 44,777 38,771 81,571 67,546 50,706 38,771
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Total expenses... 313,674 439,998 580,627 419,518 486,662 574,505 606,684 445,575 486,662
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Operating income... 26,150 11,539 2,455 8,698 14,381 (22,325) 720 6,963 14,381
Other non-operating
expense.......... -- -- -- -- 2,476 -- -- -- 2,476
Interest expense... 15,713 29,295 42,785 33,018 28,241 38,519 42,785 33,018 28,241
Income tax expense
(benefit)........ 2,844 (2,622) (6,538) (899) 1,544 (13,390) (7,510) (1,871) 1,544
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Income (loss) from
continuing
operations....... 7,593 (15,134) (33,792) (23,421) (17,880) (47,454) (34,555) (24,184) (17,880)
Income (loss) from
discontinued
operations, net
of taxes......... (5,635) (3,948) 7,688 7,688 -- (3,948) 7,688 7,688 --
Loss on disposal of
discontinued
operations, net
of taxes......... -- -- (3,737) (3,737) -- -- (3,737) (3,737) --
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net income
(loss)........... $ 1,958 $ (19,082) $ (29,841) $ (19,470) $ (17,880) $ (51,402) $ (30,604) $ (20,233) $ (17,880)
========== ========== ========== ========== ========== =========== ========== ========== ==========
Earnings (loss) per
share from
continuing
operations--basic
and diluted...... $ 0.21 $ (0.37) $ (0.78) $ (0.61) $ (0.49) $ (1.01) $ (0.88) $ (0.62) $ (0.49)
Earnings (loss) per
share--basic and
diluted.......... $ 0.05 $ (0.46) $ (0.86) $ (0.52) $ (0.49) $ (1.09) $ (0.80) $ (0.54) $ (0.49)
Weighted average
shares used in
computing per
share
amounts--basic
and diluted...... 36,612 41,308 47,498 47,491 47,532 46,969 47,498 47,491 47,532
Supplemental pro
forma loss per
share from
continuing
operations--
basic and
diluted.......... $ (0.84) $ (0.61) $ (0.43) $ (0.31)
Supplemental pro
forma loss per
share--basic and
diluted.......... $ (0.91) $ (0.54) $ (0.36) $ (0.31)
Weighted average
shares used in
computing
supplemental pro
forma per share
amounts--basic
and diluted...... 56,367 56,896 56,889 56,930
7
PRO FORMA
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- FOR THE FOR THE YEARS FOR THE
NINE MONTHS ENDED ENDED NINE MONTHS ENDED
RECAST SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------------- ----------------------- ----------------------
1997 1998 1999 1999 2000 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER FINANCIAL DATA
Calculation of
Operating EBITDA:
Operating
income......... $ 26,150 $ 11,539 $ 2,455 $ 8,698 $ 14,381 $ (22,325) $ 720 $ 6,963 $ 14,381
Depreciation and
other
amortization... 8,904 8,782 16,183 10,219 19,099 10,035 16,183 10,219 19,099
Amortization of
purchased
intangibles.... 26,050 46,977 61,617 44,777 38,771 81,571 67,546 50,706 38,771
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
EBITDA......... 61,104 67,298 80,255 63,694 72,251 69,281 84,449 67,888 72,251
Change in
deferred
revenue........ -- 20,729 91,149 48,189 30,046 51,615 91,149 48,189 30,046
Less:
Change in
redemption
settlement
assets......... -- 11,838 63,472 27,205 11,540 34,111 63,472 27,205 11,540
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Operating
EBITDA....... $ 61,104 $ 76,189 $ 107,932 $ 84,678 $ 90,757 $ 86,785 $ 112,126 $ 88,872 $ 90,757
========== ========== ========== ========== ========== =========== ========== ========== ==========
Operating EBITDA as
a percentage of
revenue.......... 18.0% 16.9% 18.5% 19.8% 18.1% 15.7% 18.5% 19.6% 18.1%
SEGMENT OPERATING
DATA
Air Miles reward
miles:
issued........... -- 611,824 1,594,594 1,164,867 1,415,221 1,361,013 1,594,594 1,164,867 1,415,221
redeemed......... -- 158,281 529,327 396,253 521,718 376,161 529,327 396,253 521,718
Transactions
processed........ 922,678 1,134,902 1,839,857 1,231,851 1,840,879 1,814,271 2,104,554 1,496,545 1,840,879
Statements
generated........ 113,940 130,895 132,817 99,436 96,297 130,895 132,817 99,436 96,297
Securitized
portfolio........ $1,821,016 $2,135,340 $2,232,375 $2,011,628 $2,033,382 $ 2,135,340 $2,232,375 $2,011,628 $2,033,382
Credit sales....... $3,001,461 $3,049,151 $3,132,520 $2,156,622 $2,521,317 $ 3,049,151 $3,132,520 $2,156,622 $2,521,317
AS OF
AS OF DECEMBER 31, SEPTEMBER 30, 2000
---------------------------------- ----------------------
RECAST PRO FORMA
---------------------- AS
1997 1998 1999 ACTUAL ADJUSTED
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash
equivalents...... $ 29,304 $ 47,036 $ 56,546 $ 73,773 $ 134,285
Redemption
settlement
assets........... -- 70,178 133,650 145,190 145,190
Credit card
receivables and
seller's
interest......... 170,938 139,458 150,804 142,509 142,509
Intangibles and
goodwill......... 83,915 362,797 493,609 453,004 453,004
Total assets....... 589,876 1,075,707 1,267,644 1,266,556 1,266,556
Deferred
revenue--product
and service...... -- 158,192 249,341 279,387 279,387
Certificates of
deposit and other
receivable
funding debt..... 188,300 147,984 116,900 88,500 88,500
Long-term and
subordinated
debt............. 117,673 332,000 318,236 341,660 248,750
Total
liabilities...... 386,104 780,902 888,172 904,340 811,431
Series A preferred
stock............ -- -- 119,400 119,400 --
Total stockholders'
equity........... 203,772 294,805 260,072 242,816 514,138
8
RISK FACTORS
BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISKS. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE FACE.
ANY OF THE FOLLOWING RISKS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS. ADDITIONAL RISKS AND UNCERTAINTIES OF
WHICH WE ARE UNAWARE OR CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO
ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT IN OUR
COMMON STOCK. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD ALSO READ THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DEPENDENT ON A SMALL NUMBER OF LARGE CLIENTS.
Our 10 largest clients were responsible for approximately 61.3% of our
consolidated revenues during the year ended December 31, 2000.
TRANSACTION SERVICES. Our 10 largest clients in this segment were
responsible for approximately 66.4% of our Transaction Services revenue in 2000.
The Limited and its retail affiliates were the largest Transaction Services
client in 2000, representing in excess of 10% of this segment's 2000 revenue.
Our contracts with The Limited and its retail affiliates expire in 2006.
CREDIT SERVICES. Our two largest clients in this segment were responsible
for 80.3% of our Credit Services revenue in 2000. The Limited and its retail
affiliates and Brylane were the largest Credit Services clients in 2000. Our
contracts with these clients expire in 2006.
MARKETING SERVICES. Our 10 largest clients in this segment were responsible
for approximately 61.4% of our Marketing Services revenue in 2000. Bank of
Montreal and Canada Safeway were the two largest Marketing Services clients in
2000, each representing in excess of 10% of this segment's 2000 revenue. Our
contracts with these clients expire between one and two years from now. We can
give no assurance that these contracts will be renewed on similar terms or at
all.
A significant decrease in revenues attributable to any of our significant
clients for any reason, including a decline in pricing or activity, or a
decision to either utilize another service provider or to no longer outsource
the services we provide, could have a material adverse effect on our business,
financial condition and operating results in general, and those of the affected
operating segment, in particular. In addition, if any of our significant clients
were acquired and the client's new management team elected to phase-out or
discontinue the client's business relationship with us, we could suffer a
material adverse effect. This risk is particularly germane as many of our
significant clients are in market sectors such as petroleum, specialty retail,
supermarkets and financial services, which have recently experienced, and are
experiencing, fairly considerable consolidation.
We provide transaction processing services to Equiva Services, LLC, which is
the service provider to Shell branded locations in the U.S. Equiva is one of our
10 largest clients both in the Transaction Services segment and on a
consolidated basis. We recently began renegotiating our contract with Equiva,
which expires in December 2001. We have been informed by Equiva that it would
like to discontinue a portion of the services we currently provide effective
upon termination of the existing contract in December 2001. As a result of this
termination, our revenue and profitability attributable to Equiva for periods
beyond 2001 will decrease. We are now in the process of negotiating with Equiva
regarding the other services we currently provide. With respect to the services
under negotiation, we can give no assurance that we will successfully reach an
agreement with Equiva on similar terms to those currently existing, or at all.
If our negotiations with Equiva result in a decrease in pricing or in the number
and types of the transaction services we provide to Equiva, our revenue and
profitability
9
attributable to Equiva would be further adversely affected, which could have a
material adverse effect on us.
A LARGE NUMBER OF OUR CLIENTS ARE AFFILIATES OF LIMITED COMMERCE CORP., OUR
SECOND LARGEST STOCKHOLDER.
A large number of our clients are affiliates of Limited Commerce Corp., a
wholly owned subsidiary of The Limited, which beneficially owned approximately
25.5% of our common stock as of December 31, 2000 and maintains two designees on
our board of directors. The Limited, together with its affiliates, is our
largest client, representing approximately 25.3% of our 2000 consolidated
revenue. The Limited and its retail affiliates represented the largest
Transaction Services client in 2000, and together with Brylane were the largest
Credit Services clients in 2000. As a significant stockholder, The Limited,
unlike our other clients, is able to exercise significant influence over matters
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions. In addition, Limited Commerce
Corp., through a stockholders agreement, has the right to designate up to two
members of our board of directors.
DEFAULTS AND BANKRUPTCIES RELATED TO OUR CONSUMER UNSECURED LENDING COULD
ADVERSELY AFFECT US.
The primary risk associated with unsecured lending is the risk of default or
bankruptcy of consumers, resulting in accounts being charged-off as
uncollectible. In addition, general economic factors, such as the rate of
inflation, unemployment levels and interest rates, may result in greater
delinquencies and credit losses among consumers. We may not be able to
successfully identify and evaluate the creditworthiness of cardholders to
minimize delinquencies and losses. Also, we cannot assure you that our pricing
strategy can offset the negative impact on profitability caused by increases in
delinquencies and losses. Increases in charge-offs could have a material adverse
effect on our business, financial condition and operating results.
THE FAILURE TO EFFECTIVELY INTEGRATE RECENT ACQUISITIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
Since August 1996, we have made several acquisitions, principally of Loyalty
Management Group Canada Inc., Harmonic Systems Incorporated and the network
transaction processing business of SPS Payment Systems, Inc. We are currently in
the process of integrating the operations of the network transaction processing
business of SPS, acquired in July 1999. We expect this integration process to
continue through 2000. If we are unable to successfully integrate the SPS
operations or any other acquired businesses, we may incur substantial costs and
delays or other operational, technical or financial problems, any of which could
harm our business and impact the trading price of our common stock. In addition,
the failure to successfully integrate acquisitions may divert management's
attention from our existing business and could damage our relationships with key
clients and employees.
AS THE AVERAGE AGE OF OUR LOAN PORTFOLIO INCREASES, WE WILL LIKELY EXPERIENCE
INCREASING OR FLUCTUATING LEVELS OF DELINQUENCY AND LOAN LOSSES.
In addition to being affected by general economic conditions and the success
of our collection and recovery efforts, our delinquency and net credit card
receivable charge-off rates at any point in time are affected by, among other
factors, the credit risk of credit card receivables and the average age of our
various credit card account portfolios. The credit risk of our credit card
receivables, in the aggregate, is impacted by the average age of our credit card
portfolio. The average age of credit card receivables affects the stability of
delinquency and loss rates of the portfolio because delinquency and loss rates
typically increase as the average age of accounts in a credit card portfolio
increases. At September 30, 2000, 19.6% of securitized accounts and 37.7% of
securitized loans were less than 24 months old. Accordingly, we believe that our
loan portfolio will experience increasing or fluctuating levels of delinquency
and loan losses as the average age of our accounts increases. This trend is
already reflected in the change in our net charge-off ratio. The net charge-off
ratio reflects the percentage of
10
the average securitized receivables at the beginning of each month in the period
indicated consisting of principal losses from cardholders unwilling or unable to
pay their credit card balances, as well as bankrupt and deceased cardholders,
less current period recoveries. For the nine months ended September 30, 2000,
our securitized net charge-off ratio on an annualized basis was 7.4% compared to
6.8% for the nine months ended September 30, 1999. For the year ended
December 31, 1999, our securitized net charge-off ratio on an annualized basis
was 7.2% compared to 7.8% for fiscal 1998 and 8.3% for fiscal 1997. We believe
that this ratio will continue to fluctuate but generally rise over the next
year, and over future years, as the average age of our accounts increases. Any
material increases in delinquencies and losses beyond our expectations could
have a material adverse impact on us and the value of our net retained interests
in loans securitized.
WE ARE SUBSTANTIALLY DEPENDENT UPON AIR CANADA, THE DOMINANT DOMESTIC AIR
CARRIER IN CANADA, AS A MAJOR SUPPLIER OF AIRLINE TICKETS THAT WE ISSUE TO
COLLECTORS OF AIR MILES REWARD MILES.
Air Canada, as a result of its December 1999 acquisition of Canadian
Airlines, is the dominant Canadian domestic air carrier. Air Canada has merged
the operations of Canadian Airlines and consolidated routes resulting in the
reduction of routes, flights and seats offered by the merged airline. As a
result of the acquisition, we entered into a new supply agreement with Air
Canada that runs through 2004, superseding our prior agreement with Canadian
Airlines. Notwithstanding our agreement with Air Canada, we cannot predict what
impact route consolidation or elimination or changes in the merged airlines'
operations will have on our ability to satisfy and retain active collectors and
sponsors of the Air Miles reward program. In addition, our Air Miles reward
program would be disrupted and adversely affected in the event of any
interruption or curtailment of Air Canada's operations.
WE ARE DEPENDENT UPON A MAJOR SUPPLIER FOR DATA TRANSMISSION SERVICES AND
POINT-OF-SALE DIAL-UP TRANSMISSION SERVICES.
We are dependent on a major supplier for data transmission services and
point-of-sale dial-up transmission services for our transaction processing
business. We also use a backup supplier of these services. In the first quarter
of 2001, we intend to complete the migration of a large percentage of our data
transmission and point-of-sale dial-up transmission needs for our transaction
processing business. Given our dependence on the supplier, if the supplier were
to fail to perform its obligations or its services were otherwise interrupted,
our transaction processing business could be materially and adversely affected.
LOSS OF DATA CENTER CAPACITY OR INTERRUPTION OF TELECOMMUNICATION LINKS COULD
ADVERSELY AFFECT OUR BUSINESS.
Our ability to protect our data centers against damage from fire, power
loss, telecommunications failure and other disasters is critical to our future.
Our services depend on links to telecommunication providers. Any damage to our
data centers or any failure of our telecommunication links that causes
interruptions in our operations could have a material adverse effect on our
ability to meet our clients' requirements, which could adversely effect our
business, financial condition and operating results.
In order to provide many of our services, we must be able to store,
retrieve, process and manage large databases and periodically expand and upgrade
our capabilities. Any interruption or loss of these capabilities from a computer
malfunction or other reasons could have a material adverse effect on our
business, financial condition and operating results.
WE ARE SUBJECT TO INTENSE COMPETITION, AND WE EXPECT TO FACE INCREASED
COMPETITION IN THE FUTURE.
GENERAL. The markets for our products and services are highly competitive.
We compete with traditional and online marketing companies, credit card issuers
and data processing companies, as well as with current and potential in-house
operations of our clients. Many of our current and potential
11
competitors have greater resources than we do, which may impair our ability to
compete. Many of our current and potential competitors have longer operating
histories, stronger brand names and greater financial, technical, marketing and
other resources than we do. In addition, these companies may have existing
relationships with our potential clients and may be able to respond to changes
in market dynamics and technology faster than we can. We cannot assure you that
we will be able to compete successfully against our current and potential
competitors.
TRANSACTION SERVICES. The payment processing industry is highly
competitive, especially among the five largest payment processors in the U.S.
Such competition requires that we continue to invest resources in technological
developments and restricts the prices we can charge for certain services. The
market requires that payment processors provide advanced and efficient
technology, causing some financial institutions and other payment processors to
either leave the business or merge with other providers, resulting in
significant consolidation in the payment processing industry. Industry
consolidation has enabled a few of our competitors to gain access to significant
capital, management, marketing and technological resources that are equal to or
greater than ours. We cannot assure you that we will continue to be able to
compete successfully with such payment processors.
CREDIT SERVICES. We also face intense and increasing competition from
numerous financial services providers, some of which have greater resources than
we do. We compete against third party private label credit card issuers who may
offer lower discount fees and greater incentives to secure new business.
Additionally, our private label cards compete with other payment methods,
primarily general-purpose credit cards like Visa, MasterCard and American
Express, as well as cash, checks and debit cards.
MARKETING SERVICES. As a provider of loyalty and database marketing
products and services, we generally compete with advertising and other
promotional and loyalty programs, both traditional and online, for a portion of
a client's total marketing budget. In addition, we compete against internally
developed products and services created by our existing and potential clients.
For each of our loyalty and database products and services, we expect
competition to intensify as more competitors enter our market. In addition, new
competitors with our Air Miles reward program may target our sponsors and reward
miles collectors as well as draw rewards from our rewards suppliers. Due to the
significant funding requirements to establish such a program, we have decided
not to operate a program in the U.S. similar to the Air Miles reward miles
program we operate in Canada. Rather, our existing stockholders have decided to
pursue such a program in the U.S. through the creation and funding of a separate
and distinct company called U.S. Loyalty Corp. Given the proximity of the U.S.
and Canada and the number of companies that have operations in, and target
consumers in, both countries, U.S. Loyalty Corp. may in the future become a
competitor of ours for the marketing budgets of existing and potential clients.
Over the past year, over half of the Air Miles reward program revenues came from
the top 10-15% of our Air Miles reward miles collectors. The loss of these
collectors could impact our ability to generate significant revenue from
sponsors and loyalty partners. The continued attractiveness of our loyalty and
rewards programs will depend in large part on our ability to remain affiliated
with sponsors that are desirable to consumers and to offer rewards that are both
attainable and attractive. For our database marketing services, our ability to
continue collecting detailed transaction data on consumers is critical in
providing effective customer strategies for our clients.
FAILURE TO SAFEGUARD OUR DATABASE AND CONSUMER PRIVACY COULD AFFECT OUR
REPUTATION AMONG OUR CLIENTS AND THEIR CUSTOMERS.
An important feature of our loyalty and marketing database programs and
credit services is our ability to develop and maintain individual consumer
profiles. As part of our reward miles redemption and credit services, we
maintain a marketing database containing information on consumers' account
balances. Although we have extensive security procedures, our databases may be
subject to unauthorized access. If we experience a security breach, the
integrity of our marketing databases could
12
be affected. With respect to our loyalty and database programs, security and
privacy concerns may cause consumers to resist providing the personal data
necessary to support this profiling capability. The use of our loyalty and
database programs or credit services could decline if any well-publicized
compromise of security occurred. We could also be subject to legal claims from
consumers. Any public perception that we released consumer information without
authorization would adversely affect our ability to attract and retain
consumers.
FLUCTUATIONS IN THE TIMING OR QUANTITY OF REWARD MILES REDEEMED BY COLLECTORS
COULD INCREASE OUR NEED FOR WORKING CAPITAL.
We cannot control the timing of a collector's decision to redeem Air Miles
reward miles or the quantity of reward miles redeemed. We could experience a
need for increased working capital to fund redemptions if collectors redeem Air
Miles reward miles at a rate that is more rapid than we anticipated, which could
have a material adverse effect on our business, financial condition and
operating results. We currently maintain cash, cash equivalents and fixed-income
securities in a separate reserve account, which we believe are adequate to fund
this obligation.
WE MAY FACE DAMAGES AS A RESULT OF EXISTING LITIGATION.
World Financial, our wholly owned subsidiary, is a party to a lawsuit filed
by Service Merchandise, Inc. in U.S. Bankruptcy Court for the Middle District of
Tennessee. In those actions, Service Merchandise, which is in voluntary
Chapter 11 bankruptcy, alleges that World Financial breached certain contractual
provisions of an agreement regarding a private label credit card program by,
among other things, unilaterally revising the credit standards applicable to
existing cardholders and withholding monthly program payments owed to Service
Merchandise. In addition, Service Merchandise alleges that certain actions taken
by World Financial violated the automatic stay provisions of the U.S. Bankruptcy
Code. In a separate action, a group of World Financial cardholders recently
filed a putative class action complaint against World Financial in U.S. District
Court in the Southern District of Florida, Miami Division, alleging that World
Financial's billing practices are false, misleading and deceptive, and therefore
in breach of state and federal laws and cardholder contracts. We believe that
both of these actions are without merit and we intend to defend them vigorously.
See "Business--Litigation." Due to the uncertainty inherent in litigation,
however, we cannot provide assurance that an ultimate result against World
Financial in either of those actions would not have a material adverse effect on
our business, financial condition or operating results.
LITIGATION RELATING TO INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.
Third parties may infringe or misappropriate our trademarks or other
intellectual property rights, which could have a material adverse effect on our
business, financial condition or operating results. The actions we take to
protect our trademarks and other proprietary rights may not be adequate.
Litigation may be necessary to enforce our intellectual property rights, protect
our trade secrets or determine the validity and scope of the proprietary rights
of others. We cannot assure you that we will be able to prevent misappropriation
or infringement of our proprietary information. Any infringement or
misappropriation could harm any competitive advantage we currently derive or may
derive from our proprietary rights.
Third parties may assert infringement claims against us. Any claims and any
resulting litigation could subject us to significant liability for damages. An
adverse determination in any litigation of this type could require us to design
around a third party's patent or to license alternative technology from another
party. In addition, litigation is time-consuming and expensive to defend and
could result in the diversion of our time and attention. Any claims from third
parties may also result in limitations on our ability to use the intellectual
property subject to these claims.
13
BILLING DISPUTES BETWEEN A CARDHOLDER AND A MERCHANT AND FRAUDULENT TRANSACTIONS
SUBMITTED BY A MERCHANT INVOLVING ELECTRONIC PAYMENT CARDS SUCH AS CREDIT
CARDS, DEBIT CARDS OR STORED VALUE CARDS PRESENT RISKS TO OUR PROFITABILITY.
In our bank card processing business, when a billing dispute between a
cardholder and a merchant is resolved in favor of the cardholder, or, when a
card issuer detects fraudulent transactions submitted by a merchant, we charge
back the amount of the transaction to the merchant. We then credit the amount of
the transaction to the cardholder's account. These billing disputes or
chargebacks relate to, among others:
- nonreceipt of merchandise or services;
- unauthorized use of a credit card; and
- general disputes between a customer and a merchant as to the quality of
the goods purchased or the services rendered by the merchant.
If we or our clearing banks are unable to collect amounts charged back to a
merchant's account, and if the merchant refuses or is unable due to bankruptcy
or other reasons to reimburse us for the chargeback, we bear the loss for the
amount of the refund paid to the cardholder. Our contingent liability is greater
in certain industries, such as the direct response marketing industry, where the
cardholder is not present to provide a signature. We attempt to reduce our
exposure to such losses by performing initial and periodic credit reviews of our
merchant clients, by adjusting our rates based, in part, on the merchant's
credit risk, business and industry, and by requiring merchants to create escrow
accounts for the purpose of satisfying amounts charged back to the merchant. We
face chargeback risks with respect to the private label credit card programs we
fund that are similar to the risks we face in our bankcard processing programs.
We cannot assure you that we will not experience significant losses from
chargebacks in the future. Increases in chargebacks not paid by merchants could
have a material adverse effect on our business, financial condition and
operating results.
CHANGES IN ASSUMPTIONS OVER TIME, SUCH AS THE AMOUNT OF PREPAYMENTS FROM AND
DEFAULTS BY CARDHOLDERS, MAY CAUSE A DECREASE IN THE ESTIMATED VALUE OF THE
INTEREST ONLY STRIPS, AND THE RESIDUAL INTEREST WE RETAIN IN THE CREDIT CARD
RECEIVABLES WE SELL IS ILLIQUID.
ASSUMPTIONS REGARDING FUTURE PREPAYMENTS AND DEFAULT ASSUMPTIONS ARE SUBJECT
TO VOLATILITY THAT COULD MATERIALLY AFFECT OPERATING RESULTS. We finance
substantially all our credit card receivables through asset securitization
transactions in which we sell our credit card receivables to a master trust that
holds the receivables as trustee for third-party investors. We retain the right
to service the receivables we sell. We maintain a residual interest in the
credit card receivables and retain an interest only strip representing the
present value of the right to the excess cash flows generated by the securitized
receivables. We calculate the gain on the sale of receivables and the value of
the interest only strips based on the present value of the anticipated cash flow
stream from the securitized receivables, which is the difference between
(1) interest and other fees paid by cardholders and (2) the sum of the
following:
- pass-through interest paid to third-party investors;
- trustee fees;
- servicing fees that we receive from the trust; and
- estimated loan portfolio losses.
A significant factor affecting the level of anticipated cash flows is the
rate at which the underlying principal of the securitized credit card
receivables is reduced. Prepayments represent principal reductions in excess of
the contractually scheduled reductions. Additional assumptions include estimated
future credit losses and a discount rate commensurate with the risks involved.
The rate of cardholder prepayments or defaults on credit card balances may be
affected by a variety of economic factors, including interest rates and the
availability of alternative financing, most of which are not
14
within our control. A decrease in interest rates could cause cardholder
prepayments to increase, thereby requiring a write down of the interest only
strips.
Assumptions regarding future prepayments and credit losses are subject to
volatility that could materially affect operating results. Both the amount and
timing of estimated cash flows are dependent on the performance of the
underlying credit card receivables, and actual cash flows may vary significantly
from expectations. If prepayments from cardholders or defaults by cardholders
exceed our estimates, we may be required to decrease the carrying value of the
interest only strips through a charge against earnings.
THE RESIDUAL INTEREST WE RETAIN IN THE CREDIT CARD RECEIVABLES WE SELL IS
ILLIQUID. In addition, we cannot assure you that the interest only strips could
in fact be sold at their stated value on the balance sheet, if at all, due to
the lack of a known market for interest only strips.
We recognize a gain on sale and the related interest only strip in the
period during which we sell the credit card receivables, while we actually
receive cash payments from our pooling and servicing agreements and servicing
fees from the trusts over the lives of the receivables we sell. This difference
in the timing of cash flows could cause a cash shortfall, which could have a
material adverse effect on our financial condition.
WE DEPEND ON OUR ABILITY TO SELL AND SECURITIZE OUR CREDIT CARD RECEIVABLES TO
FUND NEW RECEIVABLES.
Since January 1996, we have used a program involving the sale and
securitization of our credit card receivables as our primary funding vehicle for
credit card receivables. A number of factors affect securitization transactions,
some of which are beyond our control, including:
- conditions in the securities markets in general;
- conditions in the asset-backed securitization market;
- conformity of credit card receivables to rating agency requirements and
changes in those requirements; and
- availability of credit enhancement.
These factors could adversely affect our ability to effect securitization
transactions or the benefits to us of securitization transactions, including the
value of our interest only strips or our ability to sell interest only strips or
portions of our interest in the receivables.
In addition, we have overcollateralized and maintained an interest in our
securitizations in order to achieve better credit ratings. Failure to obtain
acceptable credit ratings or more stringent credit enhancement requirements
could decrease the efficiency of or have an adverse effect on the timing of, or
our ability to effect, future securitizations. Securitization transactions
subject us to covenants such as receivables performance and the continued
solvency of private label program participants. If we do not satisfy these
covenants, an early amortization event could occur. In an early amortization
event, the trustee would hold our interest in the related receivables and excess
interest income until such time as the securization investors are fully repaid.
The occurrence of an early amortization event would significantly limit our
ability to securitize additional receivables.
We intend to continue public securitizations of our credit card receivables.
The inability to securitize credit card receivables due to changes in the
market, the unavailability of credit enhancements, an early amortization event,
or any other circumstance or event would have a material adverse effect on our
business, financial condition and operating results.
THE TRUST MAY TERMINATE OUR SERVICING RIGHTS.
The pooling and servicing agreements related to our securitizations provide
that the trustee may terminate our servicing rights if we fail to perform our
servicing obligations under those agreements,
15
such as the failure to make timely payments to certificate holders. As of the
date of this prospectus, no servicing rights had been terminated. However, we
cannot assure you that we will be able to perform our servicing obligations and,
if we are unable to perform those obligations, that our servicing rights will
not be terminated. A termination of our servicing rights would have a material
adverse effect on our business, financial conditions and operating results.
WE EXPECT GROWTH IN OUR CREDIT SERVICES SEGMENT RESULTING FROM NEW AND ACQUIRED
PRIVATE LABEL CARD PROGRAMS, WHOSE CREDIT CARD RECEIVABLE PERFORMANCE MAY NOT
BE CONSISTENT WITH THAT OF OUR EXISTING PROGRAMS.
An important source of growth in our private card operations is expected to
come from the acquisition of existing private label programs and from initiating
new private label programs at retailers that previously did not operate a
program. Although we believe our pricing and models for determining credit risk
are designed to evaluate the credit risk of existing programs and the credit
risk we are willing to assume for start-up programs, there can be no assurance
that the loss experience on newly acquired and start-up plans will be consistent
with our more established programs. The failure to successfully underwrite these
private label programs may result in increased portfolio losses and reduce our
profitability and could have a material adverse effect on our business,
financial condition and operating results.
INTEREST RATE FLUCTUATIONS IMPACT THE YIELD ON OUR ASSETS AND FUNDING EXPENSE.
An increase or decrease in market interest rates could have a negative
impact on the amount we realize from the net interest spread between the yield
on our assets and our cost of funding. A rise in market interest rates may
indirectly impact the payment performance of consumers or the value of, or
amount we could realize from the sale of, interest only strips. We try to
minimize the impact of changes in market interest rates on our cash flow, asset
value and net income primarily by funding fixed-rate assets with fixed-rate
funding sources and by using interest-rate derivatives to match asset and
liability repricings. Nonetheless, changes in market interest rates may have a
negative impact on us.
OUR HEDGING ACTIVITY SUBJECTS US TO OFF-BALANCE SHEET RISK.
The interest rate swap and treasury lock agreements we use to reduce our
exposure to fluctuations in interest rates subject us to off-balance sheet risk.
These off-balance sheet financial instruments involve elements of credit and
interest rate risk in excess of the amount recognized on our balance sheet. Our
hedging policy subjects us to risks relating to the creditworthiness of the
commercial banks with whom we contract in our hedging transactions. If one of
these banks cannot honor its obligations, we may suffer a loss. The purpose of
our hedging policy is to reduce the effect of interest rate fluctuations on our
results of operations. Therefore, while our hedging policy reduces our exposure
to losses resulting from unfavorable changes in interest rates, it also reduces
or eliminates our ability to profit from favorable changes in interest rates.
POSTAL RATE INCREASES COULD LEAD TO REDUCED VOLUME OF BUSINESS.
Postal rate increases have negatively impacted the direct marketing industry
during the past years. Any future increases may force us and our clients that
are direct mailers to mail fewer pieces. This response by direct mailers could
decrease the amount of processing services purchased from us, which could have a
material adverse effect on our business, financial condition and operating
results.
16
FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE U.S. DOLLAR AND CANADIAN DOLLAR
MAY AFFECT OUR OPERATING RESULTS.
A large portion of our Marketing Services revenue relates to the Air Miles
reward program and is in Canadian dollars. We are exposed to fluctuations in the
exchange rate between the U.S. dollar and the Canadian dollar through our
operations in Canada. Although we have entered into cross-currency hedge
transactions to fix the exchange rate on any Canadian debt repayment due to a
U.S. counter party, we do not hedge our net investments in foreign operations.
Significant changes in the exchange rate could have a material adverse effect on
our business, financial condition and operating results.
IF OUR BANK SUBSIDIARY FAILS TO MEET CREDIT CARD BANK CRITERIA, WE MAY BECOME
SUBJECT TO REGULATION UNDER THE BANK HOLDING COMPANY ACT.
Our bank subsidiary, World Financial, is a limited purpose credit card bank.
The Bank Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation, insures the deposits of World Financial. World Financial is subject
to regulation and examination by the Office of the Comptroller of the Currency,
its primary regulator, and is also subject to regulation by the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance
Corporation, as back-up regulators. World Financial is not a "bank" as defined
under the Bank Holding Company Act because it is in compliance with the
following requirements:
- it engages only in credit card operations;
- it does not accept demand deposits or deposits that the depositor may
withdraw by check or similar means for payment to third parties;
- it does not accept any savings or time deposits of less than $100,000,
except for deposits pledged as collateral for extensions of credit;
- it maintains only one office that accepts deposits; and
- it does not engage in the business of making commercial loans.
If World Financial failed to meet the credit card bank criteria described
above, World Financial would be a "bank" as defined by the Bank Holding Company
Act, subjecting us to the provisions, requirements and restrictions of the Bank
Holding Company Act as a bank holding company. We believe that becoming a bank
holding company would significantly harm us, as we could be required to either
divest any activities deemed to be non-banking activities or cease any
activities not permissible for a bank holding company and its affiliates.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
Our future success is substantially dependent upon the continued services of
our senior management team. The loss of the services of any of our executive
officers could have a material adverse effect on our business. Many of our
executive officers have only been employed by us for a short time. We do not
currently have "key person" life insurance policies on any of our employees, and
we generally do not enter into employment agreements with our employees. Our
future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in our markets is
intense, and we may be unable to attract or retain highly qualified personnel in
the future.
SOME OF OUR STOCKHOLDERS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
As of December 31, 2000, Limited Commerce Corp. and the affiliated entities
of Welsh, Carson, Anderson & Stowe, in the aggregate beneficially owned
approximately 99.8% of our outstanding common stock and would have owned 81.4%
of our common stock as of that date after giving pro forma effect to this
offering. As a result, these stockholders are able to exercise significant
influence
17
over, and in most cases control, matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Their continued concentration of ownership after this offering may
also have the effect of delaying, preventing or deterring a change in control
that may otherwise be beneficial to you.
DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD PREVENT A TAKEOVER THAT MIGHT BE
BENEFICIAL TO YOU.
Delaware law, as well as provisions of our certificate of incorporation and
bylaws, could discourage unsolicited proposals to acquire us, even though such
proposals may be beneficial to you. These provisions include:
- a board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms;
- our board's authority to issue shares of preferred stock without
stockholder approval; and
- provisions of Delaware law that restrict many business combinations and
provide that directors serving on staggered boards of directors, such as
ours, may be removed only for cause.
These provisions of our certificate of incorporation, bylaws and Delaware law
could discourage tender offers or other transactions that might otherwise result
in our stockholders receiving a premium over the market price for our common
stock.
THE FAILURE TO FAVORABLY NEGOTIATE AND INTEGRATE FUTURE ACQUISITIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
We have made several acquisitions since August 1996, and we intend to
acquire additional complementary businesses as part of our growth strategy.
Although we may acquire additional businesses, we may not be able to
successfully integrate them in a timely manner or at all. If we are not able to
successfully integrate acquired businesses, we may incur substantial costs and
delays or other operational, technical or financial problems. In addition, the
failure to successfully integrate acquisitions may divert management's attention
from our existing business and may damage our relationships with key clients and
employees.
To finance future acquisitions, we may issue equity securities that could be
dilutive to our stockholders. We may also incur debt and additional amortization
expenses related to goodwill and other intangible assets in future acquisitions.
The interest expense related to this debt and additional amortization expense
may significantly reduce our profitability and could have a material adverse
effect on our business, financial condition and operating results.
RISKS RELATED TO OUR INDUSTRY
THE MARKETS FOR THE SERVICES THAT WE OFFER MAY FAIL TO EXPAND OR MAY CONTRACT.
Our growth and continued profitability relies on acceptance of the services
that we offer. If demand for loyalty and database marketing, transaction or
credit services decreases, the price of our common stock could fall and you
could lose value in your investment. The use of loyalty and database marketing
by retailers is in its early stages and we cannot guarantee that merchants will
continue to use these types of marketing strategies. Changes in technology may
enable merchants and retail companies to directly process transactions in a
cost-efficient manner without the use of our services, which could have a
material adverse effect on our business, financial condition and operating
results.
INDUSTRY RISKS RELATED TO CONSUMER CREDIT PRODUCTS COULD NEGATIVELY IMPACT US.
We face a number of risks associated with unsecured lending, including the
following:
- delinquencies and credit losses will increase because of future economic
downturns;
18
- an increasing number of consumers will default on the payment of their
outstanding balances or seek protection under bankruptcy laws;
- fraud by cardholders and third parties will increase;
- increased criticism from consumer advocates and the media could hurt
consumer acceptance of our products; and
- litigation, including class action litigation, challenging our product
terms, rates, disclosures, collections or other practices, under state and
Federal consumer protection statutes and other laws, could adversely
affect our lending practices.
Our business, financial condition and operating results could be materially
adversely affected if we have underestimated any of these risks or are unable to
adjust our pricing for such changes.
LEGISLATION RELATING TO CONSUMER PRIVACY MAY AFFECT OUR ABILITY TO COLLECT DATA.
The enactment of legislation or industry regulations arising from public
concern over consumer privacy issues could have a material adverse impact on our
loyalty and database marketing services. Any such legislation or industry
regulations could place restrictions upon the collection and use of information
that is currently legally available, which could materially increase our cost of
collecting some data. Legislation or industry regulation could also prohibit us
from collecting or disseminating certain types of data, which could adversely
affect our ability to meet our clients' requirements.
The Gramm-Leach-Bliley Act, which became law in November 1999, requires
financial institutions to comply with various notice procedures in order to
disclose nonpublic personal information about their consumers to nonaffiliated
third parties and restricts their ability to share account numbers. The
requirements of this law also apply to the disclosure of any list, description
or other grouping of consumers derived from nonpublic personal information. This
law makes it more difficult to collect and use information that has been legally
available and may increase our costs of collecting some data. This law also
requires us to disclose our privacy policies and practices to consumers. New
regulations, promulgated by the federal government under the Gramm-Leach-Bliley
Act, that become effective in July 2001 will require credit card customers to
have the ability to opt out of having information generated by their credit card
purchases shared with nonaffiliated third parties.
On April 13, 2000, the Canadian federal government and Minister of Industry
of Canada enacted the Personal Information Protection and Electronic Documents
Act. This act, which became effective on January 1, 2001, comprises
comprehensive private sector privacy legislation that applies to organizations
engaged in any commercial activities in Canada. It enacted into law 10 privacy
principles from the Canadian Standards Association's Model Privacy Code. This
act also requires organizations to obtain consent to the collection, use or
disclosure of personal information. The nature of the required consent will
depend on the sensitivity of the personal information and will permit personal
information to be used only for the purposes for which it was collected. The
Province of Quebec has had similar privacy legislation applicable to the private
sector in that province since 1994, and other provinces are considering further
privacy legislation.
CURRENT AND PROPOSED REGULATION AND LEGISLATION RELATING TO OUR CREDIT SERVICES
COULD LIMIT OUR BUSINESS ACTIVITIES, PRODUCT OFFERINGS AND FEES CHARGED.
Various Federal and state laws and regulations significantly limit the
credit services activities in which we are permitted to engage. Such laws and
regulations, among other things, limit the fees and other charges that we can
impose on customers, limit or prescribe certain other terms of our products and
services, require specified disclosures to consumers, or require that we
maintain certain licenses, qualifications and minimum capital levels. In some
cases, the precise application of these statutes and regulations is not clear.
In addition, numerous legislative and regulatory proposals are advanced each
year which, if adopted, could have a material adverse effect on our
profitability or further restrict the
19
manner in which we conduct our activities. The failure to comply with, or
adverse changes in, the laws or regulations to which our business is subject, or
adverse changes in their interpretation, could have a material adverse effect on
our ability to collect our receivables and generate fees on the receivables,
thereby adversely affecting our business, financial condition and operating
results.
STATE TAX ISSUES COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS.
Transaction processing companies may be subject to state taxation of certain
portions of their fees charged to merchants for their services. If we are
required to pay such taxes and are unable to pass this tax expense through to
our merchant clients, our business, financial condition and operating results
could be adversely affected.
LAWS AND REGULATIONS PERTAINING TO THE INTERNET MAY ADVERSELY AFFECT OUR
BUSINESS.
An increasing number of laws and regulations pertain to the Internet. These
laws and regulations relate to liability for information retrieved from or
transmitted over the Internet, on-line content regulation, user privacy,
taxation and the quality of products and services. Moreover, the applicability
to the Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. Any new law or
regulation pertaining to the Internet, or the application or interpretation of
existing laws, could decrease the demand for our promotional services, increase
our cost of doing business or otherwise have a material adverse effect on our
business, results of operations and financial condition.
RISKS RELATED TO THIS OFFERING
IF THE PRICE OF OUR COMMON STOCK FLUCTUATES SIGNIFICANTLY, YOUR INVESTMENT COULD
LOSE VALUE.
Prior to this offering, there has been no public market for our common
stock. Although we have applied to have our common stock listed on the New York
Stock Exchange, we cannot assure you that an active public market will develop
for our common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price. If an
active public market for our common stock does not develop, the trading price
and liquidity of our common stock will be materially and adversely affected.
Negotiations between us and the underwriters will determine the initial offering
price, which may not be indicative of the trading price for our common stock
after this offering. In addition, the stock market is subject to significant
price and volume fluctuations, and the price of our common stock could fluctuate
widely in response to several factors, including:
- our quarterly operating results;
- changes in our earnings estimates;
- additions or departures of key personnel;
- changes in the business, earnings estimates or market perceptions of our
competitors;
- changes in general market or economic conditions; and
- announcements of legislative or regulatory change.
WE HAVE A LARGE NUMBER OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE AND, IF THESE
SHARES ARE SOLD IN THE FUTURE, YOUR INVESTMENT WILL BE DILUTED.
If a large number of shares of our common stock are sold in the open market
after this offering, or the market perceives that such sales could occur, the
trading price of our common stock could decrease. After this offering, we will
have an aggregate of 120,627,107 shares of our common stock
20
authorized but unissued and not reserved for specific purposes. In general, we
may issue all of these shares without any action or approval by our
stockholders. We may pursue acquisitions of competitors and related businesses
and may issue shares of our common stock in connection with these acquisitions.
Upon consummation of the offering, we will have 70,619,893 shares of our
common stock outstanding. Of these shares, all shares sold in the offering,
other than shares, if any, purchased by our affiliates, will be freely tradable.
Of the remaining 57,619,893 shares, 10,625 shares will be freely transferable
and 57,609,268 shares will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act.
We have also reserved 8,753,000 shares of our common stock for issuance
under our stock option and restricted stock plan, of which 4,882,626 shares are
issuable upon exercise of options granted as of December 31, 2000, including
options to purchase 1,232,353 shares exercisable as of December 31, 2000 or that
will become exercisable within 60 days after such date. Any shares issued in
connection with the exercise of currently outstanding stock options or otherwise
would further dilute your investment in our common stock.
OUR MANAGEMENT'S BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING
MAY ADVERSELY AFFECT YOUR INVESTMENT.
Our management can spend a significant portion of the proceeds from this
offering in ways with which our stockholders may not agree. We intend to use
approximately $92.9 million of the net proceeds from the offering to repay
outstanding debt. We expect that the remaining net proceeds will be available
for general corporate purposes, including potential acquisitions and working
capital.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents included in this prospectus may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements may use words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project" and similar expressions as they relate to us or
our management. When we make forward-looking statements, we are basing them on
our management's beliefs and assumptions, using information currently available
to us. These forward-looking statements are subject to risks, uncertainties and
assumptions, including but not limited to those discussed under the section
"Risk Factors" and elsewhere in this prospectus.
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from what we projected. Any forward-looking statements contained in
this prospectus reflect our current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking statements attributable to us or individuals
acting on our behalf are expressly qualified in their entirety by this
paragraph. You should specifically consider the factors identified under the
section "Risk Factors" and elsewhere in this prospectus which could cause actual
results to differ before making an investment decision.
21
USE OF PROCEEDS
The net proceeds from this offering will be approximately $153.4 million, or
$178.9 million if the underwriters exercise their over-allotment option in full,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. We will repay approximately $92.9 million that is outstanding
of a $130.0 million U.S. Term Loan, which is part of our $330.0 million credit
agreement entered into in July 1998. The balance of the net proceeds is intended
for potential acquisitions. We are currently considering acquisition candidates
in the transaction services field. We have no present agreements, commitments or
understandings with respect to the acquisition of any business, although we
continue to monitor and evaluate acquisition opportunities on an ongoing basis.
Pending such uses, we intend to invest the net proceeds in short-term
interest-bearing, investment-grade instruments, such as certificates of deposit
or direct or guaranteed obligations of government agencies of the United States.
The foregoing represents our best estimate of the use of the net proceeds of
this offering based on the current status of our business. Our estimates and
current expectations are subject to significant change, based on numerous
factors, including certain factors beyond our control. If we do not utilize the
net proceeds of the offering as set forth above, or if we utilize different
amounts than presently contemplated, we could use any remaining cash for other
corporate purposes, including working capital.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of our board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that our board deems relevant. In addition, under the terms of our credit
agreement, we cannot declare or pay dividends or return capital to our
stockholders, nor can we authorize or make any other distribution, payment or
delivery of property or cash to our stockholders.
22
DILUTION
Our pro forma net deficit in tangible book value as of September 30, 2000
was approximately $90.8 million, or approximately $1.58 per share of common
stock, after giving effect to the conversion of all our outstanding shares of
Series A preferred stock into common stock. Pro forma net deficit in tangible
book value per share represents the amount of tangible assets, less intangibles
assets and goodwill and total liabilities, divided by the number of shares of
common stock outstanding, after giving effect to the conversion of all our
outstanding shares of Series A preferred stock into common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the pro forma net tangible book value per share of our common stock
immediately after the offering. After giving effect to our sale of 13,000,000
shares of common stock in this offering at an assumed initial public offering
price of $13.00 per share and after deduction of the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of September 30, 2000 would have been
approximately $61.1 million, or $0.87 per share. This represents an immediate
increase in pro forma net tangible book value to existing stockholders
attibutable to new investors of $2.44 per share and the immediate dilution of
$12.13 per share to new investors.
Assumed initial public offering price per share............. $13.00
Pro forma net deficit in tangible book value per share
before offering......................................... $(1.58)
Increase per share attributable to new investors.......... 2.44
------
Pro forma net tangible book value per share after the
offering.................................................. 0.87
------
Dilution per share to new investors......................... $12.13
======
The following table sets forth as of September 30, 2000, after giving effect
to the conversion of all our outstanding shares of Series A preferred stock into
common stock, the total consideration paid and the average price per share paid
by our existing stockholders and by new investors, before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us at an assumed initial public offering price of $13.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- -------- -------- -------- ---------
(AMOUNTS IN THOUSANDS)
Existing stockholders.......................... 57,620 81.6% $346,115 67.2% $ 6.01
New investors.................................. 13,000 18.4 169,000 32.8 13.00
------ ----- -------- -----
Total........................................ 70,620 100.0% $515,115 100.0%
====== ===== ======== =====
This table assumes no options were exercised after September 30, 2000. As of
September 30, 2000, there were outstanding options to purchase a total of
4,832,069 shares of common stock at a weighted average exercise price of $12.42
per share and 8,753,000 shares of common stock reserved for issuance under our
stock option and restricted stock plan. If all outstanding options were
exercised on the date of the closing of the offering, new investors purchasing
shares in this offering would suffer dilution per share of $12.19.
23
CAPITALIZATION
Capitalization is the amount invested in a company and is a common
measurement of a company's size. The table below shows our capitalization as of
September 30, 2000 as follows:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all of our Series A
preferred stock into common stock; and
- on a pro forma as adjusted basis to give effect to the sale of the
13,000,000 shares of our common stock offered by this prospectus at an
assumed initial public offering price of $13.00 per share and the
application of the net proceeds from the sale, having deducted estimated
underwriting discounts and commissions and estimated offering expenses.
You should read this table in conjunction with the consolidated financial
statements and related notes that are included in this prospectus.
AT SEPTEMBER 30, 2000
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and cash equivalents................................... $ 73,773 $ 73,773 $134,285
======== ======== ========
Certificates of deposit..................................... $ 74,000 $ 74,000 $ 74,000
Short-term debt............................................. 89,125 89,125 59,125
-------- -------- --------
Total short-term debt..................................... $163,125 $163,125 $133,125
======== ======== ========
Long-term debt, excluding current portion:
Certificates of deposit................................... $ 14,500 $ 14,500 $ 14,500
Senior credit facility.................................... 150,535 150,535 87,625
Subordinated notes........................................ 102,000 102,000 102,000
-------- -------- --------
Total long-term debt.................................... 267,035 267,035 204,125
Series A cumulative convertible preferred stock, $0.01 par
value; 120 shares authorized, issued and outstanding,
actual; none issued or outstanding, pro forma and pro
forma as adjusted......................................... 119,400 -- --
Stockholders' equity:
Common stock, $0.01 par value; 200,000 shares authorized,
actual, pro forma and pro forma as adjusted;
47,529 shares issued and outstanding, actual;
57,620 shares issued and outstanding, pro forma;
70,620 shares issued and outstanding, pro forma as
adjusted................................................ 475 576 706
Additional paid-in capital................................ 226,240 345,539 498,831
Retained earnings......................................... 16,101 16,101 14,601
-------- -------- --------
Total stockholders' equity.............................. 242,816 362,216 514,138
-------- -------- --------
Total capitalization.................................. $629,251 $629,251 $688,263
======== ======== ========
At the closing of this offering, as set forth in an agreement between us and
the holder of a warrant to purchase 167,084 shares of our common stock, we will
purchase the unexercised warrant from the warrantholder at a purchase price
equal to the initial public offering price set forth on the cover page of this
prospectus less the exercise price of $9.00 per share. Assuming an initial
offering price of $13.00 per share, that would result in a payment to the
warrantholder at closing of approximately $700,000. There are no other warrants
outstanding to purchase our common stock.
We estimate that there will be 70,619,893 shares of common stock outstanding
after this offering. In addition to the shares of common stock to be outstanding
after this offering, we may issue additional shares of common stock.
24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information is
based on the unaudited financial statements of Alliance Data Systems
Corporation, Loyalty Management Group Canada Inc., Harmonic Systems
Incorporated, and the network transaction processing business of SPS Payment
Systems, Inc. included elsewhere in this prospectus. The unaudited pro forma
adjustments are based upon certain assumptions that we believe are reasonable.
The unaudited pro forma consolidated financial information and accompanying
notes should be read in conjunction with the historical financial statements of
Alliance Data Systems Corporation, Loyalty Management Group Canada Inc.,
Harmonic Systems Incorporated and the network transaction processing business of
SPS Payment Systems, Inc., and the respective notes to those statements, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
The data contained in the pro forma columns give effect to the following
completed acquisitions, each accounted for under the purchase method of
accounting, as if those acquisitions had been consummated on January 1, 1998:
- the acquisition of Loyalty Management Group Canada Inc., effective
July 24, 1998;
- the acquisition of Harmonic Systems Incorporated, effective September 15,
1998; and
- the acquisition of the network transaction processing business of SPS
Payment Systems, Inc., effective July 1, 1999.
The unaudited pro forma consolidated financial information does not purport
to be indicative of the results that would have been obtained had the
transactions been completed as of the assumed dates and for the periods
presented or that may be obtained in the future. The unaudited pro forma
consolidated financial information is included in this prospectus for
informational purposes, and while we believe that it may be helpful in
understanding our combined operations for the periods indicated, you should not
unduly rely on the information.
25
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CALENDAR YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------
HARMONIC PRO
ADSC LOYALTY(1) SYSTEMS(1) SPS(1) SUBTOTAL ADJUSTMENTS FORMA
-------- ---------- ----------- -------- -------- ----------- --------
Total revenue...................... $451,537 $40,879 $12,090 $47,674 $552,180 $ -- $552,180
Cost of operations................. 344,369 44,741 16,328 37,591 443,029 -- 443,029
General and administrative......... 39,870 -- -- -- 39,870 -- 39,870
Depreciation and other
amortization..................... 8,782 805 448 -- 10,035 -- 10,035
Amortization of purchased
intangibles...................... 46,977 2,020 -- -- 48,997 32,574 (2) 81,571
-------- ------- ------- ------- -------- -------- --------
Total operating expenses......... 439,998 47,566 16,776 37,591 541,931 32,574 574,505
-------- ------- ------- ------- -------- -------- --------
Operating income (loss)............ 11,539 (6,687) (4,686) 10,083 10,249 (32,574) (22,325)
Interest expense................... 29,295 203 221 -- 29,719 8,800 (3) 38,519
Income tax (benefit) expense....... (2,622) (3,699) -- 3,710 (2,611) (10,779)(4) (13,390)
-------- ------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations....................... $(15,134) $(3,191) $(4,907) $ 6,373 $(16,859) $(30,595) $(47,454)
======== ======= ======= ======= ======== ======== ========
Earnings (loss) per share from
continuing operations -- basic
and diluted...................... $ (0.37) $ (1.01)
======== ========
Weighted average shares used in
computing per share amounts --
basic and diluted................ 41,308 5,661 46,969
======== ======== ========
See the accompanying notes on page 29.
26
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
PRO
ADSC SPS(1) SUBTOTAL ADJUSTMENTS FORMA
-------- -------- -------- ----------- --------
Total revenue..................................... $583,082 $24,322 $607,404 $ -- $607,404
Cost of operations................................ 456,908 20,128 477,036 -- 477,036
General and administrative........................ 45,919 -- 45,919 -- 45,919
Depreciation and other amortization............... 16,183 -- 16,183 -- 16,183
Amortization of purchased intangibles............. 61,617 -- 61,617 5,929 (2) 67,546
-------- ------- -------- ------- --------
Total operating expenses........................ 580,627 20,128 600,755 5,929 606,684
-------- ------- -------- ------- --------
Operating income (loss)........................... 2,455 4,194 6,649 (5,929) 720
Interest expense.................................. 42,785 -- 42,785 -- 42,785
Income tax (benefit) expense...................... (6,538) 1,543 (4,995) (2,515 )(4) (7,510)
-------- ------- -------- ------- --------
Income (loss) from continuing operations.......... $(33,792) $ 2,651 $(31,141) $(3,414) $(34,555)
======== ======= ======== ======= ========
Earnings (loss) per share from continuing
operations--basic and diluted................... $ (0.78) $ (0.88)
======== ========
Weighted average shares used in computing per
share amounts--basic and diluted................ 47,498 47,498
======== ========
See the accompanying notes on page 29.
27
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------
PRO
ADSC SPS(1) SUBTOTAL ADJUSTMENTS FORMA
-------- -------- -------- ----------- --------
Total revenue..................................... $428,216 $24,322 $452,538 $ -- $452,538
Cost of operations................................ 332,480 20,128 352,608 -- 352,608
General and administrative expenses............... 32,042 -- 32,042 -- 32,042
Depreciation and other amortization............... 10,219 -- 10,219 -- 10,219
Amortization of purchased intangibles............. 44,777 -- 44,777 5,929 (2) 50,706
-------- ------- -------- ------- --------
Total operating expenses........................ 419,518 20,128 439,646 5,929 445,575
-------- ------- -------- ------- --------
Operating income (loss)........................... 8,698 4,194 12,892 (5,929) 6,963
Interest expense.................................. 33,018 -- 33,018 -- 33,018
Income tax expense (benefit)...................... (899) 1,543 644 (2,515 )(4) (1,871)
-------- ------- -------- ------- --------
Income (loss) from continuing operations.......... $(23,421) $ 2,651 $(20,770) $(3,414) $(24,184)
======== ======= ======== ======= ========
Earnings (loss) per share from continuing
operations--basic and diluted................... $ (0.61) $ (0.62)
======== ========
Weighted average shares used in computing per
share amounts--basic and diluted................ 47,491 47,491
======== ========
See the accompanying notes on page 29.
28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statements of Operations for the two
years ended December 31, 1999 and the nine months ended September 30, 1999
reflect the pro forma adjustments for the acquisitions previously mentioned. The
1998 statements are presented on a recast calendar-year basis so as to provide a
better basis of comparison to the 1999 statements.
(1) Represents operating activity for each of the respective acquired businesses
for the periods set forth below:
YEAR ENDED
DECEMBER 31, NINE MONTHS
------------------------- ENDED
1998 1999 SEPTEMBER 30, 1999
---------- --------- -------------------
Loyalty............................ 7 months -- --
Harmonic Systems................... 9 months -- --
SPS................................ 12 months 6 months 6 months
(2) Represents pro forma adjustments to goodwill and other purchased
intangibles' amortization in connection with the acquisitions as follows:
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1998 1999 1999
-------- -------- --------------
Loyalty....................................... $15,925 $ -- $ --
Harmonic Systems.............................. 4,792 -- --
SPS........................................... 11,857 5,929 5,929
------- ------ ------
$32,574 $5,929 $5,929
======= ====== ======
We amortize goodwill over a 20 to 25 year life. We amortize other purchased
intangibles over a three to five year period.
(3) Represents pro forma adjustments to interest expense related to debt
incurred in connection with the Loyalty and Harmonic Systems acquisitions.
The interest expense is as follows:
YEAR ENDED
DECEMBER 31, 1998
-----------------
Loyalty..................................................... $4,900
Harmonic Systems............................................ 3,900
------
$8,800
======
(4) Represents the:
- tax effect of pro forma adjustments including amortization expense related
to the SPS acquisition but excluding amortization expense related to the
Loyalty and Harmonic Systems acquisitions; and
- recognition of tax expense for the acquired businesses which had not
recorded tax expense.
29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
We are the result of a 1996 merger of two entities acquired by Welsh,
Carson, Anderson & Stowe--J.C. Penney's transaction services business, BSI
Business Services, Inc., and The Limited's credit card bank operation, World
Financial. Prior to December 31, 1998, our fiscal year was based on a 52/53 week
fiscal year ending on the Saturday closest to January 31. We have since changed
our fiscal year end to December 31. The following table sets forth our summary
historical financial information for the periods ended and as of the dates
indicated. Fiscal 1996, fiscal 1997, fiscal 1998 and fiscal 1999 information is
derived from financial statements that were audited by Deloitte & Touche LLP.
Fiscal 1995 information is derived from financial statements that were audited
by other auditors. The 1996, 1997, 1998 and 1999 information presented herein
has been restated from amounts previously reported to reduce the amortization
period of the premium on purchased credit card portfolio from 15 years to three
years and to change the timing of revenue and expense recognition from upfront
to either over the estimated life of an Air Miles reward mile or at time of
redemption. See Note 22 to the consolidated financial statements included in
this prospectus. The selected consolidated financial data for the nine months
ended September 30, 1999 and 2000 have been derived from our unaudited
consolidated financial statements, which are included in this prospectus and
which, in our opinion, reflect all adjustments, consisting only of adjustments
of a normal and recurring nature, necessary for a fair presentation. Results for
the nine months ended September 30, 2000 are not necessarily indicative of
results for the full year. You should read the following historical financial
information along with the information contained throughout this prospectus,
including the financial statements and related notes that are included in this
prospectus.
FOR THE NINE MONTHS
FISCAL ENDED SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1995(1) 1996(2) 1997(3) 1998(4) 1999(5) 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Total revenue.......................... $ 178,385 $ 280,935 $ 353,399 $ 410,913 $ 583,082 $ 428,216 $ 501,043
Cost of operations..................... 115,627 207,896 256,222 319,806 456,908 332,480 384,576
General and administrative expenses.... 14,291 25,695 32,225 33,587 45,919 32,042 44,216
Depreciation and other amortization.... 3,629 6,318 7,402 8,270 16,183 10,219 19,099
Amortization of purchased
intangibles.......................... -- 15,900 28,159 43,766 61,617 44,777 38,771
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses........... 133,547 255,809 324,008 405,429 580,627 419,518 486,662
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income....................... 44,838 25,126 29,391 5,484 2,455 8,698 14,381
Other non-operating expenses(6)........ -- -- -- -- -- -- 2,476
Interest expense....................... -- 5,649 15,459 27,884 42,785 33,018 28,241
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes....... 44,838 19,477 13,932 (22,400) (40,330) (24,320) (16,336)
Income tax expense (benefit)........... 15,624 5,704 5,236 (4,708) (6,538) (899) 1,544
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations........................... 29,214 13,773 8,696 (17,692) (33,792) (23,421) (17,880)
Income (loss) from discontinued
operations, net of taxes............. -- (3,823) (8,247) (300) 7,688 7,688 --
Loss on disposal of discontinued
operations, net of taxes............. -- -- -- -- (3,737) (3,737) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...................... $ 29,214 $ 9,950 $ 449 $ (17,992) $ (29,841) $ (19,470) $ (17,880)
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) from continuing
operations--basic and diluted........ $ 0.38 $ 0.24 $ (0.42) $ (0.78) $ (0.52) $ (0.49)
========== ========== ========== ========== ========== ==========
Earnings (loss) per share--basic and
diluted.............................. $ 0.27 $ 0.01 $ (0.43) $ (0.86) $ (0.44) $ (0.49)
========== ========== ========== ========== ========== ==========
Weighted average shares used in
computing per share amounts--
basic and diluted.................... 36,521 36,612 41,729 47,498 47,487 47,529
========== ========== ========== ========== ========== ==========
30
FOR THE NINE MONTHS
FISCAL ENDED SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1995(1) 1996(2) 1997(3) 1998(4) 1999(5) 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER FINANCIAL DATA
Calculation of operating EBITDA:
Operating income................... $ 44,838 $ 25,126 $ 29,391 $ 5,484 $ 2,455 $ 8,698 $ 14,381
Depreciation and other
amortization..................... 3,629 6,318 7,402 8,270 16,183 10,219 19,099
Amortization of purchased
intangibles...................... -- 15,400 28,159 43,766 61,617 44,777 38,771
---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA............................. 48,467 47,344 64,952 57,520 80,255 63,694 72,251
Change in deferred revenue......... -- -- -- 20,729 91,149 48,189 30,046
Less:
Change in redemption settlement
assets........................... -- -- -- 11,838 63,472 27,205 11,540
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating EBITDA(7).................. $ 48,467 $ 47,344 $ 64,952 $ 66,411 $ 107,932 $ 84,678 $ 90,757
========== ========== ========== ========== ========== ========== ==========
Operating EBITDA as a percentage of
revenue............................ 27.2% 16.9% 18.4% 16.2% 18.5% 19.8% 18.1%
Cash flows from operating
activities......................... 121,399 67,696 (30,678) 9,311 251,638 215,992 45,797
Cash flows from investing
activities......................... 1,030,528 (148,721) (103,746) (145,386) (309,451) (268,094) (22,289)
Cash flows from financing
activities......................... (1,122,425) 82,011 104,870 163,282 74,929 91,079 (4,910)
SEGMENT OPERATING DATA
Air Miles reward miles:
issued............................. -- -- -- 611,824 1,594,594 1,164,867 1,415,221
redeemed........................... -- -- -- 158,281 529,327 396,253 521,718
Transactions processed............... -- 881,316 929,274 1,073,040 1,839,857 1,231,851 1,840,879
Statements generated(8).............. 100,240 126,114 113,940 117,672 132,817 99,436 96,297
Securitized portfolio(9)............. $1,290,581 $1,685,622 $2,021,599 $2,135,340 $2,232,375 $2,011,028 $2,033,382
Credit sales......................... $2,464,290 $2,402,881 $3,001,029 $2,866,062 $3,132,520 $2,156,622 $2,521,317
AS OF
--------------------------------------------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996(10) 1997 1998 1998 1999 2000
----------- ----------- ----------- ------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents............ $ 46,918 $ 50,149 $ 20,595 $ 47,036 $ 56,546 $ 73,773
Redemption settlement assets......... -- -- -- 70,178 133,650 145,190
Credit card receivables and seller's
interest........................... 90,789 161,686 144,440 139,458 150,804 142,509
Intangibles and goodwill............. -- 103,261 93,909 362,797 493,609 453,004
Total assets......................... 225,272 498,355 619,901 1,075,707 1,267,644 1,266,556
Deferred revenue--product and
service............................ -- -- -- 158,192 249,341 279,387
Certificates of deposit.............. 67,200 68,400 50,900 49,500 116,900 88,500
Short-term debt...................... -- 80,811 82,800 98,484 -- --
Long-term and subordinated debt...... -- 50,000 180,000 332,000 318,236 341,660
Total liabilities.................... 114,677 294,144 415,145 780,902 888,172 904,340
Series A preferred stock............. -- -- -- -- 119,400 119,400
Total stockholders' equity........... 110,595 204,211 204,756 294,805 260,072 242,816
- ------------------------------
(1) Fiscal 1995 represents the operating results of World Financial Network
Holding Corporation for the 52 weeks ended February 3, 1996.
(2) Fiscal 1996 represents the operating results of World Financial Network
Holding Corporation and BSI Business Services, Inc. for the 52 weeks ended
February 1, 1997.
(3) Fiscal 1997 represents the operating results of the merged entities under
current management for the 53 weeks ended January 1, 1998 and Financial
Automation Limited for two months.
(4) Fiscal 1998 represents the operating results of the merged entities under
current management for the 11 months ended December 31, 1998, Loyalty for
five months, and Harmonic Systems for three months.
(5) Fiscal 1999 represents the operating results of the merged entities under
current management for the year ended December 31, 1999, and SPS for six
months.
(6) Other expenses represents a non-operating loss on disposal of equity
securities.
(7) Operating EBITDA is equal to operating income plus depreciation and
amortization and the change in deferred revenue less the change in
redemption settlement assets. We have presented operating EBITDA because we
use it as an integral part of our internal reporting and performance
evaluation for senior management. In addition, operating EBITDA eliminates
the
31
uneven effect across all segments of considerable amounts of non-cash
amortization of purchased intangibles recognized in business combinations
accounted for under the purchase method. We use operating EBITDA to monitor
compliance with the financial covenants in our amended credit agreement and
to measure the performance and liquidity of our reportable segments.
Operating EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating
income or net income as an indicator of operating performance or to the
statement of cash flows as a measure of liquidity. In addition, operating
EBITDA is not intended to represent funds available for dividends,
reinvestment or other discretionary uses, and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. The operating
EBITDA measure presented in this prospectus may not be comparable to
similarly titled measures presented by other companies.
(8) Statements generated represents the number of billing statements generated
for both securitized cardholders and cardholders and customers serviced on
behalf of other clients.
(9) Securitized portfolio represents outstanding credit card receivables at the
end of the period that we have originated or purchased, and have been
securitized.
(10) Reduction of credit card receivables in fiscal 1995 is a result of
securitizing most of the credit card receivables off-balance sheet.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORMATION OF ALLIANCE DATA SYSTEMS CORPORATION
Although our predecessor companies have long operating histories, we have
largely been built by acquisition and therefore have a relatively short
operating history as a combined entity. We are the result of the 1996 merger of
two entities acquired by Welsh, Carson, Anderson & Stowe--J.C. Penney's
transaction services business, BSI Business Services, Inc., and The Limited's
credit card bank operation, World Financial. Since then, we have made the
following acquisitions, each accounted for as a purchase, with the results of
operations of the acquired businesses included from their respective closing
dates:
- in November 1996, we acquired the private label portfolio of National City
Bank of Columbus, which consisted of approximately $370.0 million in
receivables and represented over 25 retailers in a broad range of
industries including soft goods, building materials, furniture and
electronics. These receivables have been securitized.
- in July 1998, we acquired Loyalty Management Group Canada Inc.
- in September 1998, we acquired Harmonic Systems Incorporated.
- in July 1999, we acquired the network services business of SPS Payment
Systems, Inc., a wholly-owned subsidiary of Associates First Capital
Corporation.
FISCAL YEAR
In order to have more consistent reporting periods, we changed our year end
to a calendar year end basis during 1998. Prior to December 31, 1998, we
operated on a 52/53 week fiscal year that ended on the Saturday nearest
January 31. Accordingly, fiscal 1997 represents the 53 weeks ended January 31,
1998, fiscal 1998 represents the 11 months ended December 31, 1998 and fiscal
1999 represents the year ended December 31, 1999. In addition to discussing the
results of operations on a historical basis, we are also providing a discussion
of our results of operations on a pro forma recast basis for the year ended
December 31, 1998 compared to a pro forma basis for the year ended December 31,
1999, and a pro forma basis for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000.
REVENUE AND EXPENSES
TRANSACTION SERVICES. Our Transaction Services segment primarily generates
revenue based on the number of transactions processed, statements mailed and
customer calls handled. Operating costs include salaries and employee benefits,
processing and servicing expense, such as data processing, postage and
telecommunications, and equipment lease expense.
CREDIT SERVICES. We securitize substantially all of the credit card
receivables that we underwrite. As a result, our Credit Services segment derives
its revenue from the servicing fees and net financing income it receives from
the securitization trusts, as well as merchant fees from the processing of
private label credit cards for our private label clients. We record gains or
losses on the securitization of credit card receivables on the date of sale
based on the estimated fair value of assets retained and liabilities incurred in
the sale. Gains represent the present value of the anticipated cash flows we
have retained over the estimated outstanding period of the receivables. This
anticipated excess cash flow essentially represents an interest only strip,
consisting of the excess of finance charges and past-due fees net of the sum of
the return paid to certificateholders, estimated contractual servicing fees and
credit losses. The interest only strip is carried at fair value, with changes in
the fair value reported as a component of cumulative other comprehensive loss.
Factors outside our control influence estimates inherent in the
33
determination of fair value of the interest only strip, and as a result, such
estimates could materially change in the near term. Net financing charges
include the gains on securitizations and other income from securitizations.
Operating expenses for this segment include salaries and employee benefits,
processing and servicing expense, which includes credit bureau, postage,
telephone and data processing expense, and a portion of interest expense. A
portion of our interest expense relates to the funding of our seller's interest
in credit card receivables and other securitization assets.
MARKETING SERVICES. Our Marketing Services segment generates the majority
of its revenue from our Air Miles reward miles program. We receive proceeds from
our sponsors based on the number of Air Miles reward miles issued to collectors.
The proceeds from issuances of Air Miles reward miles are allocated into two
components based on the relative fair value of the related element. The largest
component is the redemption element for which the revenue is recognized at the
time an Air Mile reward mile is redeemed, or over the estimated life of an Air
Miles reward mile in the case of Air Miles reward miles that we estimate will go
unused by the collector base, known as "breakage". The service element, which
consists of direct marketing and administrative services provided to sponsors,
is amortized over the estimated life of an Air Miles reward mile.
On certain of our contracts, a portion of the proceeds are paid at the
issuance of Air Miles reward miles and a portion is paid at the time of
redemption. The proceeds received at issuance are initially deferred as service
revenue and the revenue is recognized ratably over the estimated life of an Air
Miles reward mile.
In addition to our Air Miles reward miles program described above, we
generate database and direct marketing revenue from building and maintaining
marketing databases, as well as managing and marketing campaigns or projects we
perform for our clients.
Operating costs for this segment include salaries and employee benefits,
redemption costs of the Air Miles reward program, marketing, data processing and
postage.
INTER-SEGMENT SALES. Our Transaction Services segment performs servicing
activities related to our Credit Services segment. For this, Transaction
Services receives a fee equal to its direct costs before corporate overhead plus
a margin that it would charge an unrelated third party for similar functions.
This fee represents an expense to our Credit Services segment and a
corresponding revenue for Transaction Services.
RESTATEMENT. Subsequent to the issuance of our 1999 consolidated financial
statements, we determined that the premium on purchased credit card portfolios
had been amortized using an inappropriate life in our fiscal 1997, 1998 and 1999
consolidated financial statements. As a result, the fiscal 1997, 1998 and 1999
consolidated financial statements were restated from amounts previously reported
to reduce the life on premium on purchased credit card portfolios from 15 years
to 3 years. This restatement increased amortization of purchased intangibles by
$9,098, $8,559 and $8,776 in fiscal 1997, 1998 and 1999 respectively, reduced
income tax expense by $3,184, $2,996 and $3,072 in fiscal 1997, 1998 and 1999
respectively, reduced net income by $5,914 in fiscal 1997, increased net loss by
$5,563 and $5,704 in fiscal 1998 and 1999, respectively, reduced net income per
share by $0.16 in fiscal 1997, and increased net loss per share by $0.13 and
$0.12 in fiscal 1998 and 1999, respectively.
In addition, we determined that the revenue earned from sponsors for
participation in our loyalty program associated with the Transaction Services
and Marketing Services revenue should have been deferred and recognized over the
estimated life of an Air Miles reward mile and the revenue associated with the
Redemption Revenue should have been deferred and recognized when the collector
redeems the Air Miles reward miles or over the estimated life of an Air Miles
reward mile for breakage. Previously, this revenue was recognized at the time
Air Miles reward miles were issued to collectors. As
34
a result, the accompanying fiscal 1998 and 1999 consolidated financial
statements have been further restated to correct the reporting of revenues from
our loyalty program and related redemption obligation, as well as the related
initial purchase price allocation and deferred tax items.
USE OF EBITDA. We evaluate operating performance based on several factors
of which the primary financial measure is operating income plus depreciation and
amortization. EBITDA is presented because it is an integral part of our internal
reporting and performance evaluation for senior management. EBITDA eliminates
the uneven effect across all segments of considerable amounts of non-cash
amortization of purchased intangibles recognized in business combinations
accounted for under the purchase method and is consistent with financial
covenants of our amended credit agreement. In addition, we use operating EBITDA
to monitor compliance with the financial covenants in our amended credit
agreement and to measure the performance and liquidity of our reportable
segments. EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating income
or net income as an indicator of operating performance or to the statement of
cash flows as a measure of liquidity. In addition, EBITDA is not intended to
represent funds available for dividends, reinvestment or other discretionary
uses, and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles. The EBITDA measure presented in this prospectus may not be
comparable to similarly titled measures presented by other companies.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
---------------------- ------------------- -------------------
1999 2000 1999 2000 1999 2000
-------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............... $266,758 $310,799 $21,829 $24,213 $ 4,159 $(7,100)
Credit Services.................... 185,060 201,659 34,005 33,948 24,315 33,038
Marketing Services................. 100,984 127,154 7,860 14,090 (19,776) (11,557)
Other and eliminations............. (124,586) (138,569) -- -- -- --
-------- -------- ------- ------- ------- -------
Total............................ $428,216 $501,043 $63,694 $72,251 $ 8,698 $14,381
======== ======== ======= ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
EBITDA
PERCENTAGE OF REVENUE MARGIN OPERATING MARGIN
---------------------- ------------------- -------------------
1999 2000 1999 2000 1999 2000
-------- -------- -------- -------- -------- --------
Transaction Services............... 62.3 % 62.0 % 8.2% 7.8% 1.6% (2.3)%
Credit Services.................... 43.2 40.3 18.4 16.8 13.1 16.4
Marketing Services................. 23.6 25.4 7.8 11.1 (19.6) (9.1)
Other and eliminations............. (29.1) (27.7) -- -- -- --
-------- --------
Total............................ 100.0 % 100.0 % 14.9% 14.4% 2.0 % 2.9 %
======== ========
35
REVENUE. Total revenue increased $72.8 million, or 17.0%, to
$501.0 million for the nine months ended September 30, 2000 from $428.2 million
for the comparable period in 1999. The increase was principally due to a 16.5%
increase in Transaction Services revenue, a 9.0% increase in Credit Services
revenue and a 25.9% increase in Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$44.0 million, or 16.5%, due primarily to an increase in the number of
transactions processed. Revenue related to transactions processed
increased approximately $29.0 million as a result of a 49.4% increase in
the number of transactions processed, partially offset by a decrease in
the average price per transaction. The increase in the number of
transactions is primarily related to the July 1999 acquisition of SPS with
the remaining increase resulting from an increase in the number of
transactions processed for existing customers. A significant portion of
the increase occurred among the large volume clients in the petroleum
industry with a lower price per transaction. Fees related to private label
card and account processing and servicing increased $2.3 million during
the nine months ended September 30, 2000 from the comparable period in
1999 primarily due to an increase in new sales related to our utilities
business offset by a decrease in the number of statements generated as a
result of a lost client. Additionally, Transaction Services benefitted
from increased inter-segment sales of $13.7 million during the nine months
ended September 30, 2000 as a result of increased processing of credit
card receivables for our Credit Services segment.
- CREDIT SERVICES. Credit Services revenue increased $16.6 million, or
9.0%, due to increases in merchant discount fees, servicing fees and
finance charges, net. Servicing fee income increased by $2.9 million, or
12.0%, during the nine months ended September 30, 2000 over the prior
comparable period due to an increase in the average outstanding balance of
the securitized credit card receivables we service. Finance charge, net,
increased $12.5 million, or 11.2%, during the nine months ended
September 30, 2000 over the comparable period in 1999 as a result of a
4.2% higher average outstanding securitized portfolio. The net yield for
the nine months ended September 30, 2000 was 50 basis points higher than
in the prior comparable period. Private label merchant discount fee income
increased by $1.6 million, or 3.5%, as a result of increased charge
volumes. This increase was offset by a change in a specific program for
one of our clients. The revenue from this client is now recorded as
finance charge income.
- MARKETING SERVICES. Marketing Services revenue increased $26.2 million,
or 25.9%, primarily due to an increase in reward revenue related to a
31.7% increase in the redemption of Air Miles reward miles. Additionally,
services revenue increased 26.2% as a result of a 21.5% increase in the
number of Air Miles reward miles issued and the accretion of deferred
revenue balances. As a result of the increased issuance activity, our
deferred revenue balance increased 7.4% to $341.7 million at
September 30, 2000 from the balance at December 31, 1999.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $64.3 million, or 17.6%, to $428.8 million during the
nine months ended September 30, 2000 from $364.5 million during the comparable
period in 1999. Total EBITDA margin decreased to 14.4% for the nine months ended
September 30, 2000 from 14.9% for the comparable period in 1999. The decrease in
EBITDA margin is due to decreases in Transaction Services and Credit Services
margins, partially offset by an increase in the Marketing Services margin.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $41.7 million, or 17.0%, to
$286.6 million for the nine months ended September 30, 2000 from
$244.9 million for the comparable period in 1999, and EBITDA margin
decreased to 7.8% for the nine months ended September 30, 2000 from 8.2%
during the comparable period in 1999. The decrease in EBITDA margin is
primarily related to a delay in achieving synergies in our network
business related to the SPS acquisition.
36
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $16.7 million, or 11.1%, to
$167.7 million for the nine months ended September 30, 2000 from
$151.1 million for the comparable period in 1999, and EBITDA margin
decreased to 16.8% for the nine months ended September 30, 2000 from 18.4%
during the comparable period in 1999. The decrease in EBITDA margin is the
result of increased processing costs from our Transaction Services segment
of $4.3 million associated with a larger securitized portfolio, which was
not offset by comparable revenue increases.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $19.9 million, or 21.4%, to
$113.1 million for the nine months ended September 30, 2000 from
$93.2 million for the comparable period in 1999, and EBITDA margin
increased to 11.0% for the nine months ended September 30, 2000 from 7.8%
for the comparable period in 1999. The increase in the margin is
attributable to the leveraging of the marketing, payroll and other
operating costs in 2000. Non-redemption expenses decreased to 46.9% of
revenue for the nine months ended September 30, 2000 from 53.8% in the
comparable period in 1999. This margin increase was offset by the
approximate $7.0 million in non-recurring redemption costs as a result of
the route consolidations between Canadian Airlines and Air Canada
following their merger. For a portion of the first six months of 2000, we
redeemed rewards without a supply contract with either Air Canada or
Canadian Airlines. Normally, we are able to purchase airline tickets at a
contractually determined discount. Prior to the merger with Air Canada, we
had a long-term supply contract with Canadian Airlines. During the second
quarter of 2000, we entered into a new supply agreement with Air Canada in
order to help maintain a supply of airline seats for our collectors of Air
Miles reward miles.
In January 2000, we increased the number of Air Miles reward miles
required to redeem some air travel rewards. We periodically review our
reward offers to collectors and will continue to seek ways to contain the
overall cost of the program and make changes to enhance the program's
value to collectors. We believe that, based on the new supply agreement
and other factors, redemption costs will return to their historical
levels. Excluding the $7.0 million of additional redemption costs, the
EBITDA margin for the nine months ended September 30, 2000 would have been
16.6%.
The EBITDA margin for the nine months ended September 30, 1999 was
affected by approximately $2.0 million of marketing and payroll costs
associated with the start-up of a new business-to-business loyalty program
in Canada.
- DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$2.9 million, or 5.2%, to $57.9 million for the nine months ended
September 30, 2000 from $55.0 million for the comparable period in 1999
due to increases in capital expenditures in 1999, especially software
development costs that have relatively short amortization periods.
Amortization of purchased intangibles decreased $6.0 million as a result
of a decrease in amortization expense for some of the intangibles related
to the acquisition of the former J. C. Penney businesses and the premium
on a purchased credit card portfolio that was fully amortized, partially
offset by amortization related to the SPS acquisition.
OPERATING INCOME. Operating income increased $5.7 million, or 65.3%, to
$14.4 million for the nine months ended September 30, 2000 from $8.7 million
during the comparable period in 1999. Operating income increased primarily from
revenue gains with relatively constant EBITDA margins, and a decrease in
depreciation and amortization.
INTEREST EXPENSE. Interest expense decreased $4.8 million, or 14.5%, to
$28.2 million for the nine months ended September 30, 2000 from $33.0 million
for the comparable period in 1999 due to a decrease in average debt. This
decrease in average debt was primarily due to the termination of a receivable
financing program in the fourth quarter of 1999.
37
TAXES. Income tax expense increased $2.4 million to a $1.5 million income
tax expense for the nine months ended September 30, 2000 from a $900,000 income
tax benefit in 1999 due to an increase in taxable income.
DISCONTINUED OPERATIONS. During September 1999, we discontinued our
subscriber services business when our principal customer for this service was
acquired by a third party. For the nine months ended September 30, 1999,
discontinued operations had income of $4.0 million, net of income tax.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant and database marketing fees, increased $200,000 to
$32.0 million for the nine months ended September 30, 2000 from $31.8 million
for the comparable period in 1999. The decrease was primarily the result of
decreased credit sales offset by a small increase in database marketing fees.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
The following is a comparison based on pro forma results of operations
presented on pages 28 to 32 in this prospectus. The results are presented as if
we had acquired SPS's network processing business on January 1, 1999.
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
---------------------- ------------------- -------------------
1999 2000 1999 2000 1999 2000
-------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............... $291,080 $310,799 $26,023 $24,213 $ 2,424 $(7,100)
Credit Services.................... 185,060 201,659 34,005 33,948 24,315 33,038
Marketing Services................. 100,984 127,154 7,860 14,090 (19,776) (11,557)
Other and eliminations............. (124,585) (138,569) -- -- -- --
-------- -------- ------- ------- ------- -------
Total............................ $452,539 $501,043 $67,888 $72,251 $ 6,963 $14,381
======== ======== ======= ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
EBITDA
PERCENTAGE OF REVENUE MARGIN OPERATING MARGIN
---------------------- ------------------- -------------------
1999 2000 1999 2000 1999 2000
-------- -------- -------- -------- -------- --------
Transaction Services............... 64.3 % 62.0 % 8.9% 7.8% (0.8)% (2.3)%
Credit Services.................... 40.9 40.3 18.4 16.8 13.1 16.4
Marketing Services................. 22.3 25.4 7.8 11.1 (19.6) (9.1)
Other and eliminations............. (27.5) (27.7) -- -- -- --
-------- --------
Total............................ 100.0 % 100.0 % 15.0% 14.4% 1.5 % 2.9 %
======== ========
REVENUE. Total revenue increased $48.5 million, or 10.7%, to
$501.0 million for the nine months ended September 30, 2000 from $452.5 million
for the comparable period in 1999. The increase was due to a 6.8% increase in
Transaction Services revenue, a 9.0% increase in Credit Services revenue and a
26.9% increase in Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$19.7 million, or 6.8%, primarily due to an increase in the number of
transactions processed. Revenue related to transactions processed
increased approximately $4.6 million as a result of a 23.4% increase in
the number of transactions processed, partially offset by a decrease in
the average price per transaction. The increase in the number of
transactions is related to an increase in the number of transactions
processed for existing customers with a significant portion of the
increase occurring among the
38
large volume clients in the petroleum industry with a lower price per
transaction. Fees related to private label credit card and assessment
processing and servicing increased $2.3 million for the nine months ended
September 30, 2000 from the comparable period in 1999 primarily due to an
increase in new sales related to our utilities business offset by a
decrease in the number of statements generated as a result of a lost
client. Additionally, Transaction Services benefitted from increased
inter-segment sales of $13.7 million during the nine months ended
September 30, 2000 as a result of increased processing of credit card
receivables for our Credit Services segment.
- CREDIT SERVICES. Credit Services revenue increased $16.6 million, or
9.0%, due to increases in servicing fees, finance charges, net, and
merchant discount fees. Servicing fee income increased by $2.9 million, or
12.0%, during the nine months ended September 30, 2000 over the prior
comparable period due to an increase in the average outstanding balance of
the securitized credit card receivables we service. Finance charge, net,
increased $12.5 million, or 11.2%, during the nine months ended
September 30, 2000 from the comparable period in 1999 as a result of a
4.2% higher average outstanding securitized portfolio. The net yield for
the nine months ended September 30, 2000 was 50 basis points higher than
in the prior comparable period. Private label merchant discount fees
income increased by $1.6 million, or 3.5%, as a result of increased charge
volumes. This increase was offset by a change in a specific program for
one of our clients. The revenue from this client is represented in finance
charge income.
- MARKETING SERVICES. Marketing Services revenue increased $26.2 million,
or 25.9%, for the nine months ended September 30, 2000 over the prior
comparable period, primarily due to an increase in reward revenue related
to a 31.7% increase in the redemption of Air Miles reward miles.
Additionally, services revenue increased 26.2% as a result of a 21.5%
increase in the number of Air Miles reward miles issued and the accretion
of deferred revenue balances. As a result of this increased issuance
activity, our deferred revenue balance increased 7.4% to $341.7 million on
September 30, 2000 from the balance at December 31, 1999.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $44.2 million, or 11.5%, to $428.8 million for the nine
months ended September 30, 2000 from $384.6 million for the comparable period in
1999. Total EBITDA margin decreased to 14.4% for the nine months ended
September 30, 2000 from 15.0% for the comparable period in 1999. The decrease in
EBITDA margin is due to decreases in Transaction Services and Credit Services
margins partially offset by an increase in the Marketing Services margin.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $21.6 million, or 7.7%, to
$286.6 million for the nine months ended September 30, 2000 from
$265.0 million for the comparable period in 1999. EBITDA margin decreased
to 7.8% for the nine months ended September 30, 2000 from 8.9% during the
comparable period in 1999. The decreased EBITDA margin is primarily
related to a delay in achieving synergies in our network business related
to the SPS acquisition.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $16.7 million, or 11.1%, to
$167.7 million for the nine months ended September 30, 2000 from
$151.1 million for the comparable period in 1999. EBITDA margin decreased
to 16.8% for the nine months ended September 30, 2000 from 18.4% for the
comparable period in 1999. The decrease in EBITDA margin is the result of
increased processing costs from our Transaction Services segment of $4.3
million associated with a larger securitized portfolio, which was not
offset by comparable revenue increases.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $19.9 million, or 21.4%, to
$113.1 million for the nine months ended September 30, 2000 from
$93.2 million for the comparable period in 1999. EBITDA margin
39
increased to 11.0% for the nine months ended September 30, 2000 from 7.8%
for the comparable period in 1999. The increase in the margin is
attributable to the leveraging of the marketing, payroll and other
operating costs in 2000. Non-redemption expenses decreased to 46.9% of
revenue for the nine months ended September 30, 2000 from 53.8% in the
comparable period in 1999. This margin increase was offset by the
approximate $7.0 million in non-recurring redemption costs as a result of
the route consolidations between Canadian Airlines and Air Canada
following their merger. For a portion of the first six months of 2000, we
redeemed rewards without a supply contract with either Air Canada or
Canadian Airlines. Normally, we are able to purchase airline tickets at a
contractually determined discount. Prior to the merger with Air Canada we
had a long-term supply contract with Canadian Airlines. During the second
quarter of 2000, we entered into a new supply agreement with Air Canada in
order to help maintain a supply of airline seats for our collectors of Air
Miles reward miles. We are in the process of integrating the new supply
agreement into our cost structure. This integration has included the
following:
In January 2000, we increased the number of Air Miles reward miles required
to redeem some air travel rewards. We periodically review our reward offers
to collectors and will continue to seek ways to contain the overall cost of
the program and make changes to enhance the program's value to collectors.
We believe that based on the new supply agreement and other factors,
redemption costs will return to their historical levels. Excluding the
$7.0 million of additional redemption costs, the EBITDA margin for the nine
months ended September 30, 2000 would have been 16.6%.
The EBITDA margin for the nine months ended September 30, 1999 was
affected by $2.0 million of marketing and payroll costs associated with
the start-up of a new business-to-business loyalty program in Canada.
- DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$3.1 million, or 5.0%, to $57.9 million for the nine months ended
September 30, 2000 from $60.9 million for the comparable period in 1999
due to increases in capital expenditures in 1998 and 1999, especially
software development costs that have relatively short amortization
periods. Amortization of purchased intangibles decreased $11.9 million as
a result of a decrease in amortization expense for some of the intangibles
related to the acquisition of the former J.C. Penney business and the
premium on a purchased credit card portfolio that was fully amortized.
OPERATING INCOME. Operating income increased $7.4 million, or 106.5%, to
$14.4 million for the nine months ended September 30, 2000 from $7.0 million
during the comparable period in 1999. Operating income improved primarily from
revenue gains and decreased depreciation and amortization.
INTEREST EXPENSE. Interest expense decreased $4.8 million, or 14.5%, to
$28.2 million for the nine months ended September 30, 2000 from $33.0 million
for the comparable period in 1999 due to an increase in average debt associated
with acquisitions and an increase in debt to fund receivables.
TAXES. Income tax expense increased $3.4 million to a $1.5 million income
tax expense for the nine months ended September 30, 2000 from a $1.9 million
income tax benefit in 1999 due to an increase in taxable income.
DISCONTINUED OPERATIONS. During September 1999, we discontinued our
subscriber services business when our principal customer for this service was
acquired by a third party. For the nine months ended September 30, 1999,
discontinued operations had income of $4.0 million, net of income tax.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant and database marketing fees, increased $200,000 to
$32.0 million for the nine months ended September 30, 2000 from $31.8 million
for the comparable period in 1999. The decrease was primarily the result of
decreased credit sales offset by a small increase in database marketing fees.
40
RECAST YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) COMPARED TO
THE YEAR ENDED DECEMBER 31, 1999 (AUDITED)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............ $ 308,048 $ 362,524 $ 8,683 $ 20,584 $(19,076) $(8,299)
Credit Services................. 242,377 247,824 54,175 46,124 41,373 34,064
Marketing Services.............. 62,824 138,310 4,440 13,547 (10,759) (23,310)
Other and eliminations.......... (161,712) (165,576) -- -- -- --
--------- --------- ------- -------- -------- -------
Total......................... $ 451,537 $ 583,082 $67,298 $ 80,255 $ 11,538 $ 2,455
========= ========= ======= ======== ======== =======
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
Transaction Services............ 68.2 % 62.2 % 2.8% 5.7% (6.2)% (2.3)%
Credit Services................. 53.7 42.5 22.4 18.6 17.1 13.7
Marketing Services.............. 13.9 23.7 7.1 9.8 (17.1) (16.9)
Other and eliminations.......... (35.8) (28.4) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 14.9% 13.8% 2.6 % 0.4 %
========= =========
REVENUE. Total revenue increased $131.5 million, or 29.1%, to
$583.1 million for 1999 from $451.6 million for 1998. The increase was
principally due to a 17.7% increase in Transaction Services revenue, a 2.2%
increase in Credit Services revenue and a 120.2% increase in Marketing Services
revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$54.5 million, or 17.7%, due to the acquisitions of Harmonic Systems in
1998 and SPS in 1999. Fees related to servicing of private label credit
card statements increased $11.9 million during 1999 over 1998 due to an
11.7% increase in price per statement, a $4.5 million termination fee from
a client and a 1.5% increase in the number of statements processed. The
revenue for transaction processing increased 41.4% mainly due to
acquisition activity offset by a decrease in average price per
transaction.
- CREDIT SERVICES. Credit Services revenue increased $5.4 million, or 2.2%,
due to increases in merchant and servicing fees and finance charges, net.
Merchant fee income increased $2.5 million, or 3.9%, due to a 2.7%
increase in credit sales on our private label credit cards. Additionally,
servicing fee income increased by $3.1 million, or 10.1%, during 1999 due
to an increase in the average outstanding balance of the securitized
credit card receivables we service. Finance charge, net, increased
$600,000 in 1999 over 1998. We recognized a $16.2 million gain on sale of
receivables during 1998 related to two securitization transactions with no
comparable securitization transactions in 1999. Excess spread income
increased 13.5% in 1999 over 1998 as a result of a 4.6% higher average
outstanding securitized portfolio and an approximate 75 basis point
increase in yield.
- MARKETING SERVICES. Marketing Services revenue increased $75.5 million, or
120.2%, due to the acquisition of Loyalty Management Group Canada Inc. on
July 24, 1998. Revenue from January 1, 1998 until the date of acquisition
was approximately $40.9 million. The remaining increase is primarily
related to an increase in Air Miles reward miles issuance and redemption
activity, which increased 17.2% and 40.7%, respectively, on a pro forma
basis in 1999 compared to 1998.
41
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $118.6 million, or 30.9%, to $502.8 million during 1999
from $384.2 million in 1998. Total EBITDA margin decreased to 13.8% in 1999 from
14.9% in 1998. The decrease in EBITDA margin is due to a decrease in Credit
Services margins, partially offset by increases in Marketing Services and
Transaction Services margins.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $42.5 million, or 14.2%, to
$341.9 million for 1999 from $299.4 million for 1998, and EBITDA margin
increased to 5.6% for 1999 from 2.8% during 1998. EBITDA margin increased
due to the newly acquired SPS Network services business which carries a
higher margin than our historical processing business. Additionally, the
margin increased due to a shift in the mix of business to higher margin
card processing and servicing products.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $13.5 million, or 7.2%, to
$201.7 million for 1999 from $188.2 million for 1998, and EBITDA margin
decreased to 18.6% for 1999 from 22.4% during 1998 due to a $16.2 million
gain on sale of receivables in 1998 related to two securitization
transactions, with no comparable securitization transactions in 1999.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $66.4 million, or 113.7%, to
$124.8 million for 1999 from $58.4 million for 1998, and EBITDA margin
increased to 9.8% for 1999 from 7.1% for 1998. The increased margin was
partially offset by $3.3 million of marketing and payroll costs associated
with the start-up of a new business-to-business loyalty program in Canada
during 1999.
- DEPRECIATION AND AMORTIZATION. Depreciation and other amortization
increased $22.3 million, or 40.1%, to $77.8 million for 1999 from
$55.5 million for 1998 due to increases in capital expenditures in 1998
and 1999, especially software development costs that have relatively short
amortization periods. Amortization of purchased intangibles increased
$14.9 million as a result of recent acquisitions, partially offset by a
decrease in amortization expense for some of the intangibles related to
the acquisition of the former J.C. Penney business which were fully
amortized.
OPERATING INCOME. Operating income decreased $9.0 million, or 78.3%, to
$2.5 million for 1999 from $11.5 million during 1998. Operating income increased
primarily from revenue gains offset by a slightly lower margin and increased
depreciation and amortization.
INTEREST EXPENSE. Interest expense increased $13.5 million, or 46.1%, to
$42.8 million for 1999 from $29.3 million for 1998 due to an increase in average
debt associated with acquisitions and an increase in debt to fund receivables.
TAXES. Income tax benefit increased $4.6 million to $6.5 million for 1999
from $1.9 million for 1998 due to an increase in pre-tax loss.
42
DISCONTINUED OPERATIONS. In September 1999, we discontinued our subscriber
services business when our principal customer for this service was acquired by a
third party. As a result of discontinuing our subscriber services, we recognized
a loss of $3.7 million, net of income tax, on disposal of discontinued
operations. In 1999, discontinued operations had income of $7.7 million, net of
income tax, compared to a loss of $3.9 million during 1998. The difference is
largely related to additional fees we received in connection with services
performed for the former customer upon termination of its contract.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant and database marketing fees, increased $5.5 million, or
10.2%, to $59.3 million for 1999 from $53.8 million for 1998. The increase was
primarily the result of increased volume of credit card receivables, credit
sales and statements generated.
PRO FORMA YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) COMPARED TO
PRO FORMA YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following is a comparison based on pro forma results of operations
presented on pages 25 to 29 in this prospectus. The results are presented as if
the Loyalty, Harmonic Systems and SPS acquisitions had been consummated on
January 1, 1998.
PRO FORMA FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............ $ 367,814 $ 386,846 $14,528 $ 24,778 $(30,329) $(9,964)
Credit Services................. 242,377 247,824 54,175 46,124 41,373 34,064
Marketing Services.............. 103,702 138,310 578 13,547 (33,369) (23,380)
Other and eliminations.......... (161,713) (165,576) -- -- -- --
--------- --------- ------- -------- -------- -------
Total......................... $ 552,180 $ 607,404 $69,281 $ 84,449 $(22,325) $ 720
========= ========= ======= ======== ======== =======
PRO FORMA FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
Transaction Services............ 66.6 % 63.7 % 3.9% 6.4% (8.2)% (2.6)%
Credit Services................. 43.9 40.8 22.4 18.6 17.1 13.7
Marketing Services.............. 18.8 22.8 0.6 9.8 (32.2) (16.9)
Other and eliminations.......... (29.3) (27.2) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 12.5% 13.9% (4.0 )% -- %
========= =========
REVENUE. Total revenue increased $55.2 million, or 10.0%, to
$607.4 million for 1999 from $552.2 million for 1998. The increase was
principally due to a 33.4% increase in Marketing Services revenue, a 5.2%
increase in Transaction Services revenue and a 2.2% increase in Credit Services
revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$19.0 million, or 5.2%, due to an increase in the number of transactions
processed and statements generated, partially offset by a decrease in the
average price per transaction. Fees related to servicing of private label
credit card statements increased $11.9 million during 1999 over 1998 due
to an 11.7% increase in price per statement, a $4.5 million termination
fee from a client and a 1.5% increase in the number of statements
processed. The increase in the number of private label credit card
statements processed was due primarily to the addition of new client
programs and internal growth. The
43
volume of transactions processed increased 13.8% offset by a decrease in
price per transaction processed. The revenue for Transaction Services is
affected by a mix of transaction processing and card processing and
servicing.
- CREDIT SERVICES. Credit Services revenue increased $5.4 million, or 2.2%,
due to increases in merchant and servicing fees and finance charge, net.
Merchant fee income increased $2.5 million, or 3.9%, due to a 2.7%
increase in credit sales on our private label credit cards. Additionally,
servicing fee income increased $3.1 million, or 10.1%, during 1999 due to
an increase in the average outstanding balance of the securitized credit
card receivables we service. Finance charge, net, increased $600,000 in
1999 over 1998. We recognized a $16.2 million gain on sale of receivables
during 1998 related to two securitization transactions with no comparable
securitization transactions in 1999. Excess spread income increased 13.5%
during 1999 over 1998 as a result of a 4.6% higher average outstanding
securitized portfolio and an approximate 75 basis point increase in yield.
- MARKETING SERVICES. Marketing Services revenue increased $34.6 million, or
33.4%, primarily due to an increase in Air Miles reward program revenue,
which was principally due to a 17.2% increase in the issuance of Air Miles
reward miles and a 40.7% increase in redemptions of Air Miles reward
miles. The increase in Air Miles activity was due to a 15.7% increase in
the average number of active collectors, partially offset by the loss of a
significant sponsor at the end of 1998. Other increases are related to
higher direct marketing fees during 1999 as a result of an increased
number of campaigns for clients, mostly related to Loyalty clients.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $40.1 million, or 8.3%, to $523.0 million for 1999 from
$482.9 million for 1998. Total EBITDA margin increased to 13.9% for 1999 from
12.5% for 1998. The increase in EBITDA margin is due to increases in Transaction
Services and Marketing Services margins, partially offset by a decrease in the
Credit Services margin.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $8.8 million, or 2.5%, to
$362.1 million for 1999 from $353.3 million for 1998, and EBITDA margin
increased to 6.4% for 1999 from 3.9% during 1998 partially due to a
one-time termination fee received from a client and an increase in our
higher margin card processing and servicing products.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $13.5 million, or 7.2%, to
$201.7 million for 1999 from $188.2 million for 1998, and EBITDA margin
decreased to 18.6% for 1999 from 22.4% for 1998 due to the timing of a
$16.2 million gain on sale of receivables in 1998 related to two
securitization transactions with no comparable securitization transactions
in 1999.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $21.7 million, or 21.1%, to
$124.8 million for 1999 from $103.1 million for 1998, and EBITDA margin
increased to 9.8% for 1999 from 0.6% for 1998. The increased margin is a
result of leveraging of non-redemption related costs partially offset by
$3.3 million of marketing and payroll costs associated with the start-up
of a new business-to-business loyalty program in Canada during 1999.
- DEPRECIATION AND AMORTIZATION. Depreciation and other amortization
increased $6.2 million, or 62.0%, to $16.2 million for 1999 from
$10.0 million for 1998 due to increases in capital expenditures in 1998
and 1999, especially software development costs that have relatively short
amortization periods. Amortization of purchased intangibles decreased
$14.4 million as a result of the expiration of intangibles related to the
former J.C. Penney business which were fully amortized.
44
OPERATING INCOME (LOSS). Operating loss decreased $22.0 million, or 98.7%,
to operating income of $720,000 for 1999 from operating loss of $22.3 million
for 1998. This improvement was the result of revenue gains, improved margins and
reduced depreciation and amortization.
INTEREST EXPENSE. Interest expense increased $4.3 million, or 11.2%, to
$42.8 million for 1999 from $38.5 million for 1998 due to increased borrowings
for acquisitions and operations.
TAXES. Income tax benefit decreased $5.9 million, or 44.0%, to
$7.5 million for the year ended December 31, 1999 from $13.4 million for the
year ended December 31, 1998 due to an increase in taxable income.
DISCONTINUED OPERATIONS. In September 1999, we discontinued our subscriber
services business when our principal customer for this service was acquired by a
third party. As a result of discontinuing our subscriber services, we recognized
a loss of $3.7 million, net of income tax, on disposal of discontinued
operations. In 1999, discontinued operations had income of $7.7 million, net of
income tax, compared to a loss of $3.9 million during 1998. The difference is
due to additional fees we received in connection with services performed for the
former customer upon termination of its contract.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant, database and direct marketing fees, increased
$5.5 million, or 10.2%, to $59.3 million for 1999 from $53.8 million for 1998.
The increase was primarily the result of increased volume of credit card
receivables, credit sales and statements generated.
ELEVEN MONTHS ENDED DECEMBER 31, 1998 (FISCAL 1998) COMPARED TO
YEAR ENDED DECEMBER 31, 1999 (FISCAL 1999)
Due to the change in our fiscal year, fiscal 1998 is one month shorter than
fiscal 1999.
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services........... $ 286,605 $ 362,524 $13,621 $ 20,584 $(11,798) $ (8,229)
Credit Services................ 212,663 247,824 39,396 46,124 27,633 34,064
Marketing Services............. 60,892 138,310 4,503 13,547 (10,351) (23,380)
Other and eliminations......... (149,247) (165,576) -- -- -- --
--------- --------- ------- -------- -------- --------
Total........................ $ 410,913 $ 583,082 $57,520 $ 80,255 $ 5,484 $ 2,455
========= ========= ======= ======== ======== ========
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
Transaction Services............ 69.7 % 62.2 % 4.8% 5.7% (4.1)% (2.3)%
Credit Services................. 51.8 42.5 18.5 18.6 13.0 13.7
Marketing Services.............. 14.8 23.7 7.4 9.8 (17.0) (16.9)
Other and eliminations.......... (36.3) (28.4) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 14.0% 13.8% 1.3 % 0.4 %
========= =========
45
REVENUE. Total revenue increased $172.2 million, or 41.9%, to
$583.1 million for fiscal 1999 from $410.9 million during fiscal 1998. The
increase was principally due to a 26.5% increase in Transaction Services
revenue, a 16.5% increase in Credit Services revenue and a 127.1% increase in
Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$75.9 million, or 26.5%, due to the acquisitions of Harmonic Systems in
1998 and SPS in 1999. Fees related to servicing of private label credit
card statements increased $15.7 million during fiscal 1999 over fiscal
1998 due to a 12.9% increase in price per statement, a $4.5 million
termination fee from a client and a 7.8% increase in the number of
statements processed. The revenue for transaction processing increased
52.7% mainly due to acquisition activity and as a result of fiscal 1998
being one month shorter than fiscal 1999, partially offset by a decrease
in average price per transaction.
- CREDIT SERVICES. Credit Services revenue increased $35.2 million, or
16.5%, due to increases in merchant and servicing fees and finance
charges, net. Merchant fee income increased $6.3 million, or 10.1%, due to
a 9.3% increase in credit sales on our private label credit cards and
fiscal 1998 being one month shorter than fiscal 1999. Additionally,
servicing fee income increased by $5.8 million, or 20.9%, during fiscal
1999 due to an increase in the average outstanding balance of the
securitized credit card receivables we service and fiscal 1998 being one
month shorter than fiscal 1999. Finance charge, net increased
$22.6 million during fiscal 1999 over fiscal 1998. We recognized a
$7.2 million gain on sale of receivables during fiscal 1998 related to a
securitization transaction with no comparable securitization transaction
in fiscal 1999.
- MARKETING SERVICES. Marketing Services revenue increased $77.4 million, or
127.1%, due to the acquisition of Loyalty Management Group Canada Inc. on
July 24, 1998. Revenue from February 1, 1998 until the date of acquisition
was approximately $35.6 million. The remaining increase is primarily
related to an increase in Air Miles reward miles activity and fiscal 1998
being one month shorter than fiscal 1999. The increase in Air Miles
activity is primarily related to an increase in the number of reward miles
collectors.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $149.5 million, or 42.3%, to $502.9 million during
fiscal 1999 from $353.4 million during fiscal 1998. Total EBITDA margin
decreased to 13.8% for fiscal 1999 from 14.0% for fiscal 1998.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $68.9 million, or 25.2%, to
$341.9 million for fiscal 1999 from $273.0 million in fiscal 1998, and
EBITDA margin increased to 5.6% for fiscal 1999 from 4.8% for fiscal 1998.
EBITDA margin increased due to the newly acquired SPS network services
business which carries a higher margin than our historical processing
business, as well as a shift in the mix of business to higher margin card
processing and servicing products.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $28.4 million, or 16.4%, to
$201.7 million for fiscal 1999 from $173.3 million for fiscal 1998, and
EBITDA margin increased to 18.6% for fiscal 1999 from 18.5% for fiscal
1998. Fiscal 1998 includes a $7.2 million gain on sale of receivables
related to the timing of a securitization transaction with no comparable
securitization transaction in fiscal 1999.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $68.4 million, or 121.3%, to
$124.8 million for fiscal 1999 from $56.4 million for fiscal 1998, and
EBITDA margin increased to 9.8% for fiscal 1999 from 7.4% for fiscal 1998.
The increased margin was partially offset by $3.3 million of marketing and
payroll costs associated with the start-up of a new business-to-business
loyalty program in Canada during fiscal 1999.
46
- DEPRECIATION AND AMORTIZATION. Depreciation and other amortization
increased $25.8 million, or 49.6%, to $77.8 million for fiscal 1999 from
$52.0 million for fiscal 1998 due to increases in capital expenditures in
fiscal 1998 and 1999, especially software development costs that have
relatively short amortization periods. Amortization of purchased
intangibles increased $17.9 million as a result of recent acquisitions,
partially offset by a decrease in amortization expense for some of the
intangibles related to the acquisition of the former J.C. Penney business
which were fully amortized.
OPERATING INCOME. Operating income decreased $3.0 million, or 54.5%, to
$2.5 million for fiscal 1999 from $5.5 million during fiscal 1998. Operating
income declined primarily due to lower margins and increased depreciation and
amortization.
INTEREST EXPENSE. Interest expense increased $14.9 million, or 53.4%, to
$42.8 million for fiscal 1999 from $27.9 million for fiscal 1998 due to an
increase in average debt associated with acquisitions and an increase in debt to
fund receivables.
TAXES. Income tax benefit increased $1.8 million, or 38.3%, to
$6.5 million for 1999 from $4.7 million for the eleven months ended
December 31, 1998 due to an increase in taxable loss.
DISCONTINUED OPERATIONS. In September 1999, we discontinued our subscriber
services business when the principal customer for this service was acquired by a
third party. As a result of discontinuing our subscriber services, we recognized
a loss of $3.7 million, net of income tax, on disposal of discontinued
operations. For fiscal 1999, discontinued operations had income of
$7.7 million, net of income tax, compared to a loss of $300,000 during fiscal
1998. The difference is largely related to additional fees we received in
connection with services performed for the former customer upon termination of
its contract.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant and database and direct marketing fees, increased
$8.7 million, or 17.2%, to $59.3 million for fiscal 1999 from $50.6 million for
fiscal 1998. The increase was primarily the result of increased volume of credit
sales and database marketing fees.
47
HISTORICAL ELEVEN MONTHS ENDED DECEMBER 31, 1998 (FISCAL 1998) COMPARED TO
HISTORICAL 53 WEEKS ENDED JANUARY 31, 1998 (FISCAL 1997)
Due to the change in our fiscal year, fiscal 1998 is one month shorter than
fiscal 1997.
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1997 1998 1997 1998 1997 1998
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............ $ 256,730 $ 286,605 $27,146 $ 13,621 $ 3,713 $(11,798)
Credit Services................. 211,921 212,663 29,349 39,396 17,221 27,633
Marketing Services.............. 23,348 60,892 8,457 4,503 8,457 (10,351)
Other and eliminations.......... (138,600) (149,247) -- -- -- --
--------- --------- ------- -------- ------- --------
Total......................... $ 353,399 $ 410,913 $64,952 $ 57,520 $29,391 $ 5,484
========= ========= ======= ======== ======= ========
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING INCOME
------------------------ ------------------- -------------------
1997 1998 1997 1998 1997 1998
--------- --------- -------- -------- -------- --------
Transaction Services............ 72.6 % 69.7 % 10.6% 4.8% 1.5% (4.1)%
Credit Services................. 60.0 51.8 13.8 18.5 8.1 13.0
Marketing Services.............. 6.6 14.8 36.2 7.4 36.2 (17.0)
Other and eliminations.......... (39.2) (36.3) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 18.4% 14.0% 8.3% 1.3 %
========= =========
REVENUE. Total revenue increased $57.5 million, or 16.3%, to
$410.9 million for fiscal 1998 from $353.4 million in fiscal 1997. The increase
was principally due to a 160.1% increase in Marketing Services revenue, a 11.6%
increase in Transaction Services revenue and a 0.4% increase in Credit Services
revenue.
- TRANSACTION SERVICES. Transaction Services revenue increased
$29.9 million, or 11.6%, due partially to the effect of the acquisition of
Harmonic Systems in fiscal 1998. Revenue increased in fiscal 1998 relating
to servicing of private label credit card statements and network servicing
by $11.1 million due to a 15.5% increase in items processed, offset
partially by a reduction of transaction fee rates, and a 4.9% increase in
statements processed. Additionally, growth was provided by a
$12.4 million increase in servicing and processing of our private label
credit card portfolio.
- CREDIT SERVICES. Credit Services revenue increased $742,000, or 0.4%, due
to increased merchant fee income, partially offset by a decrease in
finance charge income. Merchant fee income increased in fiscal 1998 due to
a 14.0% increase in cardholders and a 10% increase in merchant fee rates.
Finance charge income decreased due to the shorter period in fiscal 1998
than in fiscal 1997 and a $2.0 million decrease in gain on sale of
receivables, offset in part by an increase in card balances.
- MARKETING SERVICES. Marketing Services revenue increased $37.5 million, or
160.1%, mainly due to the acquisition of Loyalty in July 1998. Loyalty
contributed approximately $35.8 million in revenue during fiscal 1998.
Growth in database marketing fees of approximately $3.0 million during
fiscal 1998 was offset by decreases in enhancement services due to the
shorter period in fiscal 1998.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $65.0 million, or 22.5%, to $353.4 million during fiscal
1998 from $288.4 million in fiscal 1997. Total
48
EBITDA margin decreased to 14.0% for fiscal 1998 from 18.4% for fiscal 1997. The
decrease in EBITDA margin is due to decreases in Marketing Services and
Transaction Services margins, partially offset by an increase in Credit Services
margin.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $43.4 million, or 18.9%, to
$273.0 million in fiscal 1998 from $229.6 million in fiscal 1997, and
EBITDA margin decreased to 4.8% for fiscal 1998 from 10.6% for fiscal 1997
due to the acquisition of Harmonic Systems, which incurred an operating
loss in fiscal 1998.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, decreased $9.3 million, or 5.1%, to
$173.3 million in fiscal 1998 from $182.6 million in fiscal 1997 due
primarily to fiscal 1998 being a shorter period. EBITDA margin increased
to 18.5% from 13.8% for fiscal 1997 due to a decrease in processing
expenses.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $41.5 million, or 278.5%, to
$56.4 million in fiscal 1998 from $14.9 million in fiscal 1997, and EBITDA
margin decreased to 7.4% for fiscal 1998 from 36.2% for fiscal 1997 due to
the acquisition of Loyalty. The largest component of the increased expense
is related to the redemption cost of the Air Miles reward program and
payroll costs associated with Loyalty.
- DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$16.4 million, or 46.1%, to $52.0 million for fiscal 1998 from
$35.6 million for fiscal 1997 due to increased amortization of purchased
intangibles from the acquisitions in fiscal 1998 offset in part by a
shorter period in fiscal 1998.
OPERATING INCOME. Operating income decreased $23.9 million, or 81.3%, to
$5.5 million for fiscal 1998 from $29.4 million for fiscal 1997. The decrease is
the result of a shorter period, increased depreciation and amortization and a
decline in margins.
INTEREST EXPENSE. Interest expense increased $12.4 million, or 80.0%, to
$27.9 million for fiscal 1998 from $15.5 million for fiscal 1997 due to an
increased debt balance associated with fiscal 1998 acquisitions.
TAXES. Income tax benefit increased $9.9 million to a $4.7 million benefit
for fiscal 1998 from a $5.2 million expense for fiscal 1997 due to a decrease in
taxable income.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant and database marketing fees, increased $1.8 million, or
3.7%, to $50.6 million for fiscal 1998 from $48.8 million for fiscal 1997. The
increase is the result of an increase in database marketing fees.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. We generated cash flow from operating activities of
$45.8 million for the nine months ended September 30, 2000 compared to cash used
in operating activity of $216.0 million in the comparable period in 1999. We
generated cash flow from operating activities of $251.6 million during the year
ended December 31, 1999 compared to $9.3 million for fiscal 1998 and a cash
outflow of $30.7 million for fiscal 1997. Operating cash flow in the nine months
ended September 30, 2000 decreased compared to the prior period as a result of
an increase in trade receivables and increased operating cash flows from the
Marketing Services segment, offset by increased interest expense. Our operating
cash flow is seasonal with cash utilization peaking at the end of December due
to increased activity in our Credit Services segment related to the holidays. We
utilize our operating cash flow for ongoing business operations and to pay
interest expense.
49
INVESTING ACTIVITIES. We utilized cash flow from investing activities of
$22.3 million for the nine months ended September 30, 2000 compared to
$268.1 million in the comparable period in 1999. We used cash in investing
activities of $309.5 million during the year ended December 31, 1999 compared to
$145.4 million for the year ended December 31, 1998 and $103.7 million for the
year ended December 31, 1997. Three significant components of investing
activities are as follows:
- ACQUISITIONS. Net cash outlays for acquisitions in the year ended
December 31, 1999 totaled $171.4 million, compared to $134.0 million for
fiscal 1998 and $716,000 for fiscal 1997.
- RECEIVABLES FUNDING. We generally fund all private label credit card
receivables through a securitization program that provides us with both
liquidity and lower borrowing costs. As of September 30, 2000, we had over
$2.0 billion of credit card receivables outstanding under securitizations.
Securitizations require credit enhancements in the form of cash, spread
accounts and additional receivables. The credit enhancement is principally
based on the outstanding balances of the private label credit cards in the
securitization trust. During the period from November to January, we are
required to maintain an additional 2.0% in credit enhancement. Accordingly
as of December 31, we typically have our highest balance of credit
enhancement assets. We intend to utilize our securitization program for
the foreseeable feature.
- RESERVE FUND. Redemption settlement assets on our balance sheet at
December 31, 1999 relate to a reserve fund we have established in
connection with funding the redemption obligation of the Air Miles reward
program. We believe the reserve fund is sufficient to meet redemption
obligations for the foreseeable future. We currently intend to set aside a
portion of future transaction fees received to fund future redemption
obligations. Based on various factors, we may reduce the amount of the
reserve fund and utilize future cash flows and excess cash for general
corporate purposes.
FINANCING ACTIVITIES. Net cash payments on borrowings was $4.9 million for
the nine months ended September 30, 2000 compared to net cash borrowings of
$91.1 million for the comparable period in 1999. Net cash payments on borrowings
was $44.8 million in the year ended December 31, 1999 compared to net borrowings
of $56.2 million in fiscal 1998 and $104.8 million in fiscal 1997. Our financing
activities include primarily net borrowings used to fund acquisitions and
working capital. We issued approximately $100.0 million of common stock to fund
a portion of our acquisition of the Loyalty Group during fiscal 1998.
LIQUIDITY SOURCES. We issue certificates of deposit through our credit card
bank subsidiary, World Financial, which issues $100,000 certificates of deposit
in various maturities ranging between three months and two years and with
effective annual fixed rates ranging from 5.45% to 7.45%. As of September 30,
2000, we had $88.5 million of certificates of deposit outstanding. We utilize
certificates of deposit to finance World Financial's operating activities and to
fund credit enhancement activity. World Financial is limited in the amounts that
it can dividend to us.
In July 1998 we entered into a $330.0 million credit agreement consisting of
a $130.0 million U.S. Term Loan, a $50.0 million Canadian A Term Loan and a
$50.0 million Canadian B Term Loan, and a $100.0 million revolving loan
commitment. The term loans and the revolving loan commitment are at a daily
floating rate equal to the sum of the Euro-dollar margin plus the London
Interbank Offered Rate applicable to the period for each Euro-dollar loan.
Principal is payable annually, and interest is payable quarterly for the base
rate loans and payable on the last day of the Euro-dollar loan period for each
Euro-dollar loan. The U.S. Term Loan, the Canadian A Term Loan and the revolving
loan commitment mature on July 25, 2003 and the Canadian B Term Loan matures on
July 25, 2005. We use the $100.0 million revolving loan commitment for general
corporate purposes. From mid-November to late January, we experience increased
needs for working capital due to increased credit card usage during the holiday
season. For additional credit enhancement during this period, our securitization
program requires us to maintain a higher percentage of securitized assets
through increased seller's interest or
50
excess funding deposits. During 2000, the highest outstanding balance on the
revolving loan commitment was $69.0 million. As of December 31, 2000, there was
$10.0 million outstanding under the revolving loan commitment.
On September 29, 2000 and January 10, 2001, we amended our credit agreement
to change the administrative agent and to adjust certain covenants related to
consolidated EBITDA, senior secured leverage ratio, adjusted consolidated net
worth and the interest coverage ratio.
We have incurred debt to finance our acquisitions. We have $102.0 million of
subordinated notes outstanding related to our August 1996 merger and our
acquisition of Harmonic Systems. These subordinated notes were issued to
affiliates of our stockholders, bear interest at 10% and are due between 2005
and 2008. To finance the Loyalty acquisition, we borrowed $100.0 million under
our credit agreement, consisting of a $50.0 million Canadian Term Loan with an
effective fixed interest rate of 8.99% and a $50.0 million Canadian Term Loan
with a floating rate of London Interbank Offered Rate plus the Euro-dollar
margin.
To fund the SPS acquisition, we used $50.0 million in working capital and
$120.0 million from the issuance of Series A preferred stock. The Series A
preferred stock has a 6% dividend rate payable at the discretion of our board of
directors or upon conversion.
The net proceeds from this offering will be approximately $153.4 million. We
intend to use the net proceeds to repay approximately $92.9 million that is
outstanding of a $130.0 million U.S. Term Loan under our credit agreement.
Following this $92.9 million debt repayment, we will record an extraordinary
loss on early extinguishment of debt of approximately $1.5 million, net of tax.
We believe that our current level of cash and financing capacity, along with
future cash flows from operations, is sufficient to meet the needs of our
existing businesses. However, we may from time to time seek longer term
financing to support additional cash needs, reduce short-term borrowings or
raise funds for acquisitions.
ECONOMIC FLUCTUATIONS
Although we cannot precisely determine the impact of inflation on our
operations, we do not believe that we have been significantly affected by
inflation. For the most part, we have relied on operating efficiencies from
scale and technology, as well as decreases in technology and communication
costs, to offset increased costs of employee compensation and other operating
expenses.
Portions of our business are seasonal. Our revenues and earnings are
favorably affected by increased transaction volume and credit card balances
during the holiday shopping period in the fourth quarter and, to a lesser
extent, during the first quarter as credit card balances are paid down.
Similarly, our petroleum related businesses are favorably affected by increased
volume in the latter part of the second quarter and the first part of the third
quarter as consumers make more frequent purchases of gasoline in connection with
summer travel.
REGULATORY MATTERS
World Financial is subject to various regulatory capital requirements
administered by the Office of the Comptroller of the Currency. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material adverse effect on our financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, World
Financial must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
51
Quantitative measures established by regulations to ensure capital adequacy
require World Financial to maintain minimum amounts and ratios of total and Tier
1 capital to risk weighted assets and of Tier 1 capital to average assets. Under
the regulations, a "well capitalized" institution must have a Tier 1 capital
ratio of at least six percent, a total capital ratio of at least 10 percent and
a leverage ratio of at least five percent and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least four percent, a total capital ratio of at least eight
percent and a leverage ratio of at least four percent, but three percent is
allowed in some cases. Under these guidelines, World Financial is considered
well capitalized. As of September 30, 2000, World Financial's Tier 1 capital
ratio was 31.3%, total capital ratio was 32.0% and leverage ratio was 50.2%, and
World Financial was not subject to a capital directive order.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our primary market risks include interest rate risk, credit risk and
foreign currency exchange rate risk.
OFF-BALANCE SHEET RISK. We are subject to off-balance sheet risk in the
normal course of business including commitments to extend credit and through
financial instruments used to reduce the interest rate sensitivity of our
securitization transactions. We enter into interest rate swap and treasury lock
agreements in the management of interest rate exposure. These off-balance sheet
financial instruments involve elements of credit and interest rate risk in
excess of the amount recognized on our balance sheet. These instruments also
result in certain credit, market, legal and operational risks. We have
established credit policies for off-balance sheet instruments consistent with
those established for on-balance sheet instruments.
INTEREST RATE RISK. Interest rate risk affects us directly in our lending
and borrowing activities. Our total interest expense was approximately
$148.0 million for 1999. Of this total, $42.8 million of the interest expense
for 1999 was attributable to on-balance sheet indebtedness and the remainder to
our securitized credit card receivables, which are financed off-balance sheet.
To manage our risk from market interest rates, we actively monitor the interest
rates and the interest-sensitive components both on and off-balance sheet to
minimize the impact that changes in interest rates have on the fair value of
assets, net income and cash flow. To achieve this objective, we manage our
exposure to fluctuations in market interest rates by matching asset and
liability repricings and through the use of fixed-rate debt instruments to the
extent that reasonably favorable rates are obtainable with such arrangements. In
addition, we enter into derivative financial instruments such as interest rate
swaps, caps and treasury locks to mitigate our interest rate risk on a related
financial instrument or to effectively lock the interest rate on a portion of
our variable debt. We do not enter into derivative or interest rate transactions
for trading or other speculative purposes. At September 30, 2000, approximately
9.3% of our outstanding debt was subject to fixed rates with a weighted average
interest rate of 8.4%. An additional 66.5% of our outstanding debt at
September 30, 2000 was effectively locked at an interest rate of 6.59% through
interest rate swap agreements and treasury locks with notional amounts totalling
$1.5 billion.
The approach we use to quantify interest rate risk is a sensitivity analysis
which we believe best reflects the risk inherent in our business. This approach
calculates the impact on pretax income from an instantaneous and sustained
increase in interest rates of 1.0%. Assuming we do not take any counteractive
measures, a 1.0% increase in interest rates would result in a decrease to pretax
income of approximately $5.5 million. Conversely, a corresponding decrease in
interest rates would result in a comparable improvement to pretax income. Our
use of this methodology to quantify the market risk of financial instruments
should not be construed as an endorsement of its accuracy or the accuracy of the
related assumptions.
52
CREDIT RISK. We are exposed to credit risk relating to the credit card
loans we make to our clients' customers. Our credit risk relates to the risk
that consumers using the private label credit cards that we issue will not repay
their revolving credit card loan balances. We have developed credit risk models
designed to identify qualified consumers who fit our risk parameters. To
minimize our risk of loan write-off, we control approval rates of new accounts
and related credit limits and follow strict collection practices. We monitor the
buying limits as well as set pricing regarding fees and interest rates charged.
FOREIGN CURRENCY EXCHANGE RATE RISK. We are exposed to fluctuations in the
exchange rate between the U.S. and the Canadian dollar through our significant
Canadian operations. Although we have entered into cross currency hedges to fix
the exchange rate on any Canadian debt repayment due to a U.S. counter party, we
do not hedge our net investment exposure in our Canadian subsidiary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and for hedging activities, and requires companies to recognize all
derivatives as either assets or liabilities on their balance sheet and measure
such instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. Adoption of SFAS
No. 133 is not anticipated to materially impact our consolidated results of
operations or financial condition but will require recognition of interest rate
swaps as derivative instruments on our balance sheet and revised disclosures in
the notes to the consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", which
replaced SFAS No. 125 and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. Disclosures relating to securitization transactions are required
for fiscal years ending after December 15, 2000. Management is currently
evaluating the impact on our financial position and results of operations when
SFAS No. 140 is adopted, but does not anticipate any material changes.
The Emerging Issues Task Force ("EITF") is reviewing an issue, Issue
No. 00-22, "Accounting for 'Point' and Other Loyalty Programs," that is closely
related to our Air Miles reward program and the way revenue is recognized for
these types of programs. We understand that the EITF will provide guidance on
this issue sometime in 2001, but a specific date has not been set. When Issue
00-22 is issued, if it requires modification of our present revenue recognition
policy, we will adhere to the guidance provided. Without knowing how the EITF
will rule on this issue, we are unable to assess the impact of Issue 00-22 at
this time.
53
BUSINESS
GENERAL
We are a leading provider of electronic transaction services, credit
services and marketing services. The programs that we develop and execute create
value by assisting our clients in acquiring and developing loyal, profitable
customers.
We target select market sectors that typically involve companies who sell
products and services to individual consumers. These market sectors include
specialty retailers, petroleum retailers, supermarkets and financial services
providers. Additionally, we target market sectors that we believe have rapidly
evolving needs for electronic payment processing and customer management. The
mass transit, tollway and parking sectors' increasing acceptance of electronic
payments is enabling them to improve customer convenience while at the same time
reduce operating expenses. We have also expanded our market sectors to include
electric and gas utilities as we see an increasing demand in products and
services that help them compete in their evolving marketplace.
Our client base includes over 300 companies from these market sectors. Our
top five clients, based on their contribution to our 2000 revenues, are:
- the retail affiliates of The Limited, including Limited Too, Victoria's
Secret, Express, Lane Bryant, Bath & Body Works, Lerner New York, Henri
Bendel and Structure;
- Brylane;
- Bank of Montreal;
- Equiva Services, LLC, which is the service provider to Shell-branded
locations in the U.S.; and
- CITGO.
We market and sell our service offerings on both a stand-alone and bundled
basis. Our products and services are centered around three core
offerings--Transaction Services, Credit Services and Marketing Services. All
three offerings support our goal of building loyalty through transaction-based
customer management solutions.
TRANSACTION SERVICES CREDIT SERVICES MARKETING SERVICES
- ------------------------------ ------------------------------ ------------------------------
- - Transaction Processing - Underwriting - Loyalty Programs
- Network Services - Risk Management - Air Miles reward program
- Bankcard Settlement - Private Label Cards
- - Account Processing and - One-to-One Loyalty
Servicing
- Card Processing - Database Marketing Services
- Billing and Payment Processing - Direct Marketing
- Customer Care - Enhancement Services
INDUSTRY DYNAMICS
The growing demand for integrated marketing solutions targeting consumers
has been fueled by rapid development of new competitors and sales channels,
intensifying competition for customers and an erosion of consumer brand loyalty.
The Internet has accelerated these trends by providing consumers with almost
instant access to a multitude of competing products and services without
traveling to an actual store location. As a result, companies are looking for
tools aimed at retaining existing customers as well as identifying and targeting
new groups of potential customers through any or all distribution channels.
We believe that companies understand the value of gathering and using
transaction data to:
- manage the interactions they have with their customers;
- increase sales; and
- increase customer loyalty.
54
Companies increasingly seek services that compile and warehouse transaction
data and analyze consumer behavior to more effectively interact with their
customers. The increasing acceptance of electronic payment systems, including
credit, debit and stored value cards, generates highly valuable transaction data
on individual consumers, while the dramatic proliferation of technology has
enabled companies to capture, access and use this information easily and almost
instantaneously.
While companies recognize the significant benefit of capturing and using
purchasing data, many lack the economies of scale and core competencies
necessary to support their own transaction processing infrastructure and credit
card operations, including the extension of credit. In addition, many companies
look externally for the expertise to develop and manage their loyalty and
database marketing services. Thus, companies that provide the infrastructure to
create, manage and facilitate electronic payment systems can create a database
of valuable information on the purchasing behavior of consumers that is critical
for developing more targeted and effective marketing programs. For example, the
use of private label credit cards creates an opportunity for retailers to
strengthen consumer brand loyalty by encouraging repeat purchases through
discounts and other special promotions.
We believe that in today's competitive economy, retailers will find an
increasing need to differentiate their products and services from those of their
competitors through comprehensive, innovative marketing strategies. These
strategies will likely use technology to analyze and predict consumer behavior
and to provide the information necessary to execute direct marketing and
promotional campaigns more effectively to existing and potential customers.
STRATEGY AND OPPORTUNITIES FOR GROWTH
Consistent with our goal of becoming a critical component in the success of
our clients' businesses, we will continue to build and enhance our consumer
databases, marketing capabilities and processing efficiencies. We plan to
continue to employ our consumer databases, marketing capabilities and processing
efficiencies in efforts to help our clients target, acquire and retain loyal,
profitable customers. We believe that by assisting our clients in building loyal
customer relationships, our clients will view our services as an integral part
of their business operations. To accomplish this strategy of becoming a critical
component in our clients' relationships with their customers we intend to:
INCREASE THE PENETRATION OF PRODUCTS AND SERVICES WE PROVIDE TO OUR EXISTING
CLIENT BASE. We plan to further increase the number and types of products and
services we provide to our existing client base with a focus on loyalty and
database services.
EXPAND OUR CLIENT BASE IN EXISTING MARKET SECTORS. We plan to acquire new
clients in our traditional markets by continuing to distinguish ourselves as a
provider of customer relationship management solutions. We will further benefit
by what we believe will be a continued trend toward outsourcing as our existing
clients and potential new clients have increasing needs for new technology and
new skill sets. As retailers continue to search for the tools to increase loyal,
profitable customer relationships, we believe that our integrated and
comprehensive offering of loyalty and database marketing services and
transaction processing services will appeal to retailers, including e-commerce
businesses, faced with increasing competition and decreasing profit margins.
CONTINUE TO EXPAND OUR SERVICES AND CAPABILITIES TO HELP OUR CLIENTS SUCCEED
IN MULTI-CHANNEL COMMERCE. We plan to help our clients be successful in all
channels they choose for distribution--whether in-store, catalog or the
Internet. Our current client base is predominantly traditional store front and
catalog-based retailers. However, our clients recognize the importance of using
the Internet as an additional distribution channel. We can apply the systems and
marketing programs we have built to support our store and catalog clients using
the Internet. As an added benefit we believe our private label credit card
system provides additional protection against fraud. Our vision is to provide
our clients with a comprehensive view of each customer across all distribution
channels and to utilize this information to execute direct marketing programs
through multiple distribution channels.
55
CONSIDER FOCUSED, STRATEGIC ACQUISITIONS AND ALLIANCES TO ENHANCE OUR CORE
CAPABILITIES OR INCREASE OUR SCALE. As we identify new opportunities or product
gaps, we may consider focused acquisitions and alliances to enhance our
competencies or increase our scale.
PROGRAMS AND PRODUCTS
Our program and product offerings are centered around three core
offerings--Transaction Services, Credit Services and Marketing Services.
TRANSACTION SERVICES
Effectively managing critical interactions with customers is required to
conduct everyday business--whether the business involves store, catalog or
Internet commerce. Our services include instantaneous credit authorizations,
effective customer care, efficient payment processing and billing services. By
fully integrating our transaction services with our loyalty and database
marketing services, we are able to execute more effective customer acquisition
and retention strategies for our clients. Our clients within this segment are
made up primarily of specialty retailers and petroleum retailers.
TRANSACTION PROCESSING. We are a leading provider of electronic transaction
services. Including our recent acquisitions, we processed 1.8 billion
transactions in 1999 on a pro forma basis, ranking us fifth in transaction
volume according to the Faulkner and Gray Card Industry 2001 report. We
processed 1.8 billion transactions in the first nine months of 2000, a 23%
increase from 1.5 million transactions processed on a pro forma basis in the
first nine months of 1999. We process these transactions through approximately
138,000 of our point-of-sale terminals. We believe we are the largest
transaction processor to the retail petroleum industry and we have a significant
presence in the specialty retail and transportation industries.
NETWORK SERVICES. We have built a fast and highly reliable network that
enables us to process all electronic payment types including credit card, debit
card, prepaid card, electronic benefits and fleet and check transactions. Our
recent acquisition of SPS's network transaction processing business has enabled
us to offer our existing products to new market segments as well as provide
additional products to existing clients. The network services we provide include
authorization, data capture and financial settlement of transactions. We also
provide merchants with on-line, two-way mail messaging that allows our clients
to improve communications with their individual locations by broadcasting and
receiving messages through their terminal devices. We support our clients with a
comprehensive help desk, operating 24 hours per day and seven days per week, as
well as terminal deployment and servicing.
We believe that we are one of the leaders in delivering new applications at
the point-of-sale, including video and audio electronic frequency and loyalty
programs, instant credit applications, and transponder and radio frequency
payment devices. We are active participants in establishing industry
point-of-sale standards.
MERCHANT BANKING SERVICES. Our merchant banking services include fast and
accurate financial settlement of MasterCard, Visa, Discover, American Express
and other electronic card transactions, including credit, debit and stored value
cards. By providing merchant banking services, we offer our clients the
flexibility to maintain their current settlement provider or to streamline their
end-to-end transaction processing with one provider. The merchant banking
services we provide also include daily deposit verification and accounting
reports.
ACCOUNT PROCESSING AND SERVICING. As reported in the Faulkner & Gray Card
Industry 2001 report, based on the number of acocunts on file we were the second
largest outsourcer of retail private label card programs in the U.S. in 1999,
with 52.5 million accounts on file. We assist clients in issuing credit cards
branded with the retailer's name or logo that can be used by customers at the
client's store locations. We also provide service and maintenance to our
clients' private label card programs and assist our clients in acquiring,
retaining and managing valuable repeat customers. Our commercial card processing
and servicing capabilities are specifically designed to handle the unique
requirements
56
associated with providing a credit card program to businesses. Our services
include new account processing, risk management, card embossing, credit
authorization, statement and invoice printing and mailing, and customer service.
CARD PROCESSING. We have developed a proprietary credit card system
designed specifically for retailers that offers significant flexibility in
processing accounts. We are able to make changes to accommodate our clients'
specific needs easily and quickly. We have also built into the system marketing
tools to assist our clients in increasing sales. Customer service screens have
prompts that, based on information from our client and the private label card
program, direct the customer service representative to extend a promotional
message. We provide credit card production services in a secured environment,
embossing 9.7 million new cards in 1999.
CUSTOMER CARE. Our retail heritage lies at the core of our culture and is
evident in our customer care operations. We focus our training programs in all
areas on achieving the highest possible standards. We monitor our performance by
conducting cardholder and store employee surveys. We have over 5,000 call center
seats in 11 locations, handling over 95 million customer inquiries in 1999. We
believe that we answer calls faster than the industry average. Our call centers
are equipped to handle phone, mail, fax and Internet inquiries. We also provide
collection activities to support our retail private label programs, where we
demonstrate our merchant mentality in our approach to maintaining the customer
relationship, within reasonable parameters, even when charge privileges have
been suspended.
BILLING AND PAYMENT PROCESSING. We use highly automated technology for bill
preparation, printing and mailing. Comingling statements, presorting and bar
coding allow us to take advantage of postal discounts. We generated on behalf of
our clients approximately 132.8 million statements in 1999 and 96.3 million
statements during the nine months ended September 30, 2000. In addition, we also
process cardholder remittances using state-of-the-art technology to maximize
efficiency. By doing so, we can improve the funds availability for both our
clients and for those private label receivables that we own or securitize.
CREDIT SERVICES
We believe that a private label credit card is one of the most effective
loyalty and marketing tools available. Our private label credit card program
allows our clients to make private label credit cards available for their
customers and offers our clients a funding vehicle for the credit card
receivables. We have been able to demonstrate the effectiveness of a private
label credit card program to our clients by making it a part of their complete
customer loyalty and marketing strategy. We believe that our ability to provide
a private label credit card program in a way that allows our clients to focus
their financial and operational resources on their core business is an important
part of our private label credit card service. As part of our private label
credit card service, we currently provide underwriting and risk management
services to 44 of our 48 private label credit clients, representing
54.5 million cardholders and $2.0 billion of receivables as of September 30,
2000. Tracing back to our predecessor company, we have gained significant
experience and expertise in successfully managing private label portfolios since
1986. Clients who utilize our credit services are predominantly specialty
retailers.
ACCOUNT UNDERWRITING AND CREDIT GUIDELINES. Our underwriting process
involves the purchase of credit bureau information for each credit applicant. We
obtain a credit report from one of the major credit bureaus based on the
applicant's mailing address and the perceived strength of each credit bureau in
that geographic region. In our initial credit evaluation process, we use one of
our six proprietary scorecards that have been refined to reflect performance of
the various retail programs. We continuously validate, monitor and maintain the
scorecards, and we use resulting data to ensure optimal risk performance.
RISK MANAGEMENT. We monitor and control the quality of our portfolio by
using behavioral scoring models to score each active account on its monthly
cycle date. The behavioral scoring models
57
dynamically evaluate credit limit assignments to determine whether credit limits
should be increased, decreased or maintained and to establish pricing on fees
based on the credit worthiness of the individual cardholder. Our proprietary
scoring models consider such factors as how long the account has been on file,
credit utilization, shopping patterns and trends, payment history and account
delinquency.
DELINQUENCY AND COLLECTIONS PROCEDURES. We consider an account delinquent
if the minimum payment due is not received by the billing due date. At that
time, we assign the account a status of 30 days delinquent. We print a message
requesting payment on a consumer cardholder's billing statement after a
scheduled payment has been missed. After an account becomes 30 days past due, a
proprietary collection scoring algorithm automatically scores the risk of the
account rolling to a more delinquent status. The collection system then
recommends a collection strategy for the past-due account based on the
collection score and account balance, and dictates the contact schedule and
collections' priority for the account. If we are unable to make a collection
after exhausting all in-house efforts, we engage collection agencies and outside
attorneys to continue those efforts.
MARKETING SERVICES
Our clients are focused on targeting, acquiring and retaining loyal and
profitable customers. We create and manage marketing and loyalty programs that
have successfully resulted in securing more frequent and sustained customer
purchasing. Our loyalty programs include the Air Miles reward program, private
label cards and one-to-one loyalty. We utilize the information gathered through
our loyalty programs to help our clients design and implement effective
marketing programs. Our clients within this segment are specialty retailers,
petroleum retailers, supermarkets and financial services providers.
AIR MILES REWARD PROGRAM. We operate what we believe to be the largest
coalition loyalty program in Canada. This program, marketed under the Air Miles
brand name, enables consumers to earn Air Miles reward miles as they shop across
a range of retailers and other sponsors participating in the Air Miles reward
program. The program has over 100 brand names represented by the program
sponsors, including Shell Canada, Canada Safeway, Amex Bank of Canada (American
Express), Bank of Montreal, Goodyear Canada and A&P Canada. Air Miles reward
miles collectors can redeem reward miles for products and services such as plane
tickets, gift certificates for groceries, movie and theater tickets, and free
long distance phone calls. We make these reward opportunities available through
over 180 rewards suppliers, including Canadian Airlines and Air Canada, the
Toronto Blue Jays, Marine Land and A&P Canada. The Air Miles reward program has
enabled sponsors to use this tool to effectively increase revenues by bringing
new customers to the sponsor, retaining existing customers and increasing the
amount spent by customers. Based upon the most recent census data available, in
1999 our active participants represented over 58% of all Canadian households. We
have issued over seven billion Air Miles reward miles since the program's
inception in 1992.
We deal with three primary parties in connection with our Air Miles reward
program:
- sponsors--our clients who enter the Air Miles reward program to build
their customers' loyalty and increased sales from those customers;
- collectors--customers of our clients who enroll in the Air Miles reward
program and become collectors of Air Miles reward miles; and
- suppliers--suppliers of the rewards that we offer collectors, such as
airlines and merchandise providers.
SPONSORS
The size of our collector base provides incentives for current sponsors to
remain with the Air Miles reward program and prospective sponsors to join the
Air Miles reward program. A sponsor enters into an agreement with us to secure
exclusive rights for its particular region and product or
58
service category, and to reward customers for changing their shopping behavior.
We believe the Air Miles reward program offers sponsors a source of sustainable
competitive advantage and an opportunity to develop customer loyalty over a
broader consumer group than might be available to participants in a stand-alone
rewards program. Over a number of years, we have been able to develop a
membership, or collector base, of 6.5 million active collectors. Through the
interaction of the Air Miles reward program's appeal to both sponsors and
collectors, we are able to increase collector spending at, and loyalty to,
participating sponsors.
COLLECTORS
The major benefits of the Air Miles reward program to collectors are that
they:
- receive a common currency from multiple sponsors--Air Miles reward miles;
- are able to generate additional Air Miles reward miles through their
choice of sponsors in the Air Miles reward program; and
- can redeem Air Miles reward miles at one location--through us.
The Air Miles reward program offers a reward structure that provides a quick
and easy way to earn a broad selection of travel, entertainment and other
lifestyle rewards simply by shopping at participating sponsors. By virtue of the
increasing number of sponsors who join the Air Miles reward program, collectors
are able to accumulate Air Miles reward miles on much of their weekly spending,
from gasoline to groceries to department store purchases to bank deposits. To
increase the program's attractiveness to collectors and potential collectors, we
have developed a variety of rewards, and continue to add suppliers, for which
the accumulated Air Miles reward miles can be redeemed.
SUPPLIERS
We enter into supply agreements with suppliers of rewards to the program
such as airlines, movie theaters and manufacturers of consumer electronics.
These supply agreements allow us to purchase goods at a set price from the
suppliers. At the time we issue Air Miles reward miles, we record a redemption
obligation on our balance sheet in connection with our estimated cost for future
redemptions of reward miles. We make payments to suppliers pursuant to the
contractual supply arrangement when a collector redeems the Air Miles reward
miles.
PRIVATE LABEL CARDS. As discussed above, a private label credit card can be
one of the most effective loyalty and marketing tools available. By providing a
program that has meaningful benefits to the customer, we can assist the retailer
in strengthening its relationship with the customer. Our experience indicates
that long-term, retail card customers typically remain more loyal to the
retailer than general purpose users, both in the number of visits to the retail
establishment and the amount spent per visit. With our integrated marketing
tools, we can quantify the value of the private label card customer for our
clients. Additionally, our private label programs can be further enhanced by our
database marketing services that enable us to capture item-level transaction
data that are used to enhance communications with customers and create
successful customer relationship management strategies, such as targeted
promotions and cross-selling opportunities.
ONE-TO-ONE LOYALTY. We have developed a number of one-to-one, real-time
electronic loyalty programs that enable our clients to increase the frequency of
customer purchasing. Through our programs, our clients can recognize,
acknowledge and reward good customers with instant reward programs that can be
implemented at the point of sale. Using the retailer's existing point-of-sale
terminal or cash register and our network services, we can capture points,
communicate program status and issue awards to the consumer at the point of
sale. Our stored value product, electronic gift certificates and prepaid cards
also encourage consumer loyalty, especially among cash customers. The retailer
issues stored value and prepaid cards that prominently display their logo and
can only be used at their retail locations.
59
DATABASE MARKETING SERVICES. We have built and manage massive databases
containing information on approximately 72 million U.S. consumers and
6.5 million Canadian households. Our U.S. consumer database contains nearly four
years of purchase information as well as details and results of marketing
programs conducted over the last four years. Through these databases we have
developed a suite of data mining and profiling products that enable our clients
to better understand their customers and aim their marketing dollars toward the
optimum opportunities for developing customer relationships. We use these
databases to assist our clients in predicting, analyzing and targeting their
customers' buying patterns. We use the services of marketing firms, on a
commission basis, to promote and sell our consumer databases to telemarketers
and credit information brokers.
We develop and execute programs designed to acquire and retain customers. We
provide total program management using direct mail, telemarketing, in-store and
on-line marketing strategies. Our services include strategy development,
creative services, production and mailshop coordination. Selected programs
include:
- QUICK CREDIT. The cornerstone of our ability to cost effectively acquire
customers for our clients is our "Quick Credit" product, which allows us
to quickly process new applications at point-of-sale terminals or cash
register devices. We view this product as a competitive advantage to our
private label card processing and servicing.
- SMART STATEMENTS. Through our Smart Statement capabilities, we have
transformed the traditional billing statement into a powerful marketing
tool by targeting individual customers with billing statements containing
personalized messages. Additionally, we can promote to small, specially
defined groups of the customer base to cross-sell specific products and
services. Additionally, our "smart insert" function allows us to include a
promotional incentive or coupon with the statement.
- ON-LINE PRE-SCREEN. For catalog clients we offer a pre-approved card by
soliciting customers when they place an order over the phone. The product,
which works similarly to Quick Credit, enables us to extend a credit offer
to a catalog customer at the completion of the order process.
ENHANCEMENT SERVICES. We develop programs designed to maintain active
customers while generating new revenue streams for our clients by cross-selling
products and services to their existing customers. Services include sourcing,
promoting and fulfillment of products. These products are non-competitive with
the clients' merchandise offering and include merchandise, travel clubs and
credit life insurance programs.
ASSET QUALITY
We securitize substantially all of the credit card receivables that we
underwrite. As of September 30, 2000, we had $24.4 million of credit card
receivables that had not been securitized. Our delinquency and net credit card
receivable charge-off rates at any point in time reflect, among other factors,
the credit risk of credit card receivables, the average age of our various
credit card account portfolios, the success of our collection and recovery
efforts, and general economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates of the portfolio.
We continue to focus our resources on refining our credit underwriting standards
for new accounts, and on collections and post charge-off recovery efforts to
minimize net losses. At September 30, 2000, 19.3% of securitized accounts and
37.9% of securitized loans were less than 24 months old. Accordingly, we believe
that our loan portfolio will experience increasing or fluctuating levels of
delinquency and loan losses as the average age of our accounts increases.
This trend is reflected in the change in our net charge-off ratio. For the
nine months ended September 30, 2000, our annualized securitized net charge-off
ratio was 7.4%, up from 6.8% for the comparable period in 1999. For 1999, our
securitized net charge-off ratio basis was 7.2% compared to 7.8% for fiscal 1998
and 8.3% for fiscal 1997. We believe, consistent with our statistical models and
other credit analyses, that this rate will continue to fluctuate but generally
rise through 2001.
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Our strategy for managing credit card receivable losses consists of credit
line management and customer purchase authorizations. We further manage credit
card receivable losses through the offering of credit lines that are generally
lower than industry standard. We continually manage individual accounts and
their related credit lines using various marketing, credit and other management
processes in order to continue to maximize the profitability of accounts.
DELINQUENCIES. Delinquencies not only affect earnings in the form of net
loan losses, but are also costly in terms of the personnel and other resources
dedicated to their resolution. A credit card account is contractually delinquent
if we do not receive the minimum payment by the specified due date on the
cardholder's statement. It is our policy to continue to accrue interest and fee
income on all credit card accounts, except in limited circumstances, until the
account and all related loans, interest and other fees are charged off. The
following table presents the delinquency trends of our credit card loan
portfolio on a securitized basis:
JANUARY 31, % OF DECEMBER 31, % OF DECEMBER 31, % OF
1998 TOTAL 1998 TOTAL 1999 TOTAL
----------- -------- ------------ -------- ------------- --------
(DOLLARS IN THOUSANDS)
Receivables outstanding............... $2,021,599 100% $2,135,340 100% $2,232,375 100%
Loans contractually delinquent:
31 to 60 days....................... 62,663 3.1% 52,581 2.5% 59,840 2.7%
61 to 90 days....................... 33,010 1.6 29,925 1.4 35,394 1.6
91 or more days..................... 50,312 2.5 53,885 2.5 60,025 2.7
---------- ----- ---------- ----- ---------- -----
Total............................. $ 145,985 7.2% $ 136,391 6.4% $ 155,259 7.0%
========== ===== ========== ===== ========== =====
SEPTEMBER 30, % OF
2000 TOTAL
-------------- --------
(DOLLARS IN THOUSANDS)
Receivables outstanding............... $2,033,382 100%
Loans contractually delinquent:
31 to 60 days....................... 59,957 3.0%
61 to 90 days....................... 35,684 1.8
91 or more days..................... 59,985 3.0
---------- -----
Total............................. $ 155,626 7.8%
========== =====
The above numbers reflect the continued seasoning of our securitized loan
portfolio. We intend to continue to focus our resources on our collection
efforts to minimize the negative impact to net loan losses that results from
increased delinquency levels.
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NET CHARGE-OFFS. Net charge-offs comprise the principal amount of losses
from cardholders unwilling or unable to pay their credit card balances, as well
as bankrupt and deceased cardholders, less current period recoveries. Net
charge-offs exclude accrued finance charges and fees. The following table
presents our net charge-offs for the periods indicated on a securitized basis:
NINE MONTHS ENDED
FISCAL SEPTEMBER 30,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Average loans outstanding(1)....... $1,615,196 $1,905,927 $2,004,827 $1,990,622 $2,075,099
Net charge-offs.................... 133,515 135,478 143,370 101,850 115,680
Net charge-offs as a percentage of
average loans outstanding
(annualized)..................... 8.3% 7.8% 7.2% 6.8% 7.4%
- ------------------------
(1) Average loans outstanding is the average balance of the securitized
receivables at the beginning of each month in the period indicated.
AGE OF PORTFOLIO. The following table sets forth, as of September 30, 2000,
the number of total accounts and amount of outstanding loans, based upon the age
of the securitized accounts:
PERCENTAGE
NUMBER OF PERCENTAGE OF LOANS OF LOANS
AGE SINCE ORIGINATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- --------- ------------- ----------- -----------
(AMOUNTS IN THOUSANDS)
0-5 Months...................................... 2,863 5.1% $ 235,872 11.6%
6-11 Months..................................... 2,931 5.2 195,205 9.6
12-17 Months.................................... 2,656 4.7 172,837 8.5
18-23 Months.................................... 2,568 4.6 162,671 8.0
24-35 Months.................................... 5,139 9.2 268,406 13.2
36+ Months...................................... 39,973 71.2 1,161,062 49.1
------ ----- ---------- -----
Total....................................... 56,125 100.0% $2,033,382 100.0%
====== ===== ========== =====
SAFEGUARDS TO OUR BUSINESS
DISASTER AND CONTINGENCY PLANNING. We have a number of safeguards to
protect us from the risks we face as a business and as an industry. Given the
significant amount of data that we manage, much of which is real-time data to
support our clients' commerce initiatives, we have established redundant
facilities for our data centers. We operate two data processing centers. In the
event we experience an outage in one of our two data centers, we can move all
processing to the other data center. Additionally, we have contracted with a
third party to provide disaster and contingency planning in the event that both
data centers experience an outage.
PROTECTION OF INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. We rely
on a combination of copyright, trade secret and trademark laws, confidentiality
procedures, contractual provisions and other similar measures to protect our
proprietary information and technology. We do not currently hold any patents nor
do we have any patent applications pending.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technology, documentation and other proprietary
information. Despite the efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain the use of our products or
technology that we consider proprietary and third parties may attempt to develop
similar technology independently. We pursue registration and protection of our
trademarks primarily in the U.S. and Canada. Effective protection of
intellectual property rights may be unavailable or limited in some countries.
The laws of some countries do not protect our proprietary rights to the same
extent as in the U.S. and Canada.
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COMPETITION
The markets for our products and services are highly competitive. We compete
with traditional and online marketing companies, credit card issuers and data
processing companies, as well as with the in-house staffs of our current and
potential clients.
MARKETING SERVICES. As a provider of loyalty and database marketing
products and services, we generally compete with advertising and other
promotional and loyalty programs, both traditional and online, for a portion of
a client's total marketing budget. In addition, we compete against internally
developed products and services created by our existing and potential clients.
For each of our loyalty and database products and services, we expect
competition to intensify as more competitors enter our market. In addition, new
competitors with our Air Miles reward program may target our sponsors and reward
miles collectors as well as draw rewards from our rewards suppliers. Our ability
to generate significant revenue from clients and loyalty partners will depend on
our ability to differentiate ourselves through the products and services we
provide and the attractiveness of our loyalty and rewards programs to consumers.
The continued attractiveness of our loyalty and rewards programs will depend in
large part on our ability to remain affiliated with sponsors that are desirable
to consumers and to offer rewards that are both attainable and attractive to
consumers. Intensifying competition will make it more difficult for us to do
this. For our database marketing services, our ability to continue to capture
detailed transaction data on consumers is critical in providing effective
customer relationship management strategies for our clients.
TRANSACTION SERVICES. The payment processing industry is highly
competitive, especially among the five largest payment processors in the U.S.,
which processed approximately 17 billion transactions during 1999. Including
recent acquisitions, we were the fourth largest payment processor in the U.S.,
processing 1.8 billion transactions during 1999 on a pro forma basis. Our top
three competitors have built their businesses by focusing on merchant banking
relationships, while our focus has been on industry segments characterized by
companies with large customer bases, customer rich data and high transaction
volumes. Our focus on specific market sectors allows us to develop and deliver
solutions targeted to the needs of these sectors. This focus is consistent with
our marketing strategy for all products and services. Additionally, we believe
we effectively distinguish ourselves from other payment processors by providing
solutions that help our clients leverage investments they have made in their
payment systems by using these systems for electronic marketing programs.
CREDIT SERVICES. Within our Credit Services business, our competition
consists primarily of financial institutions whose marketing focus has been on
developing credit card programs with large revolving balances. Our competition
further drives their businesses by cross-selling their other financial products
to their cardholders. Our focus has been on targeting retailers that understand
the competitive advantage of developing loyal customers. Typically these
retailers have customers that make more frequent and smaller transactions. This
results in the effective capture of detail-rich data within our database
marketing services, allowing us to mine and analyze this data to develop
successful customer relationship management strategies for our clients.
As an issuer of private label credit cards, we compete with other payment
methods, primarily general-purpose credit cards like Visa, MasterCard and
American Express, as well as cash, checks and debit cards.
REGULATION
PRIVACY LEGISLATION. The enactment of legislation or industry regulations
arising from public concern over consumer privacy issues could have a material
adverse impact on our loyalty and database marketing services. Restrictions
could be placed upon the collection and use of information, in which case our
cost of collecting some kinds of data might be materially increased. Legislation
or industry
63
regulation could also prohibit us from collecting or disseminating certain types
of data, which could adversely affect our ability to meet our clients'
expectations.
The Gramm-Leach-Bliley Act, which became law in November 1999, requires
financial institutions to comply with various notice procedures in order to
disclose nonpublic personal information about their consumers to nonaffiliated
third parties and restricts their ability to share account numbers. The
requirements of this law also apply to the disclosure of any list, description
or other grouping of consumers derived from nonpublic personal information. This
law makes it more difficult to collect and use information that has been legally
available and may increase our costs of collecting some data. This law also
requires us to disclose our privacy policies and practices to consumers. New
regulations, promulgated by the federal government under the Gramm-Leach-Bliley
Act, that become effective in July 2001 will require credit card customers to
have the ability to opt out of having information generated by their credit card
purchases shared with nonaffiliated third parties.
On April 13, 2000, the Canadian federal government and Minister of Industry
of Canada enacted the Personal Information Protection and Electronic Documents
Act. This act, which became effective on January 1, 2001, comprises
comprehensive private sector privacy legislation that applies to organizations
engaged in any commercial activities in Canada. It enacted into law 10 privacy
principles from the Canadian Standards Association's Model Privacy Code. This
act requires organizations to obtain consent to the collection, use or
disclosure of personal information. The nature of the required consent will
depend on the sensitivity of the personal information and will permit personal
information to be used only for the purposes for which it was collected. The
Province of Quebec has had similar privacy legislation applicable to the private
sector in that province since 1994 and other provinces are considering further
privacy legislation.
FAIR CREDIT REPORTING ACT. The Fair Credit Reporting Act regulates consumer
reporting agencies. Under this Act, an entity risks becoming a consumer
reporting agency if it furnishes consumer reports to third parties. A consumer
report is a communication of information which bears on a consumer's
creditworthiness, credit capacity, credit standing or certain other
characteristics and which is collected or used or expected to be used to
determine the consumer's eligibility for credit, insurance, employment or
certain other purposes. The Fair Credit Reporting Act explicitly excludes from
the definition of consumer report a report containing information solely as to
transactions or experiences between the consumer and the entity making the
report. An entity may share consumer reports with any of its affiliates so long
as that entity provides consumers with an appropriate disclosure and an
opportunity to opt out of this affiliate sharing.
Our objective is to conduct our operations in a manner that would fall
outside the definition of consumer reporting agency under the Fair Credit
Reporting Act. If we were deemed to be a consumer reporting agency, however, we
would be subject to a number of complex and burdensome regulatory requirements
and restrictions. These restrictions could have a significant adverse economic
impact on us.
INTERSTATE TAXATION. Several states have passed legislation that attempts
to tax the income from interstate financial activities, including credit cards,
derived from accounts held by local state residents. We believe that this
legislation will not materially affect us. Our belief is based upon current
interpretations of the enforceability of such legislation, prior court decisions
and the volume of business we conduct in states that have passed legislation.
REGULATION OF THE BANK. World Financial is a limited purpose credit card
bank chartered as a national banking association and a member of the Federal
Reserve System. The Bank Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation, insures the deposits of World Financial. World
Financial is subject to regulation and examination by the Office of the
Comptroller of the Currency, its primary regulator, and is also subject to
regulation by the Board of Governors of the Federal Reserve System and the
Federal Deposit Insurance Corporation, as back-up regulators. World
64
Financial is not a "bank" as defined under the Bank Holding Company Act;
instead, it is a credit card bank because it is in compliance with the following
requirements:
- it engages only in credit card operations;
- it does not accept demand deposits or deposits that the depositor may
withdraw by check or similar means for payment to third parties;
- it does not accept any savings or time deposits of less than $100,000,
except for deposits pledged as collateral for extensions of credit;
- it maintains only one office that accepts deposits; and
- it does not engage in the business of making commercial loans.
If World Financial failed to meet the credit card bank criteria described
above, World Financial would be a "bank" as defined by the Bank Holding Company
Act, subjecting us to the provisions, requirements and restrictions of the Bank
Holding Company Act as a bank holding company. We believe that becoming a bank
holding company would significantly harm us, as we would be required to either
divest our non-banking activities or cease all activities that are not
permissible for a bank holding company and its affiliates.
INVESTMENT IN OUR COMPANY AND WORLD FINANCIAL NETWORK NATIONAL
BANK. Because of our ownership of World Financial, certain acquisitions of our
common stock may be subject to regulatory approval or notice under Federal law.
Investors are responsible for insuring that they do not directly or indirectly
acquire our common stock in excess of the amount that can be acquired without
regulatory approval.
EXPORTATION OF INTEREST RATES AND FEES. National banks such as World
Financial may charge interest at the rate allowed by the laws of the state where
the bank is located, and may "export" those interest rates on loans to borrowers
in other states, without regard to the laws of such other states. In 1996, the
United States Supreme Court ruled that national banks may also impose fees
material to a determination of the interest rate allowed by the laws of the
state where the national bank is located on borrowers in other states, without
regard to the laws of such other states. The Supreme Court based its opinion
largely on its deference to a regulation adopted by the Office of the
Comptroller of the Currency that includes certain fees, including late fees,
over limit fees, annual fees, cash advance fees and membership fees, within the
term "interest" under the provision of the National Bank Act that has been
interpreted to permit national banks to export interest rates. As a result,
national banks such as World Financial may export such fees.
65
DIVIDENDS AND TRANSFERS OF FUNDS. Federal law limits the extent to which
World Financial can finance or otherwise supply funds to us and our affiliates
through dividends, loans or otherwise. These limitations include:
- minimum regulatory capital requirements; and
- restrictions concerning the payment of dividends out of net profits or
surplus and Sections 23A and 23B of the Federal Reserve Act governing
transactions between a bank and its affiliates.
In general, Federal law prohibits a national bank such as World Financial
from making dividend distributions on common stock if the dividend would exceed
currently available undistributed profits. In addition, World Financial must get
prior approval from the Office of the Comptroller of the Currency for a dividend
if the distribution would exceed current year net income combined with retained
earnings from the prior two years less dividends paid in the current fiscal
year. World Financial cannot make a dividend payment if the distribution would
cause it to fail to meet applicable capital adequacy standards.
COMPTROLLER OF THE CURRENCY
SAFETY AND SOUNDNESS. The Federal Deposit Insurance Corporation Improvement
Act of 1991 requires banking agencies to prescribe certain non-capital standards
for safety and soundness relating generally to operations and management, asset
quality and executive compensation. This act also provides that regulatory
action may be taken against a bank that does not meet such standards.
CAPITAL ADEQUACY. World Financial is subject to various regulatory capital
requirements administered by the Office of the Comptroller of the Currency.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
World Financial must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require World Financial to maintain minimum amounts and ratios of total and Tier
1 capital to risk weighted assets, and of Tier 1 capital to average assets.
Under the regulations, a "well capitalized" institution must have a Tier 1
capital ratio of at least six percent, a total capital ratio of at least 10
percent and a leverage ratio of at least five percent and not be subject to a
capital directive order. An "adequately capitalized" institution must have a
Tier 1 capital ratio of at least four percent, a total capital ratio of at least
eight percent and a leverage ratio of at least four percent, but three percent
is allowed in some cases. Under these guidelines, World Financial is considered
well capitalized. As of September 30, 2000, World Financial's Tier 1 capital
ratio was 31.3%, total capital ratio was 32.0% and leverage ratio was 50.2%, and
World Financial was not subject to a capital directive order.
The Office of the Comptroller of the Currency's risk-based capital standards
explicitly consider a bank's exposure to a decline in the economic value of its
capital due to changes in interest rates when evaluating a bank's capital
adequacy. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
This evaluation is made as a part of World Financial's regular safety and
soundness examination.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. The
Improvement Act requires the Federal Deposit Insurance Corporation to implement
a system of risk-based premiums for deposit insurance. Pursuant to this system,
the premiums paid by a depository institution will be based on the probability
that the FDIC will incur a loss in respect of that institution. The FDIC has
adopted a
66
system that imposes insurance premiums based upon a matrix that takes into
account a bank's capital level and supervisory rating. Due to its capital level
and supervisory rating, World Financial currently pays the lowest rate on
deposit insurance premiums.
Under the Improvement Act, only "well capitalized" and "adequately
capitalized" banks may accept brokered deposits. "Adequately capitalized" banks,
however, must first obtain a waiver from the FDIC before accepting brokered
deposits and these deposits may not pay rates that significantly exceed the
rates paid on deposits of similar size and maturity accepted from the bank's
normal market area or the national rate on deposits of comparable maturity, as
the FDIC determines, for deposits from outside the bank's normal market area.
World Financial issues certificates of deposit in amounts of $100,000 or
greater.
LENDING ACTIVITIES. World Financial's activities as a credit card lender
are also subject to regulation under various Federal consumer protection laws
including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Community Reinvestment Act, the Soldiers' and Sailors'
Civil Relief Act and state consumer protection laws. Regulators are authorized
to impose penalties for violations of these statutes and, in certain cases, to
order banks such as World Financial to pay restitution to injured cardholders.
Cardholders may also bring actions for violations of these regulations. Federal
and state bankruptcy and debtor relief laws also affect World Financial's
ability to collect outstanding balances owed by cardholders who seek relief
under these laws.
For the purposes of the Office of the Comptroller of the Currency's
Community Reinvestment Act Regulations, World Financial has applied for and
received a limited purpose designation. The regulations subject banks receiving
such a designation to a community development test for evaluating required
Community Reinvestment Act compliance. The community development performance of
a limited purpose bank is evaluated pursuant to various criteria involving
qualified investments and community development services. As of September 30,
2000, World Financial had met its minimum responsibilities under the Act.
CONSUMER AND DEBTOR PROTECTION LAWS. From time to time legislation has been
proposed in Congress to limit interest rates and fees that could be charged on
credit card accounts or otherwise restrict practices of credit card issuers. If
this or similar legislation is proposed and adopted, our ability to collect on
account balances or maintain previous levels of finance charges and other fees
could be adversely affected. Additionally, changes have been proposed to the
Federal bankruptcy laws. Changes in Federal bankruptcy laws and any changes to
state debtor relief and collection laws could adversely affect us if these
changes result in, among other things, accounts being charged off as
uncollectible and additional administrative expenses. It is unclear at this time
whether and in what form any legislation will be adopted or, if adopted, what
its impact on us would be. Congress may in the future consider other legislation
that would materially affect the credit card and related fee-based services
industries.
Existing laws and regulations may permit class action lawsuits on behalf of
customers in the event of violations of applicable laws, and these lawsuits can
be very expensive to defend, even without any violation. If a class action were
determined adversely, it might have a material adverse effect on us.
EMPLOYEES
As of December 31, 2000, we had approximately 6,180 employees in the U.S.,
Canada and New Zealand.
LEGAL PROCEEDINGS
From time to time, we are involved in various claims and lawsuits incidental
to our business, including claims and lawsuits alleging breaches of contractual
obligations.
67
Service Merchandise, Inc., which is in voluntary Chapter 11 bankruptcy, and
its subsidiary Service Credit Corp., as plaintiffs, have filed an action against
World Financial in U.S. Bankruptcy Court for the Middle District of Tennessee.
The plaintiffs are alleging claims of breach of contract, anticipatory breach of
contract, and violations of the automatic stay provisions of the U.S. Bankruptcy
Code. The action centers around claims that World Financial violated various
contractual provisions of a private label credit card program agreement for
Service Merchandise that World Financial entered into with Service Credit Corp.
Plaintiffs allege that World Financial violated the agreement, by among other
things, unilaterally revising the credit standards applicable to existing
cardholders and withholding monthly program payments from Service Credit Corp.,
and allege violations of the automatic stay provisions of the U.S. Bankruptcy
Code. The plaintiffs have not specified their alleged damages. In April 2000, we
moved to dismiss the amended complaint. On November 9, 2000, the Bankruptcy
Court issued an order dismissing a portion of the counts of the amended
complaint, but allowing plaintiffs to go forward with other claims for breach of
contract, anticipatory breach of contract and violation of the automatic stay.
On January 5, 2001, we answered the plaintiffs' complaint, denying their
material allegations and sought leave of the Bankruptcy Court, including a
motion for relief from the automatic stay, to file counterclaims against both
plaintiffs. Through these counterclaims, we are seeking to recover from Service
Merchandise and Service Credit various amounts, cumulatively exceeding $30
million, that we contend are due and owing. Given the early stage of the
litigation, we are unable to determine whether the ultimate resolution of the
claims by and against World Financial will have a material effect on our
business, financial condition or operating results. We intend to defend World
Financial's interests vigorously.
On November 16, 2000, in the United States District Court, Southern District
of Florida, Miami Division, a group of World Financial cardholders filed a
putative class action complaint against World Financial. The plaintiffs,
individually and on behalf of all others similarly situated, commenced the
action alleging that World Financial engaged in a systematic program of false,
misleading, and deceptive practices to improperly bill and collect consumer
debts from thousands of cardholders. The suit stems from World Financial's
practices involved in calculating finance charges and in crediting cardholder
payments on the next business day if received after 6:30 a.m. The plaintiffs
contend that such practices are deceptive and result in the imposition of
excessive finance charges and other penalties to cardholders. Plaintiffs allege
that World Financial, through such practices, has violated several federal and
Florida state consumer protection statutes and breached cardholder contracts.
Plaintiffs have requested, individually and on behalf of a putative class,
monetary and punitive damages for the alleged stated claims and permanent
injunctions for alleged statutory violations. The plaintiffs have not specified
their alleged damages. World Financial believes these allegations are without
merit and intends to defend this matter vigorously.
68
PROPERTIES
The following table sets forth information with respect to our principal
facilities.
CURRENT APPROXIMATE
MONTHLY SQUARE
LOCATION SEGMENT LEASE RATE FOOTAGE
- -------- ---------------------------- -------------------------- -----------
Northglenn, Colorado........ Transaction Services $ 37,104 65,000
Marietta, Georgia........... Transaction Services $ 3,067 2,103
Buffalo Grove, Illinois..... Transaction Services $ 35,399 24,136
Lenexa, Kansas.............. Transaction Services $ 45,244 65,000
Minneapolis, Minnesota...... Marketing Services and $ 4,386 3,105
Transaction Services
Minneapolis, Minnesota...... Marketing Services and $ 31,997 28,442
Transaction Services
Voorhees, New Jersey........ Transaction Services $ 75, 431 67,050
Columbus, Ohio.............. Transaction Services $ 36,536 103,161
Columbus, Ohio.............. Transaction Services and $ 69,407 100,800
Credit Services
Columbus, Ohio.............. Transaction Services $ 14,400 57,600
Columbus, Ohio.............. Marketing Services, $ 40,733 54,615
Transaction Services and
Credit Services
Columbus, Ohio.............. Transaction Services and $ 25,535 32,255
Credit Services
Columbus, Ohio.............. Marketing Services, $ 10,820 39,951
Transaction Services and
Credit Services
Reno, Ohio.................. Credit Services $ 11,128 12,140
Johnson City, Tennessee..... Transaction Services $ 44,925 45,000
Dallas, Texas............... Marketing Services and $ 114,228 114,419
Transaction Services
Dallas, Texas............... Transaction Services and $ 121,000 114,419
Credit Services
Dallas, Texas............... Marketing Services, $ 57,479 61,750
Transaction Services and
Credit Services
Dallas, Texas............... Transaction Services $ 18,224 72,897
San Antonio, Texas.......... Transaction Services $ 47,692 67,540
Mississauga, Ontario, $ 42,500 40,000
Canada.................... Marketing Services
Toronto, Ontario, Canada.... Marketing Services $ 81,492 91,534
Montreal, Quebec, $ 3,125 5,000
Canada.................... Marketing Services
Calgary, Alberta, Canada.... Database Marketing Services $ 9,066 8,059
Auckland, New Zealand....... Transaction Services $ 12,041 11,700
-------------------------- ----------
Total..................... $ 992,959 1,287,676
========================== ==========
LEASE
EXPIRATION
LOCATION DATE
- -------- ------------------------------------
Northglenn, Colorado........ August 31, 2007
Marietta, Georgia........... August 31, 2002
Buffalo Grove, Illinois..... February 29, 2010
Lenexa, Kansas.............. January 31, 2008
Minneapolis, Minnesota...... August 31, 2004
Minneapolis, Minnesota...... August 31, 2004
Voorhees, New Jersey........ January 1, 2005
Columbus, Ohio.............. January 31, 2008
Columbus, Ohio.............. January 25, 2001
Columbus, Ohio.............. August 31, 2004
Columbus, Ohio.............. August 31, 2007
Columbus, Ohio.............. August 31, 2007
Columbus, Ohio.............. August 31, 2002
Reno, Ohio.................. April 30, 2002
Johnson City, Tennessee..... October 19, 2010
Dallas, Texas............... November 30, 2009
Dallas, Texas............... October 10, 2010
Dallas, Texas............... July 31, 2007
Dallas, Texas............... April 30, 2006
San Antonio, Texas.......... January 31, 2002
Mississauga, Ontario, August 31, 2009
Canada....................
Toronto, Ontario, Canada.... September 16, 2007
Montreal, Quebec,
Canada.................... June 30, 2009
Calgary, Alberta, Canada.... December 31, 2004
Auckland, New Zealand....... September 13, 2005
Total.....................
We believe our current and proposed facilities are suitable to our
businesses and that we will be able to lease, purchase or newly construct
additional facilities as needed.
69
MANAGEMENT
The following table sets forth the name, age and positions of each of our
executive officers, business unit presidents and directors as of January 15,
2001:
NAME AGE POSITION
- ---- --------------------- ------------------------------------------
J. Michael Parks.......................... 50 Chairman of the Board of Directors, Chief
Executive Officer and President
Ivan Szeftel.............................. 47 Executive Vice President and President,
Retail Credit Services
John Scullion............................. 43 President and Chief Executive Officer, The
Loyalty Group
Michael A. Beltz.......................... 45 Executive Vice President and President,
Transaction Services Group
Edward Heffernan.......................... 38 Executive Vice President and Chief
Financial Officer
Dwayne H. Tucker.......................... 44 Executive Vice President and Chief
Administrative Officer
Steven T. Walensky........................ 43 Executive Vice President and Chief
Information Officer
Carolyn S. Melvin......................... 47 Senior Vice President, Secretary and
General Counsel
Robert P. Armiak.......................... 39 Vice President and Treasurer
Michael D. Kubic.......................... 45 Vice President, Corporate Controller and
Chief Accounting Officer
Richard E. Schumacher, Jr................. 33 Vice President, Tax
Bruce K. Anderson......................... 60 Director
Anthony J. deNicola....................... 36 Director
Daniel P. Finkelman....................... 45 Director
Robert A. Minicucci....................... 48 Director
Bruce A. Soll............................. 43 Director
Kenneth R. Jensen......................... 57 Director Nominee
J. MICHAEL PARKS, chairman of the board of directors, chief executive
officer and president, joined us in March 1997. Before joining us, Mr. Parks was
president of First Data Resources, the credit card processing and billing
division of First Data Corporation, from December 1993 to July 1994. Mr. Parks
joined First Data Corporation in July 1976 where he gained increased
responsibility for sales, service, operations and profit and loss management
during his 18 years of service. Mr. Parks holds a Bachelor's degree from the
University of Kansas.
IVAN SZEFTEL, executive vice president and president of our Retail Credit
Services business unit, joined us in May 1998. Before joining us, he served as
chief operating officer of Forman Mills, Inc. from November 1996 to April 1998.
Prior to that, he served as executive vice president and chief financial officer
of Charming Shoppes, Inc. from November 1981 to February 1996. Mr. Szeftel holds
Bachelor's and post graduate degrees from the University of Cape Town and is a
Certified Public Accountant in the State of Pennsylvania.
JOHN SCULLION, president and chief executive officer of Loyalty Management
Group Canada Inc., joined The Loyalty Group in October 1993. Prior to becoming
president, he served as chief operating officer for The Loyalty Group. Prior to
that, he served as chief financial officer of The Rider Group from
September 1988 to October 1993. Mr. Scullion holds a Bachelor's degree from the
University of Toronto.
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MICHAEL A. BELTZ, executive vice president and president of our Transaction
Services Group, joined us in May 1997. From May 1997 to January 2001, he served
as executive vice president of business development and planning. He is
responsible for transaction services, new market identification, and
acquisitions. Before joining us, he served as executive vice president of sales
and acquisitions of First Data Corporation from July 1983 to April 1997.
Mr. Beltz holds a Bachelor's degree from the University of Nebraska.
EDWARD HEFFERNAN, executive vice president and chief financial officer,
joined us in May 1998. Before joining us, he served as vice president, mergers
and acquisitions for First Data Corporation from October 1994 to May 1998. Prior
to that he served as vice president, mergers and acquisitions for Citicorp from
July 1990 to October 1994, and prior to that he served in corporate finance at
Credit Suisse First Boston from June 1986 until July 1990. He holds a Bachelor's
degree from Wesleyan University and an MBA from Columbia Business School.
DWAYNE H. TUCKER, executive vice president and chief administrative officer,
joined us in June 1999. He is responsible for recruitment, organization
development, training, facilities and corporate communications. Before joining
us, he served as vice president of human resources for Northwest Airlines from
February 1998 to February 1999 and as senior vice president of human resources
for First Data Corporation from March 1990 to February 1998. Mr. Tucker holds a
Bachelor's degree from Tennessee State University.
STEVEN T. WALENSKY, executive vice president and chief information officer,
joined us in July 1998. He is responsible for management of the corporate
information services organization. Before joining us, he served as senior vice
president of data center services for First Data Corporation from October 1995
to June 1998. Prior to that, he held management positions with Visa
International and Sprint. Mr. Walensky holds a Bachelor's degree from Rockhurst
College.
CAROLYN S. MELVIN, senior vice president of legal services, general counsel
and secretary, joined us in September 1995 as vice president, general counsel
and secretary of World Financial. She is responsible for legal, audit and
compliance. Before joining us, she served as vice president and counsel for
National City Corporation from December 1982 until September 1995. Ms. Melvin
holds a B.A. degree from Dickinson College and a J.D. from Ohio State University
College of Law.
ROBERT P. ARMIAK, vice president and treasurer, joined us in February 1996.
He is responsible for cash management, hedging strategy, risk management and
capital structure. Before joining us, he held several positions, including most
recently, treasurer, at FTD Inc. from August 1990 to February 1996. He holds a
Bachelor's degree from Michigan State University and an MBA from Wayne State
University.
MICHAEL D. KUBIC, vice president, corporate controller and chief accounting
officer, joined us in October 1999. Before joining us, he served as vice
president of finance for Kevco, Inc. from March 1999 to October 1999. Prior to
that he served as vice president and corporate controller for BancTec, Inc. from
September 1993 to February 1998. Mr. Kubic holds a Bachelor's degree from the
University of Massachusetts and is a Certified Public Accountant in the State of
Texas.
RICHARD E. SCHUMACHER, JR., vice president of tax, joined us in
October 1999. He is responsible for corporate tax affairs. Before joining us, he
served as tax senior manager for Deloitte & Touche LLP from 1989 to
October 1999 where he was responsible for client tax services and practice
management and was in the national tax practice serving the banking and
financial services industry. Mr. Schumacher holds a Bachelor's degree from Ohio
State University and a Master's from Capital University Law and Graduate School
and is a Certified Public Accountant in the State of Ohio.
BRUCE K. ANDERSON has served as a director since our merger in August 1996.
Since March 1979, he has been a partner and co-founder of the investment firm,
Welsh, Carson, Anderson & Stowe. Prior to that, he spent nine years with ADP
where, as executive vice president and a member of the board of directors, he
was active in corporate development and general management. Before joining ADP,
71
Mr. Anderson spent four years in computer marketing with IBM and two years in
consulting. Mr. Anderson is currently a director of Amdocs Limited. He holds a
Bachelor's degree from the University of Minnesota.
ANTHONY J. DENICOLA has served as a director since our merger in
August 1996. Mr. deNicola is a partner with Welsh, Carson, Anderson & Stowe,
joining the firm in April 1994. Prior to that, he spent four years with William
Blair & Company, financing middle market buy-outs from July 1990 to February
1994. Mr. deNicola is currently a director of Centennial Cellular Corporation.
He holds a Bachelor's degree from DePauw University and an MBA from Harvard
Business School.
DANIEL P. FINKELMAN has served as a director since January 1998.
Mr. Finkelman is senior vice president of The Limited, Inc. and is responsible
for all brand and business planning for that specialty retailer. He has been
employed with The Limited since August 1996. Before joining The Limited, he was
self-employed as a consultant from February 1996 to August 1996 and he served as
executive vice president of marketing for Cardinal Health, Inc. from May 1994 to
February 1996. Prior to that, he was a partner with McKinsey & Company where he
was co-leader of the firm's marketing practice, focusing on loyalty and customer
relationship management. Mr. Finkelman holds a Bachelor's degree from Grinnell
College and graduated as a Baker Scholar at Harvard Business School.
ROBERT A. MINICUCCI has served as a director since our merger in
August 1996. Mr. Minicucci is a partner with Welsh, Carson, Anderson and Stowe,
joining the firm in August 1993. Before joining Welsh, Carson, Anderson & Stowe,
he served as senior vice president and chief financial officer of First Data
Corporation from December 1991 to August 1993. Mr. Minicucci is currently a
director of Amdocs Limited. Mr. Minicucci holds a Bachelor's degree from Amherst
College and an MBA from Harvard Business School.
BRUCE A. SOLL has served as a director since February 1996. Mr. Soll is
senior vice president and counsel of The Limited, where he has been employed
since September 1991. Before joining The Limited, he served as the Counsellor to
the Secretary of Commerce in the Bush Administration from February 1989 to
September 1991 where he was a senior policy official, focusing on international
trade, telecommunications and technology. Mr. Soll holds a Bachelor's degree
from Claremont McKenna College and a J.D. from the University of Southern
California Law School.
KENNETH R. JENSEN has been nominated to serve as a director. Mr. Jensen has
been executive vice president, chief financial officer, treasurer, assistant
secretary and a director of Fiserv, Inc., a public company engaged in data
processing outsourcing, since July 1984. He was named senior executive vice
president of Fiserv in 1986. Mr. Jensen holds a Bachelor's degree from Princeton
University in Economics, an MBA from the University of Chicago in Accounting,
Economics and Finance and a Ph.D. from the University of Chicago in Accounting,
Economics and Finance.
72
CLASSES OF BOARD OF DIRECTORS
Our certificate of incorporation authorizes there to be between six and 12
directors. Our board of directors currently consists of six members, we have
nominated Kenneth R. Jensen to serve as an independent director, and we intend
to designate two additional independent directors before consummation of this
offering. Our board is divided into three classes that serve staggered
three-year terms, as follows:
CLASS EXPIRATION OF TERM MEMBERS
- ----- ------------------ -----------------------
Class I............................. 2001 Anthony J. deNicola,
Bruce A. Soll
Class II............................ 2002 Bruce K. Anderson,
Daniel P. Finkelman
Class III........................... 2003 Robert A. Minicucci,
J. Michael Parks
Newly elected directors and any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. There are no family relationships among any of our directors,
executive officers or division presidents.
COMMITTEES OF THE BOARD OF DIRECTORS
Our full board of directors has fulfilled the function of an audit committee
and compensation committee for the last fiscal year. Our board of directors has
a capital budget committee and, upon the consummation of this offering, will
establish an audit committee, a compensation committee and an executive
committee.
The audit committee, which will consist of three independent directors
including Mr. Jensen, will review the scope and approach of the annual audit,
our annual financial statements and related auditors' report and the auditors'
comments relative to the adequacy of our system of internal controls and
accounting systems. The audit committee will also recommend to our board of
directors the appointment of independent public accountants for the following
year. The audit committee will consist of at least three members, all of whom
will be financially literate and will be independent directors and one of whom
will have significant experience in accounting or finance matters. Our audit
committee will adopt and periodically review a written charter that will specify
the scope of its responsibilities.
The compensation committee, which currently consists of Robert A. Minicucci,
and Daniel P. Finkelman, will review management compensation levels and provide
recommendations to our board of directors regarding salaries and other
compensation for our executive officers, including bonuses and incentive plans,
and will administer our stock option plan.
The executive committee, which will consist of three directors, will have
the power and authority of our board of directors to manage our affairs between
meetings. The executive committee will also regularly review significant
corporate matters and recommend action as appropriate to our board of directors.
The capital budget committee, which currently consists of Anthony J.
deNicola and Bruce Soll, has the power and authority of the board of directors
to adopt our capital expenditure budget and to evaluate and authorize any and
all capital expenditures that exceed $50,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our board of directors as a whole made decisions
relating to the compensation of Michael Parks and the executive officers
reporting directly to him. During this time,
73
Mr. Parks participated in all discussions concerning compensation of the
executive officers reporting directly to him, except that Mr. Parks was excluded
from discussions regarding his own compensation. None of our executive officers
served as a member of the board of directors or the compensation committee of
any entity that has one or more executive officers serving on our board of
directors or on the compensation committee of our board of directors.
DIRECTOR COMPENSATION
All directors are reimbursed for reasonable out-of-pocket expenses incurred
while serving on the board of directors and any committee of the board of
directors. Our non-employee directors currently participate in our amended and
restated stock option and restricted stock plan. Individuals who are
non-employee directors on the closing date of this offering will have a choice
of receiving either (1) a nonqualified stock option to purchase 42,000 shares of
our common stock or (2) a nonqualified stock option to purchase 28,500 shares of
our common stock plus a cash compensation package providing cash compensation of
$15,000 annually, $1,000 for each board meeting attended and $500 for each
committee meeting attended. Non-employee directors who are elected after this
offering will make this choice of compensation alternatives upon becoming
directors and will receive the nonqualified stock options on the date that they
first become directors.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for the
year ended December 31, 2000 for our chief executive officer, our four other
most highly compensated executive officers and one additional executive officer
that would have been one of our four most highly compensated executive officers
if he had continued to be employed with us as of December 31, 2000. These six
individuals are referred to as the named executive officers.
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------------- --------------------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS(1) STOCK AWARDS($)(2) OPTIONS, SARS (#) COMPENSATION
- --------------------------- ---------- -------- ------------------ ----------------- --------------
J. Michael Parks....................... $475,000 $ -- $1,800,000 230,000 $ 33,482
Chairman of the Board,
Chief Executive Officer and President
Ivan Szeftel........................... $335,000 $ -- $ 525,000 80,000 $ 21,135
Executive Vice President and
President, Retail Credit Services
Michael A. Beltz....................... $260,000 $ -- $ 525,000 80,000 $ 15,503
Executive Vice President and
President,
Transaction Services Group
John Scullion(3)....................... $255,104 $ -- $ 525,000 80,000 $ 11,993
President and Chief Executive
Officer, The Loyalty Group
Edward K. Mims(4)...................... $214,077 $ -- $ 525,000 80,000 $290,787
Executive Vice President
and Chief Financial Officer
James E. Anderson(5)................... $233,692 $ -- $ 525,000 80,000 $ 17,176
Executive Vice President and
President, Utilities Services
- --------------------------
(1) Bonuses are historically paid each March for the prior year and have not
been determined for the year ended December 31, 2000. Bonuses are determined
based upon the achievement of operating income, various financial and
operational objectives and individual objectives.
74
(2) Amounts in this column represent the value of performance-based restricted
stock awards issued at $15.00 per share. These awards will not vest unless
specific performance measures tied to either EBITDA or return on
stockholders' equity are met. If these performance measures are met, some of
these restricted shares will vest ratably over a five year period and some
will vest on an accelerated basis shorter than five years if certain annual
EBITDA performance targets are met.
(3) Mr. Scullion's salary, bonus and all other compensation are paid in Canadian
dollars. Amounts reflected are converted to U.S. dollars at an average
conversion rate for the year of $0.67.
(4) Mr. Mims commenced employment with us in February 1998 and resigned
effective October 11, 2000. All other compensation includes the lump-sum
payment of $269,923 received in 2000 by Mr. Mims as part of his severance
agreement.
(5) Mr. Anderson commenced employment with us in May 1997 and resigned effective
December 31, 2000.
All other compensation amounts include our matching contributions to the
401(k) and Retirement Savings Plan, the Supplemental Executive Retirement Plan,
the life insurance premiums we pay on behalf of each executive officer and
long-term disability expenses as follows:
LIFE INSURANCE LONG-TERM
401(K) PLAN PREMIUMS SERP DISABILITY SEVERANCE
----------- -------------- -------- ---------- ---------
J. Michael Parks.............................. $11,580 $ 172 $21,730 $ -- $ --
Ivan Szeftel.................................. $11,580 $ 149 $ 9,406 $ -- $ --
Michael A. Beltz.............................. $ 9,980 $ 115 $ 5,408 $ -- $ --
John Scullion................................. $ -- $4,221 $ -- $7,722 $ --
Edward K. Mims................................ $13,180 $ 108 $ 7,577 $ -- $269,923
James E. Anderson............................. $11,580 $ 103 $ 5,493 $ -- $ --
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning option grants
made to the named executive officers during 2000 pursuant to our stock option
plan.
INDIVIDUAL GRANTS
--------------------------------------------------
PERCENTAGE OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM ($)(2)
OPTIONS FISCAL PRICE EXPIRATION -----------------------------
GRANTED(#) YEAR(1) ($/SH) DATE 5% 10%
---------- ------------- -------- ---------- ------------- -------------
J. Michael Parks............ 230,000 8.7% $15.00 9/1/10 $2,169,686 $5,498,411
Ivan Szeftel................ 80,000 3.0% $15.00 9/1/10 $ 754,674 $1,912,491
Michael A. Beltz............ 80,000 3.0% $15.00 9/1/10 $ 754,674 $1,912,491
John Scullion............... 80,000 3.0% $15.00 9/1/10 $ 754,674 $1,912,491
Edward K. Mims(3)........... 80,000 3.0% $15.00 9/1/10 $ 754,674 $1,912,491
James E. Anderson(4)........ 80,000 3.0% $15.00 9/1/10 $ 754,674 $1,912,491
- ------------------------
(1) In 2000, we granted options to purchase a total of 19,331 shares of common
stock at an exercise price of $11.25 per share and options to purchase a
total of 2,629,145 shares of common stock at an exercise price of $15.00 per
share.
(2) In accordance with SEC rules, the amounts shown on this table represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. These gains are based on the
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect our estimates or projections of the future price of our common
stock. The gains shown are net of the
75
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of our common stock, the
option holder's continued employment through the option period, and the date
on which the options are exercised.
(3) Under Mr. Mim's severance agreement, options that were vested as of the date
of his resignation may be exercised by Mr. Mims for a period of up to six
months after that date. One-third of Mr. Mims' unvested options will vest on
August 31, 2001 and be exercisable thereafter for a period of six months.
(4) Under Mr. Anderson's severance agreement, options that were vested as of the
date of his resignation may be exercised through February 2001. One-third of
Mr. Anderson's unvested options will vest on August 31, 2001 and be
exercisable thereafter for a period of six months.
OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth certain information concerning all
unexercised options held by the named executive officers as of December 31,
2000. No options were exercised by the named executive officers during 2000.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------ --------------
J. Michael Parks............................... 298,609 348,056 $694,441 $382,641
Ivan Szeftel................................... 61,111 152,222 $239,444 $273,889
Michael A. Beltz............................... 72,221 141,110 $142,221 $154,441
John Scullion.................................. 41,667 121,666 $129,168 $129,165
Edward K. Mims(2).............................. 36,111 132,777 $ 70,278 $121,942
James E. Anderson(3)........................... 43,055 125,832 $ 85,553 $123,331
- ------------------------
(1) Value for "in-the-money" options represents the positive spread between the
respective exercise prices of outstanding options and the anticipated
initial public offering price of $13.00 per share.
(2) Under Mr. Mim's severance agreement, options that were vested as of the date
of his resignation may be exercised by Mr. Mims for a period of up to six
months after that date. One-third of Mr. Mims' unvested options will vest on
August 31, 2001 and be exercisable thereafter for a period of six months.
(3) Under Mr. Anderson's severance agreement, options that were vested as of the
date of his resignation may be exercised through February 2001. One-third of
Mr. Anderson's unvested options will vest on August 31, 2001 and be
exercisable thereafter for a period of six months.
EMPLOYMENT, SEVERANCE AND INDEMNIFICATION AGREEMENTS
We generally do not to enter into employment agreements with our employees.
However, as part of some of our acquisitions, we have entered into agreements
with selected key individuals to ensure the success of the integration of the
acquisition and long-term business strategies. In addition, we have entered into
employment agreements with Mr. Parks and Mr. Szeftel.
J. MICHAEL PARKS. Mr. Parks entered into an employment agreement effective
March 10, 1997 to serve as our chairman of the board and chief executive
officer. The agreement provides that Mr. Parks will receive a minimum annual
base salary of $475,000. Mr. Parks is entitled to an annual incentive bonus of
$400,000 based on the achievement of our annual financial goals. Under the
agreement, Mr. Parks was granted options to purchase 333,332 shares of our
common stock at an exercise price of $9.00 per share. Of these options, options
to purchase 277,776 shares have vested. The remaining
76
options to purchase 55,556 shares vest in January 2001 upon the achievement of
corporate performance goals. Additionally, Mr. Parks was granted options to
purchase 83,333 shares of our common stock at an exercise price of $9.90 per
share in 1999 and options to purchase 230,000 shares of our common stock at an
exercise price of $15.00 per share in 2000, of which options to purchase 20,833
shares are currently vested. Additionally, Mr. Parks is entitled to participate
in our 401(k) and Retirement Savings Plan, our 1999 Incentive Compensation Plan
and any other employee benefits as provided to other senior executives.
IVAN SZEFTEL. Mr. Szeftel entered into an employment agreement dated
May 4, 1998 to serve as the president of our retail services division. The
agreement provides that Mr. Szeftel is entitled to receive a minimum annual base
salary of $325,000, subject to increases based on annual reviews. Mr. Szeftel is
entitled to an annual incentive bonus of $200,000 based on the achievement of
our annual financial goals. In addition, we granted Mr. Szeftel options to
purchase 111,111 shares of our common stock at an exercise price of $9.00 per
share, of which options to purchase 55,555 shares are currently vested.
Mr. Szeftel holds options to purchase 27,777 shares of common stock which vest
in January 2001 upon the achievement of corporate performance goals,
Mr. Szeftel was granted options to purchase 22,222 shares of our common stock at
an exercise price of $9.90 per share in 1999 and options to purchase 80,000
shares of our common stock at an exercise price of $15.00 per share in 2000, of
which options to purchase 5,556 shares are currently vested. Mr. Szeftel is
entitled to participate in our 401(k) and Retirement Savings Plan, our 1999
Incentive Compensation Plan and any other employee benefits as provided to other
senior executives. Under the agreement, Mr. Szeftel is entitled to severance
payments if we terminate his employment without cause or if Mr. Szeftel
terminates his employment for good reason. In such cases, Mr. Szeftel will be
entitled to six months base salary if terminated in his first year, nine months
base salary if terminated in his second year and 12 months base salary if
terminated after his second year.
EDWARD K. MIMS. In connection with Mr. Mims' resignation as Chief Financial
Officer effective as of October 11, 2000 and his resignation as an employee
effective as of October 31, 2000, we entered into a severance agreement under
which we paid Mr. Mims a lump sum severance payment of $269,923. The severance
agreement provides that Mr. Mims is entitled to an incentive compensation
payment pursuant to the 2000 Incentive Compensation Plan, outplacement benefits,
reimbursement of continuing professional educational expenses and professional
fees through 2001. In addition, options that were vested as of the date of
Mr. Mims' resignation may be exercised by Mr. Mims for a period of up to six
months after that date. One-third of Mr. Mims' unvested options granted pursuant
to our amended and restated stock option plan will vest on August 31, 2001 and
be exercisable thereafter for a period of six months. Mr. Mims is also entitled
to receive a lump sum cash payment pursuant to restricted stock awards if
specified performance targets are met.
JAMES E. ANDERSON. In connection with the resignation of Mr. Anderson as an
officer and an employee effective December 31, 2000, we entered into a severance
agreement with Mr. Anderson that provides for severance pay equal to 52 weeks of
his former annual base salary payable in 26 equal installments. The severance
agreement provides that Mr. Anderson is entitled to an incentive compensation
payment pursuant to the 2000 Incentive Compensation Plan in the amount of
$117,500 and a relocation payment of up to $80,000 if he is relocated and such
costs of relocation are not paid in full by a subsequent employer. In addition,
options that were vested as of the date of Mr. Anderson's resignation may be
exercised through February 2001. One-third of Mr. Anderson's unvested options
granted pursuant to our amended and restated stock option plan will vest on
August 31, 2001 and be exercisable thereafter for a period of six months.
Mr. Anderson is also entitled to receive a lump sum cash payment pursuant to
restricted stock awards if specified performance targets are met.
77
AMENDED AND RESTATED STOCK OPTION AND RESTRICTED STOCK PLAN
We adopted the Amended and Restated Alliance Data Systems Corporation and
its Subsidiaries Stock Option and Restricted Stock Plan in April 2000. This plan
provides for grants of incentive stock options, nonqualified stock options and
restricted stock awards to selected employees, officers, directors and other
persons performing services for us or any of our subsidiaries. We have reserved
a total of 8,753,000 shares of common stock for issuance pursuant to this plan.
As of December 31, 2000, there were 4,882,626 shares of common stock subject to
outstanding options previously granted at a weighted average exercise price of
$12.45 per share.
Under the plan, we may grant incentive stock options to any person employed
on a full-time basis by us or any of our subsidiaries. We may grant nonqualified
stock options and restricted stock awards to any of our stockholders, any
employees of our stockholders that perform services for us and any person
employed by, or performing services for, us or any of our subsidiaries,
including our directors and officers. Our non-employee directors currently
participate in our stock option plan as described in "--Director Compensation"
above. The exercise price for incentive stock options granted under the plan may
not be less than 100% of the fair market value of the common stock on the option
grant date. If an incentive stock option is granted to an employee who owns more
than 10% of our common stock, the exercise price of that option may not be less
than 110% of the fair market value of the common stock on the option grant date.
The exercise price for nonqualified stock options granted under the plan may be
equal to, more than or less than 100% of the fair market value of the common
stock on the option grant date. The options granted under both the current plan
and our prior plan terminate on the tenth anniversary of the date of grant.
The plan also provides for the granting of performance-based restricted
stock awards to our chief executive officer, officers that report directly to
him and certain other officers. The plan gives our committee administering the
plan the sole discretion to determine the vesting provisions for
performance-based restricted stock awards. As of December 31, 2000
performance-based restricted awards representing an aggregate of 687,000 shares
had been granted to 31 officers. The restricted shares subject to these grants
will not vest unless specified performance measures tied to either EBITDA or
return on stockholders' equity are met. If these performance targets are met,
some of these restricted shares will vest over a five year period. However, some
of the restricted shares will vest on a more accelerated basis if certain annual
EBITDA performance targets are met.
The plan provides that our chief executive officer and a committee appointed
by our board of directors will administer the plan. The compensation committee
of our board of directors administers the plan with respect to:
- grants to members of our executive committee, which includes our chief
executive officer, our named executive officers and our directors;
- grants of awards; and
- determining the pool of shares available under options and awards.
Our chief executive officer generally has the authority to administer the
plan and act as the plan's administrative committee, except for grants to
officers that report directly to him, grants of performance-based restricted
stock awards, determining the number of shares available under the plan and
amending the plan for those participants who are not members of the executive
committee or our board of directors.
The plan gives our committee administering the plan the sole discretion to
determine the vesting provisions of each individual stock option. In the event
of a change of control, our plan provides that the committee may provide for
accelerated vesting of options. Options granted on or after September 1, 2000
vest over a three year period from the date of grant. Options issued under our
original option plan vest on a common vesting date, which is the first day of
February. The normal
78
vesting provision for options granted under our prior plan provides for vesting
of 33 1/3% of the options each year over a three-year period, beginning on the
first day of February of the eighth year after the options have been awarded.
However, if we meet the annual operating income goal as determined by our board
of directors, vesting for these options granted under our prior plan can be
accelerated. Our board of directors designates a percentage of these options
that will vest in this accelerated manner if we meet the annual operating income
goal. Historically, this designated percentage has been equal to 25% of the
options granted.
On the date of the public offering, all exempt employees and specific
employees in Canada and New Zealand will receive a one-time grant of options,
ranging from amounts of 100 to 1,000 shares. These options will vest in thirds
over a three-year period beginning on the first anniversary of the date of
grant.
ALLIANCE DATA SYSTEMS 401(K) AND RETIREMENT SAVINGS PLAN
The Alliance Data Systems 401(k) and Retirement Savings Plan is a defined
contribution plan that is qualified under Section 401(k) of the Internal Revenue
Code of 1986. Contributions made by employees or by us to the plan, and income
earned on these contributions, are not taxable to employees until withdrawn from
the plan. The plan covers U.S. employees of ADS Alliance Data Systems, Inc., our
wholly-owned subsidiary, and any other subsidiary or affiliated organization
that adopts this plan. We and all of our U.S. subsidiaries are currently covered
under the plan. All employees who are at least 21 years old and who we have
employed for at least 30 days.
Under this plan, we make regular matching contributions on the first 3% of
each participant's contributions. An additional matching contribution on the
second 3% of each participant's contributions may be made annually at the
discretion of our board of directors. Each of our matching contributions vests
20% over five years for employees with less than five years of service. All
contributions vest immediately if the participating employee retires at age 65,
becomes disabled, dies or is terminated without cause. In addition to matching
contributions, we make a non-discretionary retirement contribution based on the
participant's age and years of service with us. The retirement contributions
become 100% vested once the participant has served five years with us.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
We adopted the ADS Alliance Data Systems, Inc. Supplemental Executive
Retirement Plan in May 1999 to help certain key individuals maximize their
pre-tax savings and company contributions that are otherwise restricted due to
tax limitations. Eligibility under the plan requires an individual to: (1) be a
regular, full-time U.S. employee of ADS Alliance Data Systems, (2) receive
compensation equal to or greater than the IRS compensation limit as of
December 31 of the previous calendar year and (3) be a participant in the
Alliance Data Systems 401(k) and Retirement Savings Plan.
This plan allows the participant to contribute:
- up to 16% of eligible compensation on a pre-tax basis;
- any 401(k) contributions that would otherwise be returned because of
reaching the statutory limit; and
- any retirement savings plan contributions for compensation in excess of
the statutory limits.
The participant is 100% vested in his or her own contributions. A participant
becomes 100% vested in the retirement savings plan contributions after five
continuous years of service. The contributions accrue interest at a rate of 8% a
year, which may be adjusted periodically by the 401(k) and Retirement Savings
Plan Investment Committee.
The participant does not have access to any of the contributions or interest
while actively employed with us, unless the participant experiences an
unforeseeable financial emergency. Loans are
79
not available under this plan. If the participant ceases to be actively
employed, retires or becomes disabled, the participant will receive the value of
his or her account within 60 days of the end of the quarter in which he or she
became eligible for the distribution. A distribution from the plan is taxed as
ordinary income and is not eligible for any special tax treatment.
2000 INCENTIVE COMPENSATION PLAN
The Alliance Data Systems 2000 Incentive Compensation Plan provides an
opportunity for certain U.S. employees to be eligible for a cash bonus based on
achieving certain objectives. To be eligible under the plan, employees must meet
certain eligibility requirements and be selected by the compensation committee.
Under the plan, each participant has an incentive compensation target that
is expressed as a percentage of annual base earnings. The participant's
incentive compensation target is based on various objectives that are weighted
to reflect the participant's contributions to company, business unit and
individual goals, which are established at the beginning of the plan year. The
company objective is based on our operating income, the business unit objective
is based on financial and operational objectives and the individual objectives
are items of importance to us that the individual can impact. The amount of
compensation a participant receives depends on the percentage of objectives that
were achieved. Eighty percent of the objectives must be achieved before a
participant is eligible for any payout. The maximum payout is equal to 150% of
the participant's incentive compensation target.
EMPLOYEE STOCK PURCHASE PLAN
We are implementing an employee stock purchase plan that will become
effective prior to this offering. We intend that the plan will qualify under
section 423 of the Internal Revenue Code. The plan will permit our eligible
employees and those of our designated subsidiaries to purchase our common stock
at a discount to the market price through payroll deductions. No employee may
purchase more than $25,000 in stock under the plan in any calendar year, and no
employee may purchase stock under the plan if such purchase would cause the
employee to own more than 5% of the voting power or value of our common stock.
We have authorized the issuance of up to 1,500,000 shares of common stock under
the plan.
The plan provides for three month offering periods, beginning on each
January 1, April 1, July 1 and October 1. We anticipate that October 1, 2001
will begin the first offering period, but the plan allows the board of directors
to change this date as well as the date, duration and frequency of any future
offering period. The plan will have a term of ten years, unless terminated
sooner by our board of directors pursuant to the provisions of the plan.
On the offering date at the beginning of each offering period, each eligible
employee is granted an option to purchase a number shares of common stock, which
option is exercised automatically on the purchase date at the end of the
offering period. The purchase price of the common stock upon exercise of the
options will be 85% of its fair market value on the offering date or purchase
date, whichever is lower.
80
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of December 31, 2000 by:
(1) each person who is known by us to own beneficially more than 5% of our
common stock;
(2) each current director and director nominee;
(3) each of the named executive officers; and
(4) all directors and executive officers as a group.
Except as indicated in this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. Percentage of ownership is based on 57,619,893 shares of our
common stock outstanding on December 31, 2000, and 70,619,893 shares of our
common stock outstanding after completion of this offering, both of which
reflect the conversion of all outstanding shares of Series A preferred stock
into common shares.
PERCENT OF SHARES
BENEFICIALLY
OWNED(1)
SHARES BENEFICIALLY -------------------
OWNED BEFORE AND BEFORE AFTER
NAME OF BENEFICIAL OWNER AFTER OFFERING(1) OFFERING OFFERING
- ------------------------ ------------------- -------- --------
Welsh, Carson, Anderson & Stowe(2) ......................... 42,826,142 74.3% 60.6%
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Limited Commerce Corp. ..................................... 14,663,376 25.5% 20.8%
Three Limited Parkway
Columbus, Ohio 43230
J. Michael Parks(3)......................................... 298,609 * *
Ivan Szeftel(4)............................................. 61,111 * *
Michael A. Beltz(5)......................................... 72,221 * *
John Scullion(6)............................................ 41,667 * *
Edward K. Mims(7)........................................... 36,111 * *
James E. Anderson(8)........................................ 43,055 * *
Bruce K. Anderson(9)........................................ 355,910 * *
Anthony J. deNicola(9)...................................... 34,166 * *
Robert A. Minicucci(9)...................................... 117,427 * *
All directors and executive officers as a group
(16 individuals)(10)...................................... 1,030,969 1.8% 1.5%
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the SEC's rules. In
computing percentage ownership of each person, shares of common stock
subject to options, warrants or convertible preferred stock held by that
person that are currently exercisable or convertible, or exercisable or
convertible within 60 days of December 31, 2000, are deemed to be
beneficially owned. These shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person.
(2) Includes 10,074,524 shares issuable upon conversion of Series A preferred
stock owned of record by WCAS VIII L.P., WCAS Information Partners, L.P.,
Patrick J. Welsh, Russell L. Carson,
81
Bruce K. Anderson, Richard H. Stowe, Andrew M. Paul, Thomas E. McInerney,
McInerney Gabrielle Family Limited Partnership, Laura M. VanBuren, James B.
Hoover, Robert A. Minicucci, Anthony J. deNicola, Paul B. Queally,
Lawrence B. Sorrel, Priscilla A. Newman, Rudolph E. Rupert, D. Scott
Mackesy, Kenneth Melkus, David F. Bellet, Sean Traynor, John Almeida and
Jonathan M. Rather. Also includes:
- 5,555,550 shares of common stock held by Welsh, Carson, Anderson & Stowe
VI, L.P.,
- 17,922,447 shares of common stock held by Welsh, Carson, Anderson & Stowe
VII, L.P.,
- 7,161,616 shares of common stock held by Welsh, Carson, Anderson & Stowe
VIII, L.P.,
- 109,568 shares of common stock held by WCAS Information Partners LP,
- 268,398 shares of common stock held by WCAS Capital Partners II LP,
- 655,555 shares of common stock held by WCAS Capital Partners III LP,
- 193,990 shares of common stock held by Patrick J. Welsh,
- 11,111 shares of common stock held by Carol Ann Welsh FBO Eric Welsh U/A
dtd 11/26/84,
- 11,111 shares of common stock held by Carol Ann Welsh FBO Randall Welsh
U/A dtd 11/26/84,
- 11,111 shares of common stock held by Carol Ann Welsh FBO Jennifer Welsh
U/A dtd 11/26/84,
- 202,352 shares of common stock held by Russell L. Carson,
- 246,039 shares of common stock held by Bruce K. Anderson,
- 62,225 shares of common stock held by Richard H. Stowe,
- 59,835 shares of common stock held by Andrew M. Paul,
- 51,315 shares of common stock held by Thomas E. McInerney,
- 51,315 shares of common stock held by McInerney Gabrielle Family
Partnership,
- 3,914 shares of common stock held by Laura Van Buren,
- 6,820 shares of common stock held by James B. Hoover,
- 81,051 shares of common stock held by Robert A. Minicucci,
- 23,677 shares of common stock held by Anthony J. deNicola,
- 14,250 shares of common stock held by Paul B. Queally,
- 13,573 shares of common stock held by IRA FBO David F. Bellett DLJSC as
Custodian IRA Rollover Account,
- 5,050 shares of common stock held by David F. Bellett,
- 1,666 shares of common stock held by Kristin M. Anderson,
- 1,666 shares of common stock held by Daniel B. Anderson,
- 1,666 shares of common stock held by Mark S. Anderson,
- 10,101 shares of common stock held by Lawrence Sorrel,
- 2,020 shares of common stock held by Priscilla Newman,
- 10,101 shares of common stock held by Rudolph Rupert, and
- 2,525 shares of common stock held by D. Scott Mackesy.
82
(3) Represents options to purchase 298,609 shares of common stock which are
exercisable within 60 days of December 31, 2000.
(4) Represents options to purchase 61,111 shares of common stock which are
exercisable within 60 days of December 31, 2000.
(5) Represents options to purchase 72,221 shares of common stock which are
exercisable within 60 days of December 31, 2000.
(6) Represents options to purchase 41,667 shares of common stock which are
exercisable within 60 days of December 31, 2000.
(7) Represents options to purchase 36,111 shares of common stock which are
exercisable within 60 days of December 31, 2000.
(8) Represents options to purchase 43,055 shares of common stock which are
exercisable within 60 days of December 31, 2000.
(9) The number of shares beneficially owned by Messrs. Anderson, deNicola and
Minicucci includes 109,871, 10,489 and 36,376 shares issuable upon
conversion of Series A preferred stock, respectively. Each of Messrs.
Anderson, deNicola and Minicucci are partners of Welsh, Carson, Anderson &
Stowe and certain of its affiliates and may be deemed to be the beneficial
owner of the common stock beneficially owned by Welsh Carson and described
in note 2 above.
(10) Includes options to purchase an aggregate of 628,327 shares of common stock
which are exercisable within 60 days of December 31, 2000 held by Messrs.
Parks, Szeftel, Beltz, Mims, James E. Anderson, Armiak, Carter, Heffernan,
Kubic, Melvin, Schumacher, Scullion, Tucker and Walensky and 150,857 shares
issuable upon conversion of Series A preferred stock.
83
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH WELSH, CARSON, ANDERSON & STOWE
Welsh, Carson, Anderson & Stowe VI, L.P., Welsh, Carson, Anderson & Stowe
VII, L.P., Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Capital Partners II,
L.P., WCAS Capital Partners III, L.P., WCAS Information Partners, L.P., WCA
Management Corporation and various individuals who are limited partners of the
Welsh Carson limited partnerships beneficially owned approximately 74.3% of our
outstanding common stock as of December 31, 2000. The individual partners of the
Welsh Carson limited partnerships include Bruce K. Anderson, Anthony J. deNicola
and Robert A. Minicucci, each of whom is a member of our board of directors.
In July 1999, we sold 120,000 shares of Series A preferred stock to Welsh,
Carson, Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P. and 20
individuals who are partners of some or all of the Welsh Carson limited
partnerships for an aggregate purchase price of $120.0 million. The preferred
shares were issued to finance, in part, the acquisition of the network services
business of SPS Payment Systems, Inc. Prior to the completion of this offering,
these preferred shares will be converted into an aggregate of 10,074,524 shares
of our common stock.
In July 1998, we sold 10,101,010 shares of common stock to Welsh, Carson,
Anderson & Stowe VIII, L.P., Welsh, Carson, Anderson & Stowe VII, L.P., WCAS
Information Partners, L.P., and 16 individuals who are partners of some or all
of the Welsh Carson limited partnerships for an aggregate purchase price of
$100.0 million. The shares were issued to finance, in part, the acquisition of
all outstanding stock of Loyalty.
In August 1998, we sold 30,303 shares of common stock to WCAS Capital
Partners II, L.P. for $9.90 per share as consideration for WCAS Capital
Partners II, L.P. extending the maturity of a 10% subordinated note we issued to
it in January 1996 in the principal amount of $30.0 million and originally due
January 24, 2002. Principal on the note is due on October 25, 2005 and interest
is payable semi-annually in arrears on each January 1 and July 1. The note was
originally issued to finance, in part, the acquisition of BSI Business
Services, Inc., now known as ADS Alliance Data Systems, Inc. This note will be
paid in full with the proceeds of this offering.
In September 1998, we issued 655,555 shares of common stock to WCAS Capital
Partners III, L.P. and issued a 10% subordinated note to WCAS Capital Partners
III, L.P. in the principal amount of $52.0 million to finance, in part, the
acquisition of Harmonic Systems Incorporated. Principal on the note is due in
two equal installments on September 15, 2007 and September 15, 2008. Interest is
payable semi-annually in arrears on each March 15 and September 15. This note
will be paid in full with the proceeds of this offering.
We paid Welsh, Carson, Anderson & Stowe $2.0 million in 1998 and $1.2
million in 1999 for investment banking services rendered in connection with our
acquisitions.
TRANSACTIONS WITH THE LIMITED
Limited Commerce Corp. beneficially owned approximately 25.5% of our common
stock as of December 31, 2000. Limited Commerce Corp. is indirectly owned by The
Limited, Inc. Therefore, The Limited, Inc., a significant customer of ours,
indirectly owns one of our principal stockholders. Pursuant to a stockholders
agreement with Welsh Carson and Limited Commerce Corp., Limited Commerce Corp.
has the right to maintain two designees on our board of directors.
Mr. Finkelman and Mr. Soll are the current Limited Commerce Corp. designees on
our board of directors.
The Limited, Inc. operates through a variety of retail and catalog
affiliates that operate under different names, including Bath & Body Works, The
Limited Stores, Structure, Victoria's Secret Catalogue, Victoria's Secret Store,
Lerner New York, Lane Bryant and Express. Many of these affiliates
84
have entered into credit card processing agreements with World Financial. These
affiliates of The Limited represented approximately 65% of our credit card
receivables as of September 30, 2000.
Pursuant to these credit card processing agreements, World Financial
provides credit card processing services and issues private label credit cards
on behalf of the businesses. Under these agreements, World Financial pays the
business an amount equal to the amount charged by the business's customers using
the private label credit card issued by World Financial, less a discount, which
varies among agreements. World Financial assumes the credit risk for these
credit card transactions. Payments are also made to World Financial from the
businesses relating to credit card issuance and processing.
Most of these credit card processing agreements were entered into in 1996
and expire in 2006. These agreements give the businesses various termination
rights, including the ability to terminate these contracts under certain
circumstances after the first six years if World Financial is unable to remain
competitive with independent third parties that provide similar services.
In general, World Financial owns information relating to the holders of
credit cards issued under these agreements, but World Financial is prohibited
from disclosing information about these holders to third parties that The
Limited determines competes with The Limited or its affiliated businesses. World
Financial is also prohibited from providing marketing services to competitors of
The Limited or its affiliated businesses as determined by The Limited. World
Financial may provide marketing services to other third parties that are not
competitors of The Limited or its affiliated businesses, but it must share
revenue from these services with The Limited and its affiliated businesses.
We periodically enter into agreements with various retail affiliates of The
Limited to provide database marketing programs and projects. These agreements
are generally short-term in nature, ranging from three to six months.
In September 2000, our subsidiary, ADS Alliance Data Systems, Inc., entered
into a marketing database services agreement with The Limited, Inc. and one of
its affiliates, Intimate Brands, Inc., which wholly owns Victoria's Secret and
Bath & Body Works. In this agreement, ADS agreed to provide an information
database system capable of capturing certain consumer information when a
consumer makes a purchase, excluding purchases for credit or financial products,
at Bath & Body Works, The Limited Stores, Structure, Victoria's Secret Store,
Lerner New York, Lane Bryant and Express, and to provide database marketing
services. Under the agreement, ADS has the right to sell, subject to the privacy
policies of The Limited and Intimate Brands, data provided to ADS by affiliates
of The Limited under the agreement, subject to the consent of The Limited and
Intimate Brands. However, ADS is prohibited from disclosing or selling any of
this information to third parties who, in the sole judgement of The Limited and
Intimate Brands, compete with affiliates or subsidiaries of The Limited. ADS is
required to share revenues generated by the sale of such data with The Limited
and Intimate Brands. This agreement expire in 2003, but can be terminated
earlier by The Limited and Intimate Brands if we fail to meet specified service
standards.
We received total revenues directly from The Limited and its retail
affiliates of $37.5 million during fiscal 1997, $30.6 million during fiscal
1998, $46.6 million during fiscal 1999 and $32.0 million during the nine months
ended September 30, 2000.
In August 1998, we sold 20,202 shares of common stock to Limited Commerce
Corp. for $9.90 per share as consideration for Limited Commerce Corp. extending
the maturity of a 10% subordinated note we issued in January 1996 to WCAS
Capital Partners II, L.P., which sold the note to Limited Commerce Corp. The
note is in the principal amount of $20.0 million and was originally due
January 24, 2002. Principal on the note is due on October 25, 2005 and interest
is payable semi-annually in arrears on each January 1 and July 1. The note was
originally issued to finance, in part, the acquisition of BSI Business
Services, Inc., now known as ADS Alliance Data Systems, Inc. This note will be
paid in full with the proceeds of this offering.
85
STOCKHOLDERS AGREEMENT WITH WELSH CARSON AND THE LIMITED
In connection with the above sale of shares to the Welsh Carson affiliates
and Limited Commerce Corp., we entered into a stockholders agreement, as
amended, with Limited Commerce Corp., various Welsh Carson affiliates and
various individual stockholders who are partners in some or all of the Welsh
Carson limited partnerships. This agreement contains transfer restrictions,
various stockholder rights, registration rights, provisions allowing Welsh
Carson and Limited Commerce Corp. to designate a portion of our board of
directors, provisions relating to the amendment of our certificate of
incorporation and bylaws and capital calls. Welsh Carson also has the right to
appoint a representative to attend and participate in board and committee
meetings. The Welsh Carson affiliates and Limited Commerce Corp. have waived
their registration rights in connection with this offering. Upon completion of
this offering, this stockholders agreement will be replaced with a new agreement
with the Welsh Carson affiliates and Limited Commerce Corp.
Under the new stockholders agreement, the Welsh Carson affiliates and
Limited Commerce Corp. will each have two demand registration rights, as well as
"piggyback" registration rights. The demand rights will enable the Welsh Carson
affiliates and Limited Commerce Corp. to require us to register their shares
with the SEC under the Securities Act at any time after the consummation of this
initial public offering. Piggyback rights will allow the Welsh Carson affiliates
and Limited Commerce Corp. to register the shares of our common stock that they
purchased along with any shares that we register with the SEC. These
registration rights are subject to customary conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares.
Under the new stockholders agreement, the size of our board of directors is
set at nine. Welsh Carson has the right to designate up to three nominees for
election to the board of directors as long as it owns more than 20% of our
common stock. Limited Commerce Corp. has the right to designate up to two of the
members as long as it owns more than 10% of our common stock and one of the
members as long as it owns between 5% and 10% of our common stock.
U.S. LOYALTY PROGRAM
We have evaluated the creation of a loyalty program in the U.S. similar to
our Air Miles reward program in Canada. Because of the significant funding
requirements to establish such a program, we have decided not to pursue the
program. Our existing stockholders have decided to pursue the program through a
separate company called U.S. Loyalty Corp., which they have funded. We do not
and will not have any ownership interest in U.S. Loyalty Corp.
We intend to provide various services to U.S. Loyalty Corp. including
management support, accounting, transaction processing, data processing and
marketing under various agreements that we plan to enter into with U.S. Loyalty
Corp. We contemplate that such agreements will include a management agreement,
an employee lease agreement, a processing agreement and a royalty agreement.
Under the royalty agreement, we will enable U.S. Loyalty Corp. to use the Air
Miles brand name and business concept in the United States.
The stockholders of U.S. Loyalty Corp. include Welsh Carson and Limited
Commerce Corp. as well as all of our directors and officers who have options to
purchase shares of our common stock. Robert A. Minicucci, who is a stockholder
and one of our directors, is the sole director and an officer and a stockholder
of U.S. Loyalty Corp. The board of directors of U.S. Loyalty Corp. will consist
of up to three Welsh Carson designees and up to two designees of The Limited.
We have no rights to share in any profits that might be earned by U.S.
Loyalty Corp. Any sums of money received by us from U.S. Loyalty Corp. will be
limited to amounts paid to us under the above agreements, which are being
negotiated on an arm's-length basis.
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INTERCOMPANY INDEBTEDNESS
In December 1998, our subsidiaries issued to us revolving promissory notes,
due November 30, 2002, as described below. Principal payments are due on demand.
These notes are still outstanding except that the note issued to us by ADS
Alliance Data Systems, Inc. in December 1998 was canceled in connection with ADS
Alliance Data Systems, Inc. issuing us a new revolving promissory note in
January 2000. The notes with our subsidiaries accrue interest at 10% per annum
and interest is payable quarterly or upon demand.
AMOUNT OF PRINCIPAL
OUTSTANDING AS OF
CREDIT LINE SEPTEMBER 30, 2000
------------ -------------------
World Financial Network National Bank note.................. $100,000,000 $ --
ADS Alliance Data Systems, Inc. note........................ 300,000,000 265,000,000
Alliance Data Systems (New Zealand) Limited note............ 11,250,000 9,750,000
Loyalty Management Group Canada Inc. note................... 20,000,000 --
87
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of 200,000,000 shares of common stock, par value $0.01 per share, of
which 70,619,893 shares will be issued and outstanding, and 20,000,000 shares of
preferred stock, par value $0.01 per share, of which no shares will be
outstanding. The following summary of our capital stock is qualified in its
entirety by reference to our certificate of incorporation and our bylaws filed
as exhibits to this registration statement.
COMMON STOCK
Our common stockholders are entitled to one vote for each share on all
matters voted upon by our stockholders, including the election of directors, and
do not have cumulative voting rights. Subject to the rights of holders of any
then outstanding shares of our preferred stock, our common stockholders are
entitled to any dividends that may be declared by our board of directors.
Holders of our common stock are entitled to share ratably in our net assets upon
our dissolution or liquidation after payment or provision for all liabilities
and any preferential liquidation rights of our preferred stock then outstanding.
Our common stockholders have no preemptive rights to purchase shares of our
stock. The shares of our common stock are not subject to any redemption
provisions and are not convertible into any other shares of our capital stock.
All outstanding shares of our common stock are, and the shares of common stock
to be issued in the offering will be, upon payment therefor, fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock will be subject to those of the holders of any shares of our preferred
stock we may issue in the future.
PREFERRED STOCK
Our board of directors may from time to time authorize the issuance of one
or more classes or series of preferred stock without stockholder approval.
Subject to the provisions of our certificate of incorporation and limitations
prescribed by law, our board of directors is authorized to adopt resolutions to
issue shares, establish the number of shares, change the number of shares
constituting any series, and provide or change the voting powers, designations,
preferences and relative rights, qualifications, limitations or restrictions on
shares of our preferred stock, including dividend rights, terms of redemption,
conversion rights and liquidation preferences, in each case without any action
or vote by our stockholders.
One of the effects of undesignated preferred stock may be to enable our
board of directors to discourage an attempt to obtain control of our company by
means of a tender offer, proxy contest, merger or otherwise. The issuance of
preferred stock may adversely affect the rights of our common stockholders by,
among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control without further action by the
stockholders.
SERIES A PREFERRED STOCK
Upon consummation of the offering, all of the outstanding shares of
Series A preferred stock will be converted into shares of common stock and there
will be no Series A preferred stock outstanding. The shares of Series A
preferred stock will convert into a number of common shares equal to the per
share dividend preference amount plus accrued dividends, divided by the lesser
of (1) $13.50 and (2) the initial public offering price.
EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon consummation of the offering there will be 200,000,000 authorized but
unissued shares of our common stock and 20,000,000 shares of preferred stock
available for our future issuance without stockholder approval. Of the shares of
common stock available for future issuance, 8,753,000 shares have been reserved
for issuance under our stock option and restricted stock purchase plan.
88
Shares of common stock and preferred stock available for future issuance may
be utilized for a variety of corporate purposes, including to facilitate
acquisitions or future public offerings to raise additional capital. We do not
currently have any plans to issue additional shares of common stock or preferred
stock, other than shares of common stock issuable under our stock option plan.
ANTI-TAKEOVER CONSIDERATIONS AND SPECIAL PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS. A number of provisions of our
certificate of incorporation and bylaws concern matters of corporate governance
and the rights of our stockholders. Provisions such as those that provide for
the classification of our board of directors and that grant our board of
directors the ability to issue shares of preferred stock and to set the voting
rights, preferences and other terms thereof may have an anti-takeover effect by
discouraging takeover attempts not first approved by our board of directors,
including takeovers which may be considered by some stockholders to be in their
best interests. To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of our common stock, which may result from
actual or rumored takeover attempts, may be inhibited. Such provisions also
could delay or frustrate the removal of incumbent directors or the assumption of
control by stockholders, even if such removal or assumption would be beneficial
to our stockholders. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even if they could be
favorable to the interests of stockholders, and could potentially depress the
market price of our common stock. Our board of directors believes that these
provisions are appropriate to protect our interests and the interests of our
stockholders.
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation divides our
board of directors into three classes. The directors in each class serve in
terms of three years and until their successors are duly elected and qualified.
The terms of directors are staggered by class. The classification system of
electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of our company and may maintain
the incumbency of our board of directors, as this structure generally increases
the difficulty of, or may delay, replacing a majority of the directors. Our
bylaws provide that directors may be removed only for cause by the holders of a
majority of the shares entitled to vote at an election of directors. A majority
of the directors then in office may elect a successor to fill any vacancies or
newly created directorships.
MEETINGS OF STOCKHOLDERS. Our bylaws provide that annual meetings of our
stockholders may take place at the time and place established by our board of
directors, provided that the date is not more than 120 days after the end of our
fiscal year. A special meeting of our stockholders may be called by our board of
directors or our chief executive officer and will be called by our chief
executive officer or secretary upon written request by a majority of our board
of directors.
ADVANCE NOTICE PROVISIONS. Our bylaws provide that nominations for
directors may not be made by stockholders at any annual or special meeting
thereof unless the stockholder intending to make a nomination notifies us of its
intention a specified number of days in advance of the meeting and furnishes to
us certain information regarding itself and the intended nominee. Our bylaws
also require a stockholder to provide to our secretary advance notice of
business to be brought by such stockholder before any annual or special meeting
of our stockholders, as well as certain information regarding the stockholder
and any material interest the stockholder may have in the proposed business.
These provisions could delay stockholder actions that are favored by the holders
of a majority of our outstanding stock until the next stockholders' meeting.
AMENDMENT OF THE BYLAWS. Our bylaws may be altered, amended, repealed or
replaced by our board of directors or our stockholders at any annual or regular
meeting, or at any special meeting if notice of the alteration, amendment,
repeal or replacement is given in the notice of the meeting.
89
DELAWARE ANTI-TAKEOVER LAW. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law regulating corporate
takeovers. This section prevents certain Delaware corporations, under certain
circumstances, from engaging in a "business combination" with:
- a stockholder who owns 15% or more of our outstanding voting stock
(otherwise known as an "interested stockholder"),
- an affiliate of an interested stockholder, or
- an associate of an interested stockholder,
for three years following the date that the stockholder became an "interested
stockholder." A "business combination" includes a merger or sale of more than
10% of our assets.
However, the above provisions of Section 203 do not apply if:
- our board approves the transaction that made the stockholder an
"interested stockholder," prior to the date of that transaction;
- after the completion of the transaction that resulted in the stockholder
becoming an "interested stockholder," that stockholder owned at least 85%
of our voting stock outstanding at the time the transaction commenced,
excluding shares owned by our officers and directors; or
- on or subsequent to the date of the transaction, the business combination
is approved by our board and authorized at a meeting of our stockholders
by an affirmative vote of at least two-thirds of the outstanding voting
stock not owned by the "interested stockholder."
This statute could prohibit or delay mergers or other change in control
attempts, and thus may discourage attempts to acquire us.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, to the fullest extent permitted by Delaware law.
Our certificate of incorporation and bylaws provide that:
- we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by applicable law;
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
Prior to the consummation of this offering, we intend to obtain directors'
and officers' insurance for our directors, officers and some employees for
specified liabilities.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also have the effect of reducing the likelihood of derivative litigation
against directors and officers, even though an action of this kind, if
successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholders' investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers pursuant to
these indemnification provisions. However, we believe that these indemnification
provisions are necessary to attract and retain qualified directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
90
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial number of shares of our common stock in the
public market could adversely affect trading prices prevailing from time to
time. As of December 31, 2000, principal stockholders held 57,489,518 shares,
representing 99.8% of the outstanding shares of our common stock. After this
offering, we will have 70,619,893 shares of our common stock outstanding. Of
these shares, all shares sold in the offering, other than shares, if any,
purchased by our affiliates, will be freely tradable. Of the remaining
57,619,893 shares, 10,625 shares will be freely transferable and 57,609,268
shares will be "restricted securities" as that term is defined in Rule 144 under
the Securities Act. Restricted shares may be sold in the public market only if
such sale is registered under the Securities Act or if such sale qualifies for
an exemption from registration, such as the one provided by Rule 144. Sales of
the restricted shares in the open market, or the availability of such shares for
sale, could adversely affect the trading price of our common stock.
LOCK-UP AGREEMENTS
Executive officers, directors and other stockholders who hold in the
aggregate approximately 57,252,490 shares of our common stock and options to
purchase approximately 3,012,524 shares of our common stock, have agreed not to
sell or otherwise dispose of any shares of our common stock for a period of 180
days after the date of this prospectus, without the prior written consent of
Bear, Stearns & Co. Inc. The underwriters do not intend to release the executive
officers, directors or other stockholders, including Welsh Carson and Limited
Commerce Corp., from the lock-up agreements; however, any of these stockholders
could be released from the lock-up agreements prior to expiration without
notice.
RULE 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year following the later of the date of the acquisition of such shares
from the issuer or from an affiliate of the issuer would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of our common stock then outstanding; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years following the later of the
date of the acquisition of such shares from the issuer or an affiliate of the
issuer, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
RULE 701
In general, under Rule 701, subject to the lock-up agreements described
above, employees or directors who purchase shares from us in connection with our
stock option plan or other written agreements are eligible to resell these
shares 90 days after the date of this offering in reliance on Rule 144, without
compliance with certain restrictions contained in Rule 144, including the
holding period.
We intend to file a registration statement on Form S-8 to register shares of
common stock reserved for issuance under our stock option plan. This
registration statement will permit the resale of shares issued under the stock
option plan by non-affiliates in the public market without restriction, subject
to the lock-up agreements.
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UNDERWRITING
UNDERWRITING AGREEMENT. Subject to the terms and conditions set forth in an
underwriting agreement among us and the underwriters, each of the underwriters
named below, for whom Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Credit Suisse First Boston are acting as representatives,
has severally agreed to purchase from us the number of shares of common stock
set forth opposite its name below:
NUMBER OF
UNDERWRITER SHARES
- ----------- ----------
Bear, Stearns & Co. Inc.....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
Credit Suisse First Boston..................................
----------
Total.................................................. 13,000,000
==========
The obligations of the underwriters under the underwriting agreement are
several and not joint. This means that each underwriter is obligated to purchase
from us only the number of shares of common stock set forth opposite its name in
the table above. Except in limited circumstances set forth in the underwriting
agreement, an underwriter has no obligation in relation to the shares of common
stock which any other underwriter has agreed to purchase.
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of common stock if any are purchased.
PUBLIC OFFERING PRICE AND DEALERS CONCESSION. The underwriters propose
initially to offer the shares of common stock offered by this prospectus to the
public at the initial public offering price per share set forth on the cover
page of this prospectus and to certain dealers at that price less a concession
not in excess of $ per share. The underwriters may allow, and these dealers may
reallow, concessions not in excess of $ per share on sales to certain other
dealers. After commencement of this offering, the offering price, concessions
and other selling terms may be changed by the underwriters. No such change will
alter the amount of proceeds to be received by us as set forth on the cover page
of this prospectus.
OVER-ALLOTMENT OPTION. We have granted the underwriters an option, which
may be exercised within 30 days after the date of this prospectus, to purchase
up to 1,950,000 additional shares of common stock to cover over-allotments, if
any, at the initial public offering price less the underwriting discount, each
as set forth on the cover page of this prospectus. If the underwriters exercise
this option in whole or in part, each of the underwriters will be severally
committed, subject to certain conditions, to purchase these additional shares of
common stock in proportion to their respective purchase commitments as indicated
in the preceding table and we will be obligated to sell these additional shares
to the underwriters. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered by this prospectus. These additional shares will be sold by the
underwriters on the same terms as those on which the shares offered by this
prospectus are being sold.
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UNDERWRITING COMPENSATION. The following table summarizes the compensation
to be paid to the underwriters by us in connection with this offering:
TOTAL
------------------------------------------
WITHOUT EXERCISE OF WITH EXERCISE OF THE
THE OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- ------------------- --------------------
Underwriting discounts...........
INDEMNIFICATION AND CONTRIBUTION. In the underwriting agreement, we have
agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in connection with these liabilities.
DISCRETIONARY ACCOUNTS. The underwriters have informed us that they do not
intend to confirm sales to any account over which they exercise discretionary
authority.
LOCK-UP AGREEMENTS. We, all of our directors and executive officers and
other stockholders, including Welsh, Carson and Limited Commerce Corp., holding
an aggregate of approximately 57,252,490 shares of our common stock, and options
to purchase approximately 3,012,524 shares of our common stock, have agreed not
to sell or offer to sell or otherwise dispose of any shares of our common stock,
subject to certain exceptions, for a period of 180 days after the date of this
prospectus, without the prior written consent of Bear, Stearns & Co. Inc. The
underwriters do not intend to release the executive officers, directors or other
stockholders, including Welsh, Carson and Limited Commerce Corp., from the
lock-up agreements; however, any of these stockholders could be released from
the lock-up agreements prior to expiration without notice.
DETERMINATION OF OFFERING PRICE. Prior to this offering, there has been no
market for our common stock. Accordingly, the initial public offering price for
the common stock was determined by negotiation between us and the
representatives of the underwriters. Among the factors considered in these
negotiations were:
- the results of our operations in recent periods;
- our financial condition;
- estimates of our future prospects and of the prospects for the industry in
which we compete;
- an assessment of our management;
- the general state of the securities markets at the time of this offering;
and
- the prices of similar securities of companies considered comparable to us.
We are applying to have our common stock listed on the New York Stock
Exchange under the symbol "ADS". There can be no assurance, however, that an
active or orderly trading market will develop for our common stock or that our
common stock will trade in the public markets after this offering at or above
the initial offering price.
RESERVED SHARE PROGRAM. The underwriters have reserved for sale, at the
initial public offering price, up to 650,000 shares of our common stock for our
employees, directors and other persons or entities with whom we have a business
relationship. The number of shares available for sale to the general public in
the offering will be reduced to the extent those persons purchase these reserved
shares. Purchases of reserved shares are to be made through accounts at Merrill
Lynch, Pierce, Fenner & Smith Incorporated in accordance with its procedures for
opening accounts and transacting in securities. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares offered in this offering.
PROSPECTUS IN ELECTRONIC FORMAT. CSFBdirect Inc., an affiliate of Credit
Suisse First Boston, is making a prospectus in electronic format available on
its Internet Web site. The underwriters have agreed to allocate a limited number
of shares to CSFBdirect for sale to its qualified brokerage account
93
holders. Other than the prospectus in electronic format, the information on such
Web site is not part of this prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter in such capacity and should not be relied on by prospective
investors.
STABILIZATION AND OTHER TRANSACTIONS. In order to facilitate this offering,
persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during and
after this offering, including over-allotment, stabilizing and short-covering
transactions and the imposition of penalty bids. Specifically, the underwriters
may over-allot or otherwise create a short position in the common stock for
their own account by selling more shares of common stock than have been sold to
them by us. The underwriters may elect to cover this short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids, under which selling concessions allowed to syndicate members or other
broker-dealers participating in this offering are reclaimed if shares of common
stock previously distributed in this offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales.
No representation is made as to the magnitude or effect of these stabilization
transactions. These transactions may be effected on the New York Stock Exchange
or otherwise and, if commenced, may be discontinued at any time.
NYSE UNDERTAKING. Bear, Stearns & Co. Inc., on behalf of the underwriters,
has undertaken with the New York Stock Exchange to meet the New York Stock
Exchange distribution standards of 2,000 round lot holders with 100 shares or
more, with 1.1 million shares outstanding and a minimum public market value of
$60.0 million.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Akin, Gump, Strauss, Hauer & Feld, L.L.P. Legal matters in
connection with this offering will be passed upon for the underwriters by
Gibson, Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of Alliance Data Systems Corporation
and subsidiaries as of December 31, 1998 and 1999 and for the year ended
December 31, 1999, the eleven months ended December 31, 1998 and the 53 week
period ended January 31, 1998 included in this prospectus and the related
financial statement schedules included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement
(which reports express an unqualified opinion and include an explanatory
paragraph related to the restatement described in note 22) and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of SPS Network Services for the year ended
December 31, 1998 and the six months ended June 30, 1999 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
94
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the common stock sold in this
offering. This prospectus does not contain all of the information set forth in
the registration statement and the accompanying exhibits and schedules. For
further information about us and our common stock, we refer you to the
registration statement and the accompanying exhibits and schedules. Statements
contained in this prospectus regarding the contents of any contract or any other
document to which we refer are not necessarily complete. In each instance,
reference is made to the copy of the contract or document filed as an exhibit to
the registration statement, and each statement is qualified in all respects by
that reference. Copies of the registration statement and the accompanying
exhibits and schedules may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Securities and Exchange Commission located at Seven World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may be
obtained at prescribed rates from the Public Reference Room of the Securities
and Exchange Commission Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the site is http://www.sec.gov.
After this offering, we will become subject to the information and reporting
requirements of the Securities Exchange Act. As a result, we will file periodic
reports, proxy statements and other information with the Securities and Exchange
Commission.
95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
PAGE
--------
ALLIANCE DATA SYSTEMS CORPORATION AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations for the fifty-three
weeks ended January 31, 1998, the eleven months ended
December 31, 1998 and the year ended December 31, 1999.... F-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-4
Consolidated Statements of Stockholders' Equity for the
fifty-three weeks ended January 31, 1998, the eleven
months ended December 31, 1998 and the year ended
December 31, 1999......................................... F-5
Consolidated Statements of Cash Flows for the fifty-three
weeks ended January 31, 1998, the eleven months ended
December 31, 1998 and the year ended December 31, 1999.... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1999 and 2000..... F-32
Consolidated Balance Sheets as of December 31, 1999
(audited) and September 30, 2000 (unaudited).............. F-33
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 2000..... F-34
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-35
SPS NETWORK SERVICES
Independent Auditors' Report................................ F-38
Statements of Income for the year ended December 31, 1998
and the six months ended June 30, 1999.................... F-39
Statements of Changes in Net Assets for the year ended
December 31, 1998 and the six months ended June 30,
1999...................................................... F-40
Statements of Cash Flows for the year ended December 31,
1998 and the six months ended June 30, 1999............... F-41
Notes to Financial Statements............................... F-42
F-1
ALLIANCE DATA SYSTEMS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Alliance Data Systems Corporation
We have audited the accompanying consolidated balance sheets of Alliance
Data Systems Corporation and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the 53 weeks ended January 31, 1998, the eleven months ended
December 31, 1998 and the year ended December 31, 1999. 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 of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies as of
December 31, 1998 and 1999, and the results of their operations and their cash
flows for the respective stated periods in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 22, the accompanying consolidated financial statements
have been restated.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 1, 2000 (January 23, 2001 as to Note 22)
F-2
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
53 WEEKS 11 MONTHS
ENDED ENDED YEAR ENDED
JANUARY 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
---------------- ----------------- ------------------
(AS RESTATED--SEE NOTE 22)
Revenues
Transaction and marketing services........ $225,504 $264,928 $368,026
Redemption revenue........................ -- 17,000 59,017
Financing charges, net.................... 127,007 119,352 141,947
Other income.............................. 888 9,633 14,092
-------- -------- --------
Total revenue......................... 353,399 410,913 583,082
-------- -------- --------
Operating expenses
Cost of operations........................ 256,222 319,806 456,908
General and administrative................ 32,225 33,587 45,919
Depreciation and other amortization....... 7,402 8,270 16,183
Amortization of purchased intangibles..... 28,159 43,766 61,617
-------- -------- --------
Total operating expenses.............. 324,008 405,429 580,627
-------- -------- --------
Operating income.............................. 29,391 5,484 2,455
Interest expense.............................. 15,459 27,884 42,785
-------- -------- --------
Income (loss) from continuing operations
before income taxes......................... 13,932 (22,400) (40,330)
Income tax expense (benefit).................. 5,236 (4,708) (6,538)
-------- -------- --------
Income (loss) from continuing operations...... 8,696 (17,692) (33,792)
Income (loss) from discontinued operations,
net of income taxes......................... (8,247) (300) 7,688
Loss on disposal of discontinued operations,
net of income taxes......................... -- -- (3,737)
-------- -------- --------
Net income (loss)............................. $ 449 $(17,992) $(29,841)
======== ======== ========
Earnings (loss) from continuing operations per
share--basic and diluted.................... $ 0.24 $ (0.42) $ (0.78)
======== ======== ========
Earnings (loss) per share--basic and
diluted..................................... $ 0.01 $ (0.43) $ (0.86)
======== ======== ========
Weighted average shares--basic and diluted.... 36,612 41,729 47,498
======== ======== ========
See accompanying notes
F-3
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------------
1998 1999
---------- ----------
(AS RESTATED--SEE NOTE 22)
ASSETS
Cash and cash equivalents................................... $ 47,036 $ 56,546
Redemption settlement assets................................ 70,178 133,650
Trade receivables less allowance for doubtful accounts
($3,576
and $1,079 at December 31, 1998 and 1999, respectively)... 143,286 69,085
Credit card receivables and seller's interest less allowance
for
doubtful accounts ($4,888 and $3,657 at December 31, 1998
and 1999, respectively)................................... 139,458 150,804
Deferred tax asset, net..................................... 3,051 26,416
Other current assets........................................ 50,691 34,148
---------- ----------
Total current assets................................ 453,700 470,649
Property and equipment, net................................. 66,339 89,231
Deferred tax asset, net..................................... 23,967 38,201
Other non-current assets.................................... 47,462 31,470
Due from securitizations.................................... 121,442 144,484
Intangible assets and goodwill, net......................... 362,797 493,609
---------- ----------
Total assets........................................ $1,075,707 $1,267,644
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 44,327 $ 83,976
Accrued expenses............................................ 58,590 75,646
Other liabilities........................................... 18,678 11,321
Debt, current portion....................................... 148,149 118,225
---------- ----------
Total current liabilities........................... 269,744 289,168
Other liabilities........................................... 21,131 32,752
Deferred revenue--service................................... 64,609 84,474
Deferred revenue--redemption................................ 93,583 164,867
Long-term and subordinated debt............................. 331,835 316,911
---------- ----------
Total liabilities................................... 780,902 888,172
---------- ----------
Commitments and contingencies
Series A cumulative convertible preferred stock, $0.01 par
value;
120 shares authorized, issued and outstanding............. -- 119,400
Stockholders equity:
Common stock, $0.01 par value; authorized 50,000 shares
(December 31, 1998), and 66,667 shares (December 31,
1999),
issued and outstanding, 47,487 shares (December 31, 1998)
and 47,529
shares (December 31, 1999)................................ 475 475
Additional paid-in capital.................................. 225,797 226,174
Retained earnings........................................... 67,534 37,693
Accumulated other comprehensive income (loss)............... 999 (4,270)
---------- ----------
Total stockholders' equity.......................... 294,805 260,072
---------- ----------
Total liabilities and stockholders' equity.......... $1,075,707 $1,267,644
========== ==========
See accompanying notes
F-4
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AS RESTATED--SEE NOTE 22)
(AMOUNTS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER TOTAL TOTAL
PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS LOSS EQUITY
-------- -------- ---------- -------- ------------- ------------- -------------
FEBRUARY 1, 1997............ 36,608 $ 366 $118,768 $ 85,077 $ -- $204,211
Net income.................. 449 449 449
Common stock issued......... 11 96 96
------- ------ -------- -------- ------- --------
JANUARY 31, 1998............ 36,619 366 118,864 85,526 -- 204,756
Net loss.................... (17,992) $(17,992) (17,992)
Other comprehensive loss,
net of tax:
Unrealized gain on
securities
available-for-sale,
net................... 1,207 1,207 1,207
Foreign currency
translation
adjustments........... (208) (208) (208)
-------
Other comprehensive loss.... 999
--------
Total comprehensive loss.... $(16,993)
========
Common stock issued......... 10,868 109 106,933 107,042
------- ------ -------- -------- ------- --------
DECEMBER 31, 1998........... 47,487 475 225,797 67,534 999 294,805
Net loss.................... (29,841) $(29,841) (29,841)
Other comprehensive loss,
net of tax:
Unrealized loss on
securities
available-for-sale,
net................... (4,684) (4,684) (4,684)
Foreign currency
translation
adjustments........... (585) (585) (585)
-------
Other comprehensive loss.... (5,269)
--------
Total comprehensive loss.... $(35,110)
========
Common stock issued......... 42 -- 377 377
------- ------ -------- -------- ------- --------
DECEMBER 31, 1999........... 47,529 $ 475 $226,174 $ 37,693 $(4,270) $260,072
======= ====== ======== ======== ======= ========
See accompanying notes
F-5
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
53 WEEKS 11 MONTHS
ENDED ENDED YEAR ENDED
JANUARY 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
(AS RESTATED--SEE NOTE 22)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations......... $ 8,696 $ (17,692) $ (33,792)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Income (loss) from discontinued operations....... (8,247) (300) 7,688
Loss on disposal of discontinued operations...... -- -- (3,737)
Depreciation and amortization.................... 35,561 52,036 77,800
Provision (credit) for doubtful accounts......... (294) (3,383) (3,540)
Change in operating assets:
Deferred income taxes.......................... (4,597) (12,372) (37,600)
Impairment of assets........................... -- 4,000 --
Accretion of deferred income................... (5,934) (9,395) (5,950)
Change in trade accounts receivables........... (75,876) (20,868) 81,276
Change in accounts payable and accrued
expenses..................................... 15,393 6,076 47,667
Change in other assets......................... 1,659 (16,686) 33,449
Change in deferred revenue..................... -- 15,520 91,149
Other operating activities..................... -- 276 (14,405)
Change in other liabilities.................... 2,961 12,099 11,621
--------- --------- ---------
Net cash provided by (used in) operating
activities................................. (30,678) 9,311 251,638
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities........................... -- (14,704) (12,314)
Increase in restricted cash and cash
equivalents.................................... -- -- (51,662)
Purchase of credit card receivables.............. (344,464) -- (33,817)
Change in due from securitizations............... (46,456) 5,470 (26,404)
Net cash paid for corporate acquisition.......... (716) (138,825) (171,423)
Change in intangible assets...................... (8,715) -- --
Proceeds from sale of credit card receivable
portfolios..................................... -- 94,091 --
Proceeds from securitization..................... 321,831 -- --
Change in seller's interest...................... 14,130 (76,975) 22,471
Capital expenditures............................. (39,356) (14,443) (36,302)
--------- --------- ---------
Net cash used in investing activities........ (103,746) (145,386) (309,451)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements................. 582,497 382,043 249,625
Repayment of borrowings.......................... (477,723) (325,803) (294,473)
Proceeds from issuance of preferred stock........ -- -- 119,400
Proceeds from issuance of common stock........... 96 107,042 377
--------- --------- ---------
Net cash provided by financing activities.... 104,870 163,282 74,929
--------- --------- ---------
Effect of exchange rate changes.................... -- (766) (7,606)
--------- --------- ---------
Change in cash and cash equivalents................ (29,554) 26,441 9,510
Cash and cash equivalents at beginning of period... 50,149 20,595 47,036
--------- --------- ---------
Cash and cash equivalents at end of period......... $ 20,595 $ 47,036 $ 56,546
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.................................... $ 21,669 $ 33,695 $ 43,215
========= ========= =========
Income taxes paid................................ $ 8,466 $ 12,406 $ 25,242
========= ========= =========
See accompanying notes
F-6
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACQUISITIONS
DESCRIPTION OF THE BUSINESS--Alliance Data Systems Corporation ("ADSC" or,
including its wholly-owned subsidiaries, the "Company") is a leading provider of
electronic transaction services, credit services and marketing services. The
Company develops and executes programs designed to help its clients target,
acquire and retain loyal, profitable customers. The Company creates value for
its clients by assisting them in managing their customer relationships.
Specifically the Company: (1) facilitates transactions between its clients and
their customers through multiple distribution channels including in-store,
catalog and the Internet; (2) assists its clients in identifying and acquiring
new customers; and (3) increases the loyalty and profitability of existing
customers.
The Company operates in three reportable segments: Transaction Services,
Credit Services and Marketing Services. Transaction Services encompasses
transaction processing, including network services and bank card settlement and
card processing and servicing, such as account processing, billing and payment
processing and customer care. Credit Services provides underwriting and risk
management services. Credit Services generally securitizes the credit card
receivables that it underwrites from its private label programs. Marketing
Services provides for loyalty programs, such as Air Miles reward miles, database
marketing, direct marketing and enhancement services.
BASIS OF PRESENTATION--During fiscal 1998, the Company changed its year end
to a calendar year end basis. Prior to December 31, 1998, the Company had a
52/53 week fiscal year that ended on the Saturday nearest January 31.
Accordingly, fiscal 1997 represents the 53 weeks ended January 31, 1998, fiscal
1998 represents the 11 months ended December 31, 1998, and fiscal 1999
represents the year ended December 31, 1999. The 1997, 1998 and 1999 financial
statements have been restated, see Note 22.
ACQUISITIONS--World Financial Network Holding Corporation ("WFNHC") provided
private label credit card services and database marketing for The Limited. On
January 24, 1996, Business Services Holdings, Inc. ("BSH") purchased J.C.
Penney's credit card transaction service business, BSI Business Services, Inc.
("BSI"). On August 30, 1996, BSH was merged into WFNHC in a transaction
accounted for as a reorganization of entities under common control. Prior to the
merger, WFNHC and BSH were under common ownership and common management.
Subsequent to the merger, WFNHC changed its name to Alliance Data Systems
Corporation and BSI changed its name to ADS Alliance Data Systems, Inc.
("ADSI").
In November 1997, the Company formed a wholly-owned subsidiary, Alliance
Data Systems (New Zealand) Limited ("ADSNZ"), to acquire the stock of Financial
Automation Limited and Financial Automation Marketing Limited (collectively,
"FAL") for approximately $10.5 million, financed through working capital. The
acquisition was accounted for using the purchase method of accounting, and the
excess purchase price over the fair value of the net identifiable assets
acquired, approximately $2.8 million, was allocated to goodwill and is being
amortized over 20 years using a straight-line basis. The results of operations
of FAL have been included in the consolidated financial statements since
November 1997. FAL developed and markets a proprietary fleet management tracking
system to companies worldwide.
In July 1998, the Company acquired the stock of Loyalty Management Group
Canada Inc. ("Loyalty") for approximately $183.0 million of net cash financed
through a capital infusion of $100.0 million from stockholders and a bank loan
of $100.0 million. The acquisition was accounted for using the purchase method
of accounting, and the excess purchase price over the fair value of the net
identifiable assets acquired, approximately $182.0 million, was allocated to
goodwill and is being amortized over 25 years using a straight-line basis. The
results of operations of Loyalty have been included in the consolidated
financial statements since July 1998.
F-7
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACQUISITIONS (CONTINUED)
In September 1998, the Company acquired the stock of Harmonic Systems
Incorporated ("HSI") for approximately $51.3 million of net cash financed
through subordinated notes of $52.0 million. The acquisition was accounted for
using the purchase method of accounting, and the excess purchase price over the
fair value of the net identifiable assets acquired, approximately
$38.4 million, was allocated to goodwill and is being amortized over 25 years
using a straight-line basis. The results of operations of HSI have been included
in the consolidated financial statements since September 1998. HSI provides
retail chains with private data communications networks for the transmission of
electronic data between their stores, a merchant's corporate data center and
third party information service providers.
In July 1999, the Company acquired the network services business of SPS
Payment Systems, Inc. ("SPS"), a wholly-owned subsidiary of Associates First
Capital Corporation, for approximately $170.0 million, which was financed by
$120.0 million of Series A Cumulative Convertible Preferred Stock and
$50.0 million of working capital. This transaction was accounted for using the
purchase method of accounting, and the excess purchase price over the fair value
of the net identifiable assets, approximately $142.5 million, was allocated to
goodwill and other intangibles and is being amortized over periods ranging from
three to 25 years using a straight-line basis. The results of operations of SPS
have been included in the consolidated financial statements since July 1999.
SUPPLEMENTARY UNAUDITED PRO FORMA INFORMATION
Unaudited pro forma information for the Company is presented below as if the
Loyalty, the HSI and the SPS acquisitions had occurred at the beginning of
fiscal 1998 (in thousands, except per share amounts):
FISCAL
-------------------
1998 1999
-------- --------
Revenue............................................... $541,892 $607,405
Net loss.............................................. $(46,431) $(30,603)
Earnings per share.................................... $ (1.11) $ (0.64)
Weighted average number of shares..................... 41,729 47,498
2. SUMMARY OF SIGNIFICANT POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of ADSC and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
REDEMPTION SETTLEMENT ASSETS--These securities relate to the redemption fund
for the Air Miles reward miles program and are held in trust for the benefit of
funding redemptions by collectors. These securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
cumulative other comprehensive income. Debt securities for which the Company
does not have the positive intent and ability to hold to maturity are classified
as securities available-for-sale.
CREDIT CARD RECEIVABLES--Credit card receivables are generally securitized
immediately or shortly after origination. As part of its securitization
agreements, the Company is required to retain an interest in the credit card
receivables, which is referred to as seller's interest. Seller's interest is
carried at fair value and credit card receivables are carried at lower of cost
or market less an allowance for doubtful accounts.
F-8
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT--Furniture, fixtures, computer equipment and
software, and leasehold improvements are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed on a
straight-line basis, using estimated lives ranging from 3 to 15 years. Leasehold
improvements are amortized over the remaining useful lives of the respective
leases or the remaining useful lives of the improvements, whichever are shorter.
Software development (costs to create new platforms for certain of the Company's
information systems) and conversion costs (systems, programming and other
related costs to allow conversion of new client accounts to the Company's
processing systems) are amortized on a straight-line basis over the length of
the associated contract or benefit period, which generally ranges from three to
five years.
REVENUE RECOGNITION POLICY
SERVICE--The Company earns transaction fees, which are principally based on
the number of transactions processed and statements generated and are recognized
as such services are performed.
AIR MILES REWARD MILES PROGRAM--The Company allocates the proceeds received
from sponsors for the issuance of Air Miles reward miles based on relative fair
values between the redemption element of the award ultimately provided to the
collector (the "Redemption element") and its service elements. This service
element consists of direct marketing and support services provided to sponsors
(the "Service element").
The fair value of the Service element is based on the estimated fair value
of providing the services on a third-party basis. The revenue related to the
Service element of the Air Miles reward miles is initially deferred and
amortized over the period of time beginning with the issuance of the Air Miles
reward miles and ending upon their expected redemption (the estimated life of an
Air Miles reward mile).
The fair value of the Redemption element of the Air Miles reward miles
issued is determined based on separate pricing offered by the Company as well as
other objective evidence. The revenue related to the Redemption element is
deferred until the collector redeems the Air Miles reward miles or over the
estimated life of an Air Miles reward mile in the case of reward miles that the
Company estimates will go unused by the collector base ("breakage").
FINANCING CHARGES, NET--Financing charges, net, represents gains and losses
on securitization of credit card receivables and interest income on seller's
interest less a provision (credit) for doubtful accounts of $(0.3 million),
$(3.4 million) and $(3.7 million) and related interest expense of $9.4 million,
$8.4 million and $10.4 million for fiscal 1997, 1998 and 1999, respectively.
The Company records gains or losses on the securitization of credit card
receivables on the date of sale based on the estimated fair value of assets sold
and retained and liabilities incurred in the sale. Gains represent the present
value of estimated future cash flows the Company has retained over the estimated
outstanding period of the receivables. This excess cash flow essentially
represents an interest only ("I/O") strip, consisting of the excess of finance
charges and past-due fees over the sum of the return paid to certificate holders
and credit losses. The I/O strip is carried at fair value, with changes in the
fair value reported as a component of cumulative other comprehensive income. The
I/O strip is amortized over the life of the credit card receivables. Certain
estimates inherent in the determination of fair value of the I/O strip are
influenced by factors outside the Company's control and, as a result, such
estimates could materially change in the near term. The gains on securitizations
and other income from securitizations are included in finance charges, net.
F-9
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLES--Goodwill represents the excess of purchase
price over the fair value of net assets acquired arising from business
combinations and is being amortized on a straight-line basis over estimated
useful lives ranging from 20 to 25 years. Other intangibles primarily represent
identified intangible assets acquired in business combinations and are being
amortized over estimated useful lives ranging from 27 months to 20 years.
EARNINGS PER SHARE--Basic earnings per share is based only on the weighted
average number of common shares outstanding, excluding any dilutive effects of
options or other dilutive securities. Diluted earnings per share is based on the
weighted average number of common and common equivalent shares, dilutive stock
options or other dilutive securities outstanding during the year adjusted for
the 1-for-9 reverse stock split on March 1, 2000 (see Note 21). However, as the
Company generated net losses, common equivalent shares, composed of incremental
common shares issuable upon exercise of stock options and warrants and upon
conversion of Series A preferred stock, are not included in diluted net loss per
share because such shares are anti-dilutive.
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share data):
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
NUMERATOR
Income (loss) from continuing operations.................. $ 8,696 $(17,692) $(33,792)
Preferred stock dividends................................. -- -- (3,377)
-------- -------- --------
Income (loss) from continuing operations available to
common stockholders..................................... 8,696 (17,692) (37,169)
Income (loss) from discontinued operations................ (8,247) (300) 7,688
Loss on disposal of discontinued operations............... -- -- (3,737)
-------- -------- --------
Net income (loss) available to common stockholders........ $ 449 $(17,992) $(33,218)
======== ======== ========
DENOMINATOR
Weighted average shares................................... 36,612 41,729 47,498
Weighted average effect of dilutive securities:
Net effect of dilutive stock options.................... -- -- --
Net effect of dilutive stock warrants................... -- -- --
-------- -------- --------
Denominator for diluted calculation....................... 36,612 41,729 47,498
======== ======== ========
Income (loss) from continuing operations--basic and
diluted................................................... $ 0.24 $ (0.42) $ (0.78)
Income (loss) from discontinued operations--basic and
diluted................................................... (0.23) (0.01) (0.08)
-------- -------- --------
Net income (loss) per share--basic and diluted.............. $ 0.01 $ (0.43) $ (0.86)
======== ======== ========
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-10
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
CURRENCY TRANSLATION--The assets and liabilities of the Company's
subsidiaries outside the U.S. are translated into U.S. dollars at the rates of
exchange in effect at the balance sheet dates. Income and expense items are
translated at the average exchange rates prevailing during the period. Gains and
losses resulting from currency transactions are recognized currently in income
and those resulting from translation of financial statements are included in
accumulated other comprehensive income (loss).
INCOME TAXES--Deferred income taxes are provided for differences arising in
the timing of income and expenses for financial reporting and for income tax
purposes using the asset/liability method of accounting. Under this method,
deferred income taxes are recognized for the future tax consequences
attributable to the differences between the financial statements' carrying
amounts of existing assets and liabilities and their respective tax bases, using
enacted tax rates.
LONG-LIVED ASSETS--Long-lived assets, goodwill and other intangible assets
are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets or intangibles may not be
recoverable. Recoverability is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--The nature and composition of some
of the Company's assets and liabilities and off-balance sheet items expose the
Company to interest rate risk. To mitigate this risk, the Company enters into
interest rate swap agreements. All of the Company's interest rate swaps are
designated and effective as hedges of specific existing or anticipated assets,
liabilities or off-balance sheet items. The Company's foreign currency
denominated assets and liabilities expose it to foreign currency exchange rate
risk. The Company has entered into cross-currency hedges to fix the exchange
rate on Canadian debt. The Company does not hedge its net investment in its
Canadian subsidiary. The Company does not hold or issue derivative financial
instruments for trading purposes.
Swap agreements involve the periodic exchange of payments over the life of
the agreements. Amounts to be paid or received are recorded on an accrual basis
as an adjustment to the related income or expense of the item to which the
agreements are designated. As of December 31, 1998, the related amount
receivable from counterparties was $1.7 million. As of December 31, 1999, the
related amount payable to counterparties was $1.5 million. Changes in the fair
value of interest rate swaps are not reflected in the accompanying financial
statements where designated to existing or anticipated assets, liabilities or
off-balance sheet items and where swaps effectively modify or reduce interest
rate sensitivity.
Realized and unrealized gains or losses at the time of maturity,
termination, sale or repayment of a derivative contract are recorded in a manner
consistent with its original designation. Amounts are deferred and amortized as
an adjustment to the related income or expense over the original period of
exposure, provided the designated asset, liability or off-balance sheet item
continues to exist, or in the case of anticipated transactions, is probable of
occurring. Realized and unrealized changes in the fair value of swaps designated
with items that no longer exist or are no longer probable to occur are recorded
as a component of the gain or loss arising from the disposition of the
designated item.
Interest rate and foreign currency exchange rate risk management contracts
are generally expressed in notional principal or contract amounts that coincide
with the notional amount of the item being hedged. However, the notional amounts
of these contracts are much larger than the amounts potentially at risk for
nonperformance by counterparties. In the event of nonperformance by the
F-11
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
counterparties, the Company's credit exposure on derivative financial
instruments is limited to the value of the contracts that have become favorable
to the Company. The Company actively monitors the credit ratings of its
counterparties. Under the terms of certain swaps, each party may be required to
pledge collateral if the market value of the swaps exceeds an amount set forth
in the agreement or in the event of a change in its credit rating.
SEGMENT INFORMATION--Effective December 31, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The new rules establish
revised standards for public companies relating to the reporting of financial
and descriptive information about their operating segments in financial
statements. The Company did not previously report segment information.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities, and requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet and measure such instruments at fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" which
deferred the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. Adoption of this statement is not anticipated to materially
impact the Company's results of operations, but will require revised balance
sheet classifications, including the recognition of interest rate swaps as
derivative instruments and revised disclosures in the notes to the consolidated
financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", which
replaced SFAS No. 125 and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. Disclosures relating to securitization transactions are required
for fiscal years ending after December 15, 2000. Management is currently
evaluating the impact on its financial position and results of operations when
SFAS No. 140 is adopted, but does not anticipate any material changes.
The Emerging Issues Task Force ("EITF") is reviewing an issue, Issue
No. 00-22, "Accounting for 'Point' and Other Loyalty Programs," that is closely
related to our Air Miles reward program and the way revenue is recognized for
these types of programs. We understand that the EITF will provide guidance on
this issue sometime in 2001, but a specific date has not been set. When Issue
00-22 is issued, if we require modification of our present revenue recognition
policy, we will adhere to the guidance provided. Without knowing how the EITF
will rule on this issue, we are unable to assess the impact of Issue 00-22 at
this time.
RECLASSIFICATIONS--For purposes of comparability, certain prior period
amounts have been reclassified to conform with the current year presentation.
F-12
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. REDEMPTION SETTLEMENT ASSETS
Redemption settlement assets consist of cash and cash equivalents and
securities available-for-sale and are designated for settling the Company's
redemptions by collectors under its Air Miles reward program in Canada under
certain contractual relationships with its sponsors. These assets are primarily
denominated in Canadian dollars. Realized gains and losses from the sale of
investment securities were not material. The principal components of securities
available-for-sale, which are carried at fair value, are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------------------------------- -------------------------------------------
UNREALIZED UNREALIZED
------------------- -------------------
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
-------- -------- -------- ----------- -------- -------- -------- ----------
(IN THOUSANDS)
Cash and cash
equivalents......... $17,909 $ -- $ -- $17,909 $ 69,571 $ -- $ -- $ 69,571
Government............ 19,951 554 (82) 20,423 29,981 -- (1,368) 28,613
Corporate............. 10,162 200 (300) 10,062 11,884 9 (540) 11,353
Equity securities....... 22,420 1,508 (2,144) 21,784 25,385 3,171 (4,443) 24,113
------- ------ ------- ------- -------- ------ ------- --------
Total................... $70,442 $2,262 $(2,526) $70,178 $136,821 $3,180 $(6,351) $133,650
======= ====== ======= ======= ======== ====== ======= ========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Software development and conversion costs............... $ 50,556 $ 55,156
Computer equipment and purchased software............... 13,649 23,127
Furniture and fixtures.................................. 40,197 45,741
Leasehold improvements.................................. 28,253 31,593
Construction in progress................................ 2,586 6,624
-------- --------
Total................................................. 135,241 162,241
Accumulated depreciation................................ (68,902) (73,010)
-------- --------
Property and equipment, net............................. $ 66,339 $ 89,231
======== ========
During fiscal 1998, the Company recorded an impairment of $4.0 million on
computer equipment and software related to the Marketing Services segment. The
related computer equipment and software was deemed by management to be
inadequate. The related charge is included in processing and servicing expenses
in the consolidated statements of operations.
5. SECURITIZATION OF CREDIT CARD RECEIVABLES
The Company regularly securitizes its credit card receivables. During fiscal
1997, fiscal 1998 and fiscal 1999, the Company securitized $4.2 billion,
$3.9 billion and $4.1 billion, respectively, of credit card receivables. The
total amount of securitized credit card receivables outstanding as of
December 31, 1998 and 1999 was $2.0 billion and $2.2 billion, respectively,
maturing from 1999 to 2003.
F-13
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES (CONTINUED)
As of December 31, 1998 and 1999, seller's interest consisted of $139.1 million
and $121.9 million, respectively.
During the initial phase of a securitization reinvestment period, the
Company generally retains principal collections in exchange for the transfer of
additional credit card receivables into the securitized pool of assets. During
the amortization or accumulation period of a securitization, the investors'
share of principal collections (in certain cases, up to a maximum specified
amount each month) is either distributed each month to the investors or held in
an account until it accumulates to the total amount, at which time it is paid to
the investors in a lump sum. One of the Company's securitization trusts has
entered an early amortization period as a result of a private label customer
entering bankruptcy proceedings. The receivables associated with the customer
are in a different trust from all of the Company's other receivables; therefore,
those proceedings will not affect the other trusts. The Company's outstanding
securitizations are scheduled to begin their amortization or accumulation
periods at various times between 2000 and 2003.
"Due from securitizations" consists of spread deposits, I/O strips and
excess funding deposits as shown in the table below:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Spread deposits......................................... $ 82,875 $104,222
I/O strips.............................................. 21,967 20,289
Excess funding deposits................................. 16,600 19,973
-------- --------
$121,442 $144,484
======== ========
The spread deposits, I/O strips and excess funding deposits are initially
recorded at their allocated carrying amount based on relative fair value. Fair
value is determined by computing the present value of the estimated cash flows,
using the dates that such cash flows are expected to be released to the Company,
at a discount rate considered to be commensurate with the risks associated with
the cash flows. The amounts and timing of the cash flows are estimated after
considering various economic factors including prepayment, delinquency, default
and loss assumptions.
I/O strips, seller's interest and other interests retained are periodically
evaluated for impairment based on the fair value of those assets.
Fair values of I/O strips and other interests retained are based on a review
of actual cash flows and on the factors that affect the amounts and timing of
the cash flows from each of the underlying credit card receivable pools. Based
on this analysis, assumptions are validated or revised as deemed necessary, the
amounts and the timing of cash flows are estimated and fair value is determined.
The Company has
F-14
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES (CONTINUED)
one collateral type, private label credit cards, and used the following
assumptions to determine fair value at December 31, 1999:
Discount rate.................................... 14.0%
Collected yield.................................. 20.1% - 25.2%
Interest expense................................. 6.94%
Credit losses rate............................... 7.3% - 9.8%
Dilution (prepayment) ratio...................... 1.6% to 2.8%
Weighted average life............................ 8 months
Spread deposits, carried at estimated fair value, represent deposits that
are held by a trustee or agent and are used to absorb losses related to
securitized credit card receivables if those losses exceed the available net
cash flows arising from the securitized credit card receivables. The fair value
of spread deposits is based on the maturity date of the respective series,
ranging from 4 months to 3 years and 4 months, and the discount rate. The
discount rate is based on a risk adjusted rate paid on the series less the
interest rate earned by the Company on the spread deposits and ranges from 2.1%
to 4.0%. The amount required to be deposited is 3.25% of credit card receivables
in the trust, other than with respect to the trust in early amortization, for
which all excess funds are required to be deposited. Spread deposits are
generally released proportionately as investors are repaid, although some spread
deposits are released only when investors have been paid in full. None of these
spread deposits were required to be used to cover losses on securitized credit
card receivables in the three-year period ended December 31, 1999.
The Company is required to maintain minimum interests ranging from 4% to 7%
of the securitized credit card receivables. This requirement is met through
seller's interest, and is supplemented through the excess funding deposits.
Excess funding deposits represent cash amounts deposited with the trustee of the
securitizations.
F-15
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill consist of the following:
AMORTIZATION LIFE
DECEMBER 31, AND METHOD
-------------------- ---------------------------
1998 1999
-------- ---------
(IN THOUSANDS)
Premium on purchased credit 3 years--straight line
card portfolio........... $ 37,539 $ 38,536
Customer contracts and 3-20 years--straight line
lists.................... 27,000 46,700
Noncompete agreement....... 19,000 2,300 5 years--straight line
Goodwill................... 252,191 411,009 20-25 years--straight line
Deferred incentives........ 10,454 11,086 27 months--straight line
Sponsor contracts.......... 37,244 39,495 5 years--declining balance
Collector database......... 45,738 48,503 15%--declining balance
-------- ---------
Total.................... 429,166 597,629
Accumulated amortization... (66,369) (104,020)
-------- ---------
Intangible assets and
goodwill, net............ $362,797 $ 493,609
======== =========
7. DEFERRED REVENUE
A reconciliation of deferred revenue--redemption, and deferred
revenue--service for the Air Miles program is as follows:
FISCAL
----------------------
1998 1999
-------- --------
DEFERRED REVENUE--REDEMPTION
Beginning balance................................... $ -- $ 93,583
Acquired balance.................................... 78,063 --
Cash proceeds....................................... 26,233 94,620
Revenue recognized.................................. (8,537) (30,911)
Other............................................... (4,175) 5,576
-------- --------
Ending balance...................................... $ 93,583 $164,867
======== ========
FISCAL
-------------------
1998 1999
-------- --------
DEFERRED REVENUE--SERVICE
Beginning balance..................................... $ -- $ 64,609
Acquired balance...................................... 59,391 --
Cash proceeds......................................... 19,804 51,916
Revenue recognized.................................... (12,933) (36,409)
Other................................................. (3,651) 2,359
-------- --------
Ending balance........................................ $ 64,609 $ 84,474
======== ========
The Company currently estimates breakage to be one-third of miles issued.
F-16
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT
Debt consists of the following:
DECEMBER 31,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS)
Certificates of deposit............................... $ 49,500 $ 116,900
Revolving credit loan agreement....................... 98,484 --
Subordinated notes.................................... 102,000 102,000
Credit agreement...................................... 130,000 120,361
Term loans............................................ 100,000 95,875
--------- ---------
479,984 435,136
Less: current portion................................. (148,149) (118,225)
--------- ---------
Long term portion..................................... $ 331,835 $ 316,911
========= =========
CERTIFICATES OF DEPOSIT--Terms of the certificates of deposit range from
three months to 24 months with annual interest rates ranging from 5.1% to 5.9%
at December 31, 1998 and from 5.4% to 6.9% at December 31, 1999. Interest is
paid monthly and at maturity.
REVOLVING CREDIT LOAN AGREEMENT--In fiscal 1996, in connection with the
Company's purchase of certain trade receivables, the Company entered into a
revolving credit loan agreement that provided for revolving credit loans of up
to $100.0 million, with interest at a variable rate (5.75% at December 31,
1998). The loan was repaid in December 1999 and this credit agreement has since
expired.
SUBORDINATED NOTES--The Company has outstanding a subordinated note with an
affiliate in the principal amount of $50.0 million. Such note bears interest at
10% payable semiannually. This note was issued at a discount of approximately
$3.6 million, and such discount is accreted into interest expense using the
effective rate of approximately 12% over the life of the note. The note is to be
repaid on October 25, 2005. The Company may, at its option, prepay the note at
its face amount.
The Company has outstanding a subordinated note with an affiliate in the
principal amount of $52.0 million. Such note bears interest at 10% payable
semi-annually. This note was issued at a discount of approximately
$6.5 million, and such discount is accreted into interest expense using the
effective rate of approximately 12% over the life of the note. The discount was
issued in the form of 5.9 million shares of common stock issued to the
affiliate. The note is to be repaid in two equal installments in September 2007
and September 2008. The Company may, at its option, prepay the note at its face
amount.
CREDIT AGREEMENT--In fiscal 1997, the Company entered into a credit
agreement to borrow $130.0 million. Funds borrowed under this facility bear
interest at the higher of (i) the prime rate for such day or (ii) the sum of 1/2
of 1% plus the Federal funds rate for a base rate loan or (iii) the sum of the
Euro-dollar margin plus the LIBOR rate applicable to such period for each
Euro-dollar loan. Interest is payable quarterly in arrears. The effective
interest rates were 7.94% and 8.0% at December 31, 1998 and 1999, respectively.
Funds borrowed under the credit agreement are to be repaid in installments of
$10.0 million on July 28, 2000, $30.0 million on July 27, 2001, $40.0 million on
August 2, 2002 and the remaining balance on July 25, 2003. The Company's
obligations under the credit agreement are secured by substantially all of its
assets.
F-17
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
TERM LOANS--The Company has outstanding two separate term loan facilities
each in the amount of $50.0 million. The first term loan is payable in four
separate annual installments of $3.1 million commencing July 30, 1999 with a
final lump sum payment of $37.5 million due July 25, 2003. The second term loan
is payable in six separate annual installments of $1.0 million commencing
July 30, 1999 with a final lump sum payment of $44.0 million due July 25, 2005.
Both loans bear interest at the higher of (i) the prime rate for such day or
(ii) the sum of 1/2 of 1% plus the Federal funds rate for a base rate loan or
(iii) the sum of the Euro-dollar margin plus the LIBOR rate applicable to such
period for each Euro-dollar loan. Interest is payable quarterly in arrears. The
effective interest rates on the two term loans were 7.07% and 8.995%,
respectively, at December 31, 1999.
LINE OF CREDIT--The Company has available borrowings under a line of credit
agreement of $100.0 million. The line of credit bears interest at the higher of
(i) the prime rate for such day or (ii) the sum of 1/2 of 1% plus the Federal
funds rate for a base rate loan or (iii) the sum of the Euro-dollar margin plus
the LIBOR rate applicable to such period for each Euro-dollar loan. The
agreement matures on July 25, 2003. There were no amounts outstanding on the
line of credit at December 31, 1998 or 1999.
Any outstanding balances, including interest, related to the credit
agreement will become payable immediately if the Company consummates a public
offering of equity securities. The Company has agreed to comply with certain
covenants as part of all non-subordinated debt agreements.
Debt at December 31, 1999 matures as follows (in thousands):
2000.............................................. $118,225
2001.............................................. 64,425
2002.............................................. 44,125
2003.............................................. 78,861
2004.............................................. 1,000
Thereafter........................................ 128,500
--------
$435,136
========
F-18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The Company files a consolidated Federal income tax return. Components of
the provision (credit) for income taxes are as follows:
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
CURRENT
Federal....................................... $ 9,464 $ 5,789 $ 18,827
State......................................... 347 98 483
Foreign....................................... 22 1,777 9,610
------- -------- --------
Total current............................... 9,833 7,664 28,920
------- -------- --------
DEFERRED
Federal....................................... (4,205) (4,839) (15,081)
State......................................... (392) (808) 1,182
Foreign....................................... -- (6,725) (21,559)
------- -------- --------
Total deferred.............................. (4,597) (12,372) (35,458)
------- -------- --------
Tax (benefit) expense related to continuing
operations.................................... 5,236 (4,708) (6,538)
Tax (benefit) expense related to discontinued
operations.................................... (4,440) (159) 2,127
------- -------- --------
Total income tax provision (benefit)............ $ 796 $ (4,867) $ (4,411)
======= ======== ========
A reconciliation of recorded federal income tax expenses (benefit) to the
expected expense computed by applying the federal statutory rate of 35% for all
periods to income from continuing operations before income taxes is as follows:
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
Expected (benefit) expense at statutory rate..... $4,877 $(7,840) $(14,115)
Increase (decrease) in income taxes resulting
from:
State and foreign income taxes................. 225 63 296
Non-deductible foreign losses.................. 159 832 623
Non-deductible acquired goodwill and other
intangibles.................................. -- 2,134 11,254
Change in valuation allowance.................. -- -- (3,266)
Other--net..................................... (25) 103 (1,330)
------ ------- --------
Total........................................ $5,236 $(4,708) $ (6,538)
====== ======= ========
F-19
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
----------------------
1998 1999
---------- ---------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Deferred income.................................... $ 5,424 $13,410
Deferred revenue................................... 2,303 23,299
Allowance for doubtful accounts.................... 2,733 1,405
Intangible assets.................................. 17,477 20,008
Estimated loss on contracts........................ 1,841 --
Net operating loss carryforwards................... 10,553 11,966
Depreciation....................................... 1,800 2,875
Discontinued operations............................ -- 2,186
Other.............................................. 3,708 3,935
------- -------
Total deferred tax assets........................ 45,839 79,084
------- -------
DEFERRED TAX LIABILITIES
Servicing rights................................... 7,771 8,120
Accrued expenses................................... 1,283 468
Other.............................................. 970 348
------- -------
Total deferred tax liabilities................... 10,024 8,936
------- -------
Net deferred tax asset......................... 35,815 70,148
Valuation allowance................................ (8,797) (5,531)
------- -------
Net deferred tax asset............................. $27,018 $64,617
======= =======
At December 31, 1999, the Company had approximately $18.8 million of Federal
net operating losses ("NOL's"), which expire at various times through 2013. In
addition, the Company has approximately $139.9 million of state NOL's, which
expire at various times through 2015. The utilization of the Federal NOL's are
subject to limitations under Section 382 of the Internal Revenue Code on account
of changes in the equity ownership. NOL's for both financial reporting and tax
reporting purposes are subject to a valuation allowance established for the tax
benefit associated with their respective unrealizable federal and state NOL's.
In 1999, $7.3 million of the valuation allowance was reversed as a result of
final regulations issued by the Internal Revenue Service in June 1999. The
Company increased the valuation allowance by $4.0 million in 1999. The valuation
allowance relates primarily to state NOL's and reduces deferred tax assets to an
amount that represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
F-20
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PREFERRED STOCK
In July 1999, the Company entered into a preferred stock purchase agreement
and issued 120,000 shares of its Series A Cumulative Convertible Preferred Stock
for proceeds of $120.0 million to an affiliate. The terms of the preferred stock
purchase agreement include, among other things, the following:
- Dividends are payable by the Company upon declaration by the Board of
Directors. Dividends are cumulative and dividends not paid currently will
accrue and compound quarterly at an annual rate of 6.0%. Dividends in
arrears at December 31, 1999 were $3.4 million.
- Each share is convertible into common shares at a conversion rate based on
the lesser of $13.50 or the initial public offering price, at the option
of the holder, at any time following issuance. Upon a $75.0 million or
greater initial public offering, shares will be mandatorily convertible
into common stock at the stated conversion price.
- The shares have an aggregate liquidation preference equal to the face
amount plus all accrued and unpaid dividends.
- Each share may be voted together with the common stock on an as-converted
basis.
- All issued and outstanding shares are redeemable on July 12, 2007 at a per
share redemption price as defined in the agreement.
11. STOCKHOLDERS' EQUITY
As part of consideration for the BSI acquisition, the seller received
warrants to purchase up to 167,084 shares of the Company's common stock at $9.00
per share. The warrants and any stock issued upon exercise of the warrants
contain or will contain transfer restrictions. The Company assigned a fair value
of $9.00 per warrant or $1,503,756 which was included in the acquisition
purchase price. The warrants expire in January 2008. The fair value of the
warrants was determined based on the fair value of the Company at the time of
acquisition.
During July 1999, the stockholders approved an increase in the number of
authorized shares from 50,000,000 shares to 66,666,667 shares.
12. STOCK COMPENSATION PLANS
Certain of the Company's employees have been granted stock options under the
Company's Stock Option and Restricted Stock Purchase Plan (the "Plan"). The
purpose of the Plan is to benefit and advance the interests of the Company by
rewarding certain employees for their contributions to the financial success of
the Company and thereby motivating them to continue to make such contributions
in the future. The stock options generally vest over a three year period,
beginning on the first day of February of the eighth year after the date of
grant and expire 10 years after the date of grant. Terms of all awards are
determined by the Board of Directors at the time of award.
F-21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
Expected dividend yield.......................... -- -- --
Risk-free interest rate.......................... 6.0% 6.0% 7.0%
Expected life of options (years)................. 4.0 yrs 4.0 yrs 4.0 yrs
Assumed volatility............................... 0.01% 0.01% 0.01%
The weighted average fair value of each option as of the grant date was
$1.89, $2.79 and $2.43 in fiscal 1997, fiscal 1998 and fiscal 1999,
respectively.
The following table summarizes stock option activity under the Plan:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
BALANCE AT FEBRUARY 1, 1997....................... 640 $ 9.00
Granted......................................... 597 9.00
Exercised....................................... (16) 9.00
Canceled........................................ (65) 9.00
-----
BALANCE AT JANUARY 31, 1998....................... 1,156 9.00
Granted......................................... 912 9.45
Exercised....................................... (57) 9.00
Canceled........................................ (194) 9.00
-----
BALANCE AT DECEMBER 31, 1998...................... 1,817 9.18
Granted......................................... 644 10.14
Exercised....................................... (42) 9.00
Cancelled....................................... (71) 9.09
-----
BALANCE AT DECEMBER 31, 1999...................... 2,348 9.54
=====
The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 1999 (in thousands, except per
share amounts):
OUTSTANDING EXERCISABLE
---------------------------------------- -------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE CONTRACTUAL AVERAGE AVERAGE
PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------- -------- ------------ -------------- -------- --------------
$9.00 to $11.25 2,348 8.34 9.54 1,311 9.30
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. The effect of determining compensation cost for the
Company's stock-based compensation plan based
F-22
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK COMPENSATION PLANS (CONTINUED)
on the fair value at the grant dates for awards under the Plan consistent with
the methods of SFAS No. 123 is disclosed in the following pro forma information
(in thousands, except per share amounts):
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
Pro forma net income (loss)...................... $ 314 $(18,629) $(30,331)
===== ======== ========
Basic pro forma earnings per share............... $0.01 $ (0.45) $ (0.71)
===== ======== ========
Diluted pro forma earnings per share............. $0.01 $ (0.45) $ (0.71)
===== ======== ========
13. EMPLOYEE BENEFIT PLANS
The Company sponsors separate defined contribution pension plans for World
Financial Network National Bank ("WFNNB") and ADSI that cover qualifying
employees based on service and age requirements. The Company makes matching
(WFNNB) or discretionary (ADSI) contributions as determined by the Board of
Directors.
14. COMMITMENTS AND CONTINGENCIES
The Company has entered into certain contractual arrangements that result in
a fee being billed to the sponsors upon redemption of Air Miles reward miles.
The Company has obtained revolving letters of credit from certain of these
sponsors that expire at various dates. These letters of credit total
$44.4 million at December 31, 1999, which exceeds the estimated amount of the
obligation to provide travel and other rewards.
The Company currently has an obligation to fund redemption of Air Miles
reward miles as they are redeemed by collectors. The Company believes that the
redemption settlement assets are sufficient to meet that obligation.
The Company leases certain office facilities and equipment under
noncancellable operating leases and is generally responsible for property taxes
and insurance. Future annual minimum rental payments required under
noncancellable operating leases, some of which contain renewal options, as of
December 31, 1999 are (in thousands):
YEAR:
- -----
2000.............................................. $ 53,002
2001.............................................. 49,496
2002.............................................. 28,887
2003.............................................. 12,009
2004.............................................. 10,056
Thereafter........................................ 34,076
--------
Total............................................. $187,526
========
WFNNB is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
F-23
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, WFNNB must meet specific
capital guidelines that involve quantitative measures of its assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require WFNNB to maintain minimum amounts and ratios of total and Tier 1 capital
(as defined in the regulations) to risk weighted assets (as defined) and of Tier
1 capital (as defined) to average assets (as defined) ("total capital ratio",
"Tier 1 capital ratio" and "leverage ratio", respectively). Under the
regulations, a "well capitalized" institution must have a Tier 1 capital ratio
of at least six percent, a total capital ratio of at least 10 percent and a
leverage ratio of at least five percent and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least four percent, a total capital ratio of at least eight
percent and a leverage ratio of at least four percent, but three percent is
allowed in some cases. Under these guidelines, WFNNB is considered well
capitalized. As of December 31, 1999, WFNNB's Tier 1 capital ratio was 50.0,
total capital ratio was 51.0 and leverage ratio was 49.1, and WFNNB was not
subject to a capital directive order.
Holders of credit cards issued by the Company have available lines of
credit, which vary by accountholder, that can be used for purchases of
merchandise offered for sale by clients of the Company. These lines of credit
represent elements of risk in excess of the amount recognized in the financial
statements. The lines of credit are subject to change or cancellation by the
Company. As of December 31, 1999, WFNNB had approximately 24.0 million active
accountholders, having an unused line of credit averaging $684 per account.
The Company has entered into certain long-term arrangements to purchase
tickets from its airline and other suppliers. These long-term arrangements allow
the Company to make purchases at set prices. At December 31, 1999, the Company
had no material minimum purchase commitments with these suppliers.
SIGNIFICANT CONCENTRATION OF CREDIT RISK--The Company's Credit Services
segment is active in originating private label credit cards in the United
States. The Company reviews each potential customer's credit application and
evaluates the applicant's financial history and ability and perceived
willingness to repay. Credit card loans are made primarily on an unsecured
basis. Card holders reside throughout the United States and are not
significantly concentrated in any one area.
15. FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit through charge cards,
interest rate swaps and futures contracts. Such instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or normal amounts of these
instruments reflect the extent of the Company's involvement in particular
classes of financial instruments.
F-24
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS--The estimated fair values of the
Company's financial instruments were as follows:
DECEMBER 31
-----------------------------------------------------------
1998 1999
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS
Cash and cash equivalents................ $ 47,036 $ 47,036 $ 56,546 $ 56,546
Redemption settlement assets............. 70,178 70,178 133,650 133,650
Trade receivables........................ 143,286 143,286 69,085 69,085
Credit card receivables and seller's
interest, net.......................... 139,458 139,458 150,804 150,804
Due from securitizations................. 121,442 121,442 144,484 144,484
FINANCIAL LIABILITIES
Accounts payable......................... 44,327 44,327 83,976 83,976
Long-term and subordinated debt.......... 479,984 491,192 435,136 447,861
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
Interest swaps............................. $900,000 $(14,148) $725,000 $ (6,083)
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
CASH AND CASH EQUIVALENTS--The carrying amount approximates fair value due
to the short maturity of the cash investments.
TRADE RECEIVABLES--The carrying amount approximates fair value due to the
short maturity and the average interest rates approximate current market
origination rates.
CREDIT CARD RECEIVABLES--The carrying amount of credit card receivables
approximates fair value due to the short maturity and the average interest rates
approximate current market origination rates.
REDEMPTION SETTLEMENT ASSETS--Fair value for securities are based on quoted
market prices.
DUE FROM SECURITIZATIONS--The carrying amount of the securitization spread
account approximates its fair value due to the relatively short maturity period
and average interest rates which approximate current market rates.
ACCOUNTS PAYABLE--Due to the relatively short maturity periods, the carrying
amount approximates the fair value.
LONG-TERM AND SUBORDINATED DEBT--The fair value was estimated based on the
current rates available to the Company for debt with similar remaining
maturities.
INTEREST SWAPS--The fair value was estimated based on the cost to the
Company to terminate the agreements.
F-25
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INTEREST SWAPS
INTEREST SWAPS--In March 1997, WFNNB entered into three interest rate swap
agreements with J.P. Morgan Company ("Morgan") with notional amounts totaling
$500.0 million. These interest rate swaps effectively change WFNNB's interest
rate exposure on $300.0 million and $200.0 million of securitized credit card
receivables to a fixed rate of approximately 6.34% and 6.72%, respectively. On
January 30, 1998, WFNNB entered into an interest rate swap agreement with Morgan
with a notional amount of $300.0 million. This interest rate swap effectively
changed WFNNB's interest rate exposure on $300.0 million of securitized accounts
receivable to a variable rate based on LIBOR. The notional amount of the swap,
$125 million at December 31, 1999, will decrease with a corresponding decrease
of the related securitized credit card receivables. In October 1998, Loyalty
entered into two cross-currency interest rate swap agreements with Morgan with
notional amounts totaling $100.0 million. The interest rate swaps effectively
changed Loyalty's interest rate exposure on $50.0 million and $50.0 million of
notes payable to a variable rate based on Canadian Bankers Acceptance and to a
fixed rate of 7.07% and 8.995%, respectively. The following briefly outlines the
terms of each swap agreement:
FIXED/VARIABLE FIXED/VARIABLE
NOTIONAL AMOUNT SWAP PERIOD RATE RECEIVED RATE PAID
- ----------------------- --------------------------------------- ------------------------ ------------------------
$250,000,000........... March 10, 1997 through March 10, 2000 USD-CP-H.15 6.340%
$50,000,000............ March 10, 1997 through March 10, 2000 USD-LIBOR-BBA 6.345%
$200,000,000........... May 15, 1997 through May 15, 2004 USD-LIBOR-BBA 6.720%
$125,000,000........... January 30, 1998 through March 15, 2003 5.67% USD-LIBOR-BBA
$50,000,000............ October 26, 1998 through July 25, 2003 USD-LIBOR-BBA+1.75% CAD-BA-CDOR+1.99%
$50,000,000............ October 26, 1998 through July 25, 2005 USD-LIBOR-BBA+3.0% 8.995%
In fiscal 1995, the Company entered into five-year and seven-year forward
rate locks to mitigate the impact of interest rate fluctuations of the five and
seven year Asset-Backed Securities ("ABS") issued in a public offering in
connection with the securitization of certain credit card receivables. At the
forward rate lock hedge determination date, the Company was in a favorable
position and received $17.7 million (five year) and $16.8 million (seven year)
which was recorded as deferred income and is being amortized ratably over five
and seven year periods, respectively. The hedging reduced the effective interest
rate of the five year ABS's from approximately 6.7% to 6.0% and reduced the
effective interest rate of the seven year ABS's from approximately 7.0% to 6.2%.
F-26
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PARENT ONLY FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
DECEMBER 31,
-------------------
1998 1999
BALANCE SHEETS -------- --------
(IN THOUSANDS)
Assets:
Cash and cash equivalents................................... $ 889 $ --
Investment in subsidiaries.................................. 191,009 350,285
Loans to subsidiaries....................................... 271,750 181,750
Receivables from subsidiaries............................... -- 66,179
Trade receivables........................................... 97,635 --
Other....................................................... 23,151 12,867
-------- --------
Total assets.............................................. $584,434 $611,081
======== ========
Liabilities:
Long-term and subordinated debt............................. $330,600 $222,361
Borrowings from subsidiaries................................ 17,510 --
Other....................................................... 7,324 10,432
-------- --------
Total liabilities......................................... 355,434 232,793
Stockholders' equity........................................ 229,000 378,288
-------- --------
Total liabilities and stockholders' equity................ $584,434 $611,081
======== ========
FISCAL
------------------------------
1997 1998 1999
STATEMENTS OF INCOME -------- -------- --------
(IN THOUSANDS)
Interest from loans to subsidiaries......................... $3,578 $17,907 $23,962
Dividends from subsidiary................................... -- -- 40,000
Processing and servicing fees............................... 695 4,457 3,404
Other income................................................ 240 156 149
------ ------- -------
Total revenue............................................. 4,513 22,520 67,515
Interest expense............................................ 1,945 21,165 25,981
Other expense............................................... 17 153 256
------ ------- -------
Total expense............................................. 1,962 21,318 26,237
------ ------- -------
Income before income taxes.................................. 2,551 1,202 41,278
Income tax expense.......................................... 848 486 720
------ ------- -------
Net income.................................................. $1,703 $ 716 $40,558
====== ======= =======
Note: Alliance Data Systems Corporation accounts for its investments in
subsidiaries under the cost method.
F-27
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PARENT ONLY FINANCIAL STATEMENTS (CONTINUED)
FISCAL
---------------------------------
1997 1998 1999
STATEMENTS OF CASH FLOWS --------- --------- ---------
(IN THOUSANDS)
Net cash provided by (used in) operating activities......... $ (59,919) $ (78,260) $ 115,555
Investing activities:
Net cash paid for corporate acquisitions.................... (3,250) (151,500) (169,322)
Loans to subsidiaries....................................... (137,669) -- --
--------- --------- ---------
Net cash used in investing activities....................... (140,919) (151,500) (169,322)
Financing Activities:
Borrowings from subsidiaries................................ -- 17,510 41,331
Issuance of long-term and subordinated debt................. 421,998 327,159 320,624
Repayment of long-term and subordinated debt................ (220,626) (221,676) (428,854)
Net proceeds from preferred stock........................... -- -- 119,400
Net proceeds from issuances of common stock................. 96 107,042 377
--------- --------- ---------
Net cash provided by (used in) financing activities......... 201,468 230,015 52,878
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 630 255 (889)
Cash and cash equivalents at beginning of period............ 4 634 889
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 634 $ 889 $ --
========= ========= =========
18. SEGMENT INFORMATION
Operating segments are defined by SFAS 131 as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is the Executive Committee, which consists
of the Chairman of the Board and Chief Executive Officer, Presidents of the
divisions; Executive Vice Presidents; and certain other officers. The operating
segments are reviewed separately because each operating segment represents a
strategic business unit that generally offers different products and serves
different markets.
The accounting policies of the operating segments are generally the same as
those described in the summary of significant accounting policies. Corporate
overhead is allocated to the segments based on a percentage of the segment's
revenues. Interest expense and income taxes are not allocated to the segments in
the computation of segment operating profit for internal evaluation purposes.
Transaction Services performs servicing activities related to Credit Services.
For this, Transaction Services receives a fee equal to its direct costs before
corporate overhead allocation plus a margin that it would charge an
F-28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (CONTINUED)
unrelated third party for similar functions. Revenues are attributed to
geographic areas based on the location of the unit processing the underlying
transactions.
TRANSACTION CREDIT MARKETING OTHER/
SERVICES SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1997 ----------- -------- --------- ----------- --------
(IN THOUSANDS)
Revenues................................ $256,730 $211,921 $23,348 $(138,600) $353,399
Depreciation and amortization........... 23,497 12,064 -- -- 35,561
Operating profit........................ 3,713 17,221 8,457 -- 29,391
TRANSACTION CREDIT MARKETING OTHER/
SERVICES SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1998 ----------- -------- --------- ----------- --------
(IN THOUSANDS)
(RESTATED - SEE NOTE 22)
Revenues................................. $286,605 $212,663 $ 60,892 $(149,247) $410,913
Depreciation and amortization............ 25,419 11,763 14,854 -- 52,036
Operating profit......................... (11,798) 27,633 (10,351) -- 5,484
TRANSACTION CREDIT MARKETING OTHER/
SERVICES SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1999 ----------- -------- --------- ----------- --------
(IN THOUSANDS)
(RESTATED - SEE NOTE 22)
Revenues................................. $362,524 $247,824 $138,310 $(165,576) $583,082
Depreciation and amortization............ 28,728 12,145 36,927 -- 77,800
Operating profit......................... (8,229) 34,064 (23,380) -- 2,455
Information concerning principal geographic areas is as follows:
UNITED STATES REST OF WORLD(1) TOTAL
------------- ---------------- ----------
(IN THOUSANDS)
(RESTATED - SEE NOTE 22)
Revenues
Fiscal 1997......................... $352,975 $ 424 $ 353,399
Fiscal 1998......................... 367,588 43,325 410,913
Fiscal 1999......................... 467,629 115,453 583,082
Total assets
December 31, 1998................... 689,234 386,473 1,075,707
December 31, 1999................... 801,219 466,425 1,267,644
- ------------------------
(1) Primarily consists of Canada following the Loyalty acquisition in
July 1998.
19. RELATED PARTY TRANSACTIONS
One of the Company's stockholders, Welsh, Carson, Anderson & Stowe and
related affiliates ("WCAS"), have provided significant financing to the Company
since the initial merger in August 1996. The related transactions are as
follows:
- The Company issued a 10% subordinated note to WCAS in January 1996, in the
principal amount of $30.0 million. Principal on the note is due on
October 25, 2005 and interest is payable semi-annually in arrears on each
January 1 and July 1. The note was originally issued to finance, in part,
the acquisition of BSI Business Services, Inc., now known as ADSI.
Additionally, the Company issued similar notes to The Limited in the
amount of $20.0 million.
F-29
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. RELATED PARTY TRANSACTIONS (CONTINUED)
- In July 1998, the Company sold 10.1 million shares of common stock to WCAS
for $100.0 million. The shares were issued to finance, in part, the
acquisition of all outstanding stock of Loyalty.
- In August 1998, the Company sold 30,303 shares of common stock to WCAS for
$300,000 and 20,202 shares of common stock to The Limited for $200,000.
- In September 1998, the Company issued 655,556 shares of common stock to
WCAS and issued a 10% subordinated note to WCAS, in the principal amount
of $52.0 million. Principal on the note is due in two equal installments
on September 15, 2007 and September 15, 2008. Interest is payable
semi-annually in arrears on each March 15 and September 15. The shares and
the note was originally issued to finance, in part, the acquisition of
HSI.
The Company paid Welsh, Carson, Anderson & Stowe $2.0 million in fiscal 1998
and $1.2 million in fiscal 1999 for fees related to acquisitions.
The other significant stockholder of the Company, The Limited (through
affiliates), is a significant customer. The Company has entered into credit card
processing agreements with several affiliates of The Limited. The Company has
received fees from The Limited and its affiliates of $53.1 million for fiscal
1997, $54.8 million for fiscal 1998 and $64.1 million for fiscal 1999.
20. DISCONTINUED OPERATIONS
During September 1999, the Board of Directors decided to discontinue the
Company's subscriber services business when a major customer was acquired by a
third party. The business is expected to wind down by second quarter 2000. The
business had revenues of approximately $27.4 million, $44.9 million, $43.1
million in fiscal 1997, 1998 and 1999, respectively. The net assets of the
business were immaterial.
21. SUBSEQUENT EVENTS
On March 1, 2000, the Company's Board of Director and stockholders approved
a change in number of authorized shares of common stock to 200,000,000, and
approved a 1-for-9 reverse stock split. Such change in authorized shares and
stock split became effective March 1, 2000. All share and per share data in the
accompanying financial statements have been restated to give effect to the
reverse stock split.
22. RESTATEMENT
Subsequent to the issuance of the Company's 1999 consolidated financial
statements, the Company's management determined that the premium on purchased
credit card portfolios had been amortized using an inappropriate life in the
Company's fiscal 1997, 1998 and 1999 consolidated financial statements. As a
result, the fiscal 1997, 1998 and 1999 consolidated financial statements were
restated from amounts previously reported to reduce the life on premium on
purchased credit card portfolios from 15 years to 3 years. This restatement
increased amortization of purchased intangibles by $9,098, $8,559 and $8,776 in
fiscal 1997, 1998 and 1999 respectively, reduced income tax expense by $3,184,
$2,996 and $3,072 in fiscal 1997, 1998 and 1999 respectively, reduced net income
by $5,914, in fiscal 1997, increased net loss by $5,563 and $5,704 in fiscal
1998 and 1999, respectively, reduced net income per share by $0.16 in fiscal
1997, and increased net loss per share by $0.13 and $0.12 in fiscal 1998 and
1999, respectively.
In addition, the Company's management determined that the revenue earned
from sponsors for participation in its loyalty program associated with the
Transaction and Marketing Services revenue
F-30
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. RESTATEMENT (CONTINUED)
should have been deferred and recognized over the estimated life of an Air Miles
reward mile and the revenue associated with the Redemption Revenue should have
been deferred and recognized when the collector redeems the Air Miles reward
miles or over the estimated life of an Air Miles reward mile for breakage.
Previously, this revenue were recognized at the time Air Miles reward miles were
issued to collectors. As a result, the accompanying fiscal 1998 and 1999
consolidated financial statements have been further restated to correct the
reporting of revenues from its loyalty program and related redemption
obligation, as well as the related initial purchase price allocation and
deferred tax items.
A summary of the significant effects of the restatements is as follows
(amounts in thousands except per share data):
FISCAL
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
AS AS AS
ORIGINALLY AS ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues:
Services...................... $225,504 $225,504 $306,366 $264,928 $483,179 $368,026
Product....................... -- -- -- 17,000 -- 59,017
Expenses:
Cost of operations............ 256,222 256,222 331,890 319,806 489,276 456,908
Amortization of purchased
intangibles................. 19,061 28,159 34,321 43,766 49,777 61,617
Income tax
expense/(benefit)........... 8,420 5,236 6,653 (4,708) 15,388 (6,538)
Net income/(loss)............... 6,363 449 (8,596) (17,992) (16,123) (29,841)
Net income/(loss) per share
AS OF DECEMBER 31,
-------------------------------------------------
1998 1999
----------------------- -----------------------
AS AS
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA
Other current assets.......................... $ 51,551 $ 50,691 $ 30,250 $ 34,148
Deferred tax asset, net....................... 18,000 27,018 31,532 64,617
Intangible assets and goodwill, net........... 305,365 362,797 448,017 493,609
Redemption obligation......................... 80,213 -- 122,198 --
Deferred revenue--service..................... -- 64,609 -- 84,474
Deferred revenue--redemption.................. -- 93,583 -- 164,867
Retained earnings............................. 83,838 67,534 67,715 37,693
Accumulated other comprehensive income
(loss)...................................... (1,971) 999 (4,208) (4,270)
Total assets.................................. 1,010,117 1,075,707 1,185,069 1,267,644
F-31
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
REVENUES
Transaction and marketing services........................ $260,393 $306,043
Redemption revenue........................................ 43,655 60,126
Financing charges, net.................................... 110,852 122,178
Other income.............................................. 13,316 12,696
-------- --------
Total revenue........................................... 428,216 501,043
OPERATING EXPENSES
Cost of operations........................................ 332,480 384,576
General and administrative................................ 32,042 44,216
Depreciation and other amortization....................... 10,219 19,099
Amortization of purchased intangibles..................... 44,777 38,771
-------- --------
Total operating expenses................................ 419,518 486,662
-------- --------
Operating income............................................ 8,698 14,381
Other expenses.............................................. -- 2,476
Interest expense............................................ 33,018 28,241
-------- --------
Loss from continuing operations before income taxes......... (24,320) (16,336)
Income tax expense (benefit)................................ (899) 1,544
-------- --------
Loss from continuing operations............................. (23,421) (17,880)
Income from discontinued operations, net of taxes........... 3,951 --
-------- --------
Net loss.................................................... $(19,470) $(17,880)
======== ========
Loss per share from continuing operation--basic and
diluted................................................... $ (0.52) $ (0.49)
======== ========
Loss per share--basic and diluted........................... $ (0.44) $ (0.49)
======== ========
Shares used in computing per share amounts--basic and
diluted................................................... 47,491 47,532
======== ========
See accompanying notes
F-32
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 2000
--------------------------
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
1999 ACTUAL EQUITY
-------------- ---------- -------------
(RESTATED--SEE
NOTE 5)
ASSETS
Cash and cash equivalents............................... $ 56,546 $ 73,773
Redemption settlement assets............................ 133,650 145,190
Trade receivables....................................... 69,085 91,673
Credit card receivables and seller's interest........... 150,804 142,509
Other current assets.................................... 60,564 65,033
---------- ----------
Total current assets................................ 470,649 518,178
Property and equipment, net............................. 89,231 90,825
Other non-current assets................................ 69,671 69,207
Due from securitizations................................ 144,484 135,341
Intangible assets and goodwill, net..................... 493,608 453,004
---------- ----------
Total assets........................................ $1,267,644 $1,266,556
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................ $ 83,976 73,417
Accrued expenses........................................ 75,646 81,830
Other liabilities....................................... 11,321 33,770
Debt, current portion................................... 118,225 163,125
---------- ----------
Total current liabilities........................... 289,168 352,141
Other liabilities....................................... 32,752 5,777
Deferred revenue........................................ 249,341 279,387
Long-term and subordinated debt......................... 316,911 267,035
---------- ----------
Total liabilities................................... 888,172 904,340
---------- ----------
Commitments and contingencies
Series A cumulative convertible preferred stock, $0.01
par value; 120 shares authorized and issued; pro
forma--none outstanding............................... 119,400 119,400 $ --
Common Stock, $0.01 par value; authorized 66,667 shares
(December 31, 1999), 200,000 (March 31, 2000), issued
47,529 shares (December 31, 1998), 47,529 shares
(March 31, 2000), 56,805 (pro forma).................. 475 475 574
Additional paid-in capital.............................. 226,174 226,240 345,541
Retained earnings....................................... 37,693 19,813 19,813
Accumulated other comprehensive loss.................... (4,270) (3,712) (3,712)
---------- ---------- --------
Total stockholders' equity............................ 260,072 242,816 362,216
---------- ---------- ========
Total liabilities and stockholders' equity............ $1,267,644 $1,266,556
========== ==========
See accompanying notes
F-33
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations.................. $ (23,421) $ (17,880)
Adjustments to reconcile income (loss) from continuing
operations to net cash (used in) provided by operating
activities:
Income (loss) from discontinued operations................ 3,951 --
Depreciation and amortization............................. 54,996 57,870
Provision for doubtful accounts........................... 1,814 2,775
Loss on sale of equity securities......................... -- 2,476
Changes in operating assets:
Change in trade accounts receivables.................... 75,343 (21,210)
Change in other assets.................................. 7,698 (4,065)
Change in other accounts payable and accrued expenses... 64,303 (4,375)
Change in other liabilities............................. 4,995 (59)
Deferred revenue........................................ 48,189 30,046
Other operating activities.............................. (21,903) 159
--------- ---------
Net cash (used in) provided by operating activities..... 215,992 45,797
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in redemption settlement assets.................. (31,651) (9,057)
Change in seller's interest............................... 9,932 4,142
Change in due from securitization......................... (11,683) 9,143
Purchase of credit card receivables....................... (35,753) --
Net cash paid for corporate acquisitions.................. (171,423) --
Capital expenditures...................................... (27,516) (26,517)
--------- ---------
Net cash used in investing activities................... (268,094) (22,289)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under debt agreements.......................... 267,229 356,675
Repayment of borrowings................................... (295,657) (361,651)
Proceeds from issuance of common stock.................... 107 66
Proceeds from issuance of preferred stock................. 119,400 --
--------- ---------
Net cash provided by (used in) financing activities..... 91,079 (4,910)
Effect of exchange rate changes........................... (2,447) (1,371)
--------- ---------
Change in cash and cash equivalents....................... 41,422 17,227
Cash and cash equivalents at beginning of period.......... 47,036 56,546
--------- ---------
Cash and cash equivalents at end of period................ $ 88,458 $ 73,773
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................. $ 32,226 $ 29,033
========= =========
Income taxes paid......................................... $ 27,507 $ 10,915
========= =========
See accompanying notes
F-34
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements and related notes of the
business and operations of Alliance Data Systems Corporation (collectively, the
"Company" or "ADSC"), for the nine months ended September 30, 1999 and 2000 have
been prepared in accordance with generally accepted accounting principles
pursuant to the rules and regulations of the Securities and Exchange Commission
and are unaudited.
In the opinion of management, the condensed consolidated financial
statements include all recurring adjustments and normal accruals necessary to
present fairly the Company's consolidated financial position and its
consolidated results of operations for the dates and periods presented. Results
for interim periods are not necessarily indicative of the results to be expected
during the remainder of the current year or for any future period. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the 53 weeks
ended January 31, 1998, the 11 months ended December 31, 1998 and the year ended
December 31, 1999 presented herein.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Net loss................................................ $(19,470) $(17,880)
Unrealized gains (losses) on securities
available-for-sale.................................... (1,802) 1,510
Currency translation adjustment......................... (295) (953)
-------- --------
Total comprehensive loss................................ $ 21,567 $(17,323)
======== ========
EARNINGS PER SHARE
Basic earnings per share is based only on the weighted average number of
common shares outstanding, excluding any dilutive effects of options or other
dilutive securities adjusted for the effect of the 1-for-9 reverse stock split
on March 1, 2000 (see Note 3). Diluted earnings per share is based on the
weighted average number of common and common equivalent shares, dilutive stock
options or other dilutive securities outstanding during the year. However, as
the Company generated net losses, common equivalent shares, composed of
incremental common shares issuable upon exercise of stock options and warrants
upon conversion of Series A preferred stock, are not included in diluted net
loss
F-35
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
per share because such shares are anti-dilutive. The following table sets forth
the computation of basic and diluted net income (loss) per share for the periods
indicated (in thousands, except per share amounts):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
NUMERATOR
Net loss.............................................. $(19,470) $(17,880)
Preferred stock dividends............................. 1,578 5,400
-------- --------
Numerator for basic and diluted earnings per
share--loss attributable to common stockholders..... $(21,048) $(23,280)
======== ========
DENOMINATOR
Weighted average shares............................... 47,491 47,532
Weighted average effect of dilutive securities:
Net effect of dilutive stock options................ -- --
Net effect of dilutive stock warrants............... -- --
Net effect of dilutive convertible preferred
stock............................................. -- --
-------- --------
Denominator for diluted calculations.................. 47,491 47,532
======== ========
NET (LOSS) PER SHARE
Basic and diluted..................................... $ (0.44) $ (0.49)
======== ========
PRO FORMA STOCKHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of the
Series A Cumulative Convertible Preferred Stock outstanding at the closing date
will be converted into shares of common stock. The unaudited pro forma
stockholders' equity as of September 30, 2000 reflects the conversion of all
outstanding convertible preferred stock at September 30, 2000 into
9,924,434 shares of common stock.
F-36
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SEGMENT INFORMATION
The Company classifies its businesses into three segments: Transaction
Services, Credit Services and Marketing Services.
LOYALTY AND
DATABASE TRANSACTION CREDIT OTHER/
MARKETING SERVICES SERVICES ELIMINATION TOTAL
NINE MONTHS ENDED SEPTEMBER 30, 1999 ----------- ----------- -------- ----------- --------
(IN THOUSANDS)
Revenues................................ $100,984 $266,758 $185,060 $(124,586) $428,216
Depreciation and amortization........... 27,636 17,671 9,690 -- 54,997
Operating profit (loss)................. (19,776) 4,159 24,315 -- 8,698
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues................................ $127,154 $310,799 $201,659 $(138,569) $501,043
Depreciation and amortization........... 25,647 31,312 910 -- 57,869
Operating profit........................ (11,557) (7,100) 33,038 -- 14,381
3. STOCKHOLDERS EQUITY
On March 1, 2000, the Company's Board of Directors and stockholders approved
an increase in the number of authorized shares of common stock to 200,000,000,
and approved a 1-for-9 reverse stock split. Such change in authorized shares and
stock split became effective March 1, 2000. All share and per share data in the
accompanying financial statements have been restated to give effect to the
reverse stock split.
4. RESTATEMENT
Subsequent to the issuance of the Company's 1999 consolidated financial
statements, the Company's management determined that the premium on purchased
credit card portfolios had been amortized using an inappropriate life in the
Company's fiscal 1997, 1998 and 1999 consolidated financial statements. As a
result, the fiscal 1997, 1998 and 1999 consolidated financial statements were
restated from amounts previously reported to reduce the life on premium on
purchased credit card portfolios from 15 years to 3 years. This restatement
increased amortization of purchased intangibles by $9,098, $8,559 and $8,776 in
fiscal 1997, 1998 and 1999 respectively, reduced income tax expense by $3,184,
$2,996 and $3,072 in fiscal 1997, 1998 and 1999 respectively, reduced net income
by $5,914, in fiscal 1997, increased net loss by $5,563 and $5,704 in fiscal
1998 and 1999, respectively, reduced net income per share by $0.16 in fiscal
1997, and increased net loss per share by $0.13 and $0.12 in fiscal 1998 and
1999, respectively.
In addition, the Company's management determined that the revenue earned
from sponsors for participation in its loyalty program associated with the
Transaction and Marketing Services revenue should have been deferred and
recognized over the estimated life of an Air Miles reward mile and the revenue
associated with the Redemption Revenue should have been deferred and recognized
when the collector redeems the Air Miles reward miles or over the estimated life
of an Air Miles reward mile for breakage. Previously, this revenue were
recognized at the time Air Miles reward miles were issued to collectors. As a
result, the accompanying fiscal 1998 and 1999 consolidated financial statements
have been further restated to correct the reporting of revenues from its loyalty
program and related redemption obligation, as well as the related initial
purchase price allocation and deferred tax items.
F-37
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Alliance Data Systems Corporation
We have audited the accompanying statements of income, changes in net assets and
cash flows of SPS Network Services for the year ended December 31, 1998 and for
the six months ended June 30, 1999. 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 of America. 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, such financial statements present fairly, in all material
respects, the results of operations and cash flows of SPS Network Services for
the year ended December 31, 1998 and the six months ended June 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 1, 2000
F-38
SPS NETWORK SERVICES
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1998 1999
------------ --------------
Processing and servicing fees............................... $ 47,674 $24,322
Operating expenses:
Processing and servicing.................................. 31,260 16,947
Salaries and employee benefits............................ 6,331 3,181
-------- -------
Total operating expenses............................ 37,591 20,128
-------- -------
Income before income taxes.................................. 10,083 4,194
Income taxes................................................ 3,711 1,543
-------- -------
Net income.................................................. $ 6,372 $ 2,651
======== =======
See accompanying notes.
F-39
SPS NETWORK SERVICES
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
------------------ --------------
Net assets at beginning of period........................... $ 9,074 $ 10,092
Net income.................................................. 6,372 2,650
Distribution of net income to parent........................ (5,354) (4,095)
----------- -----------
Net assets at end of period................................. $ 10,092 $ 8,647
=========== ===========
See accompanying notes.
F-40
SPS NETWORK SERVICES
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,372 $ 2,650
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 395 205
Change in accounts receivable............................. (1,435) (336)
Change in other assets.................................... 103 (54)
Change in other liabilities............................... 57 1,708
---------- ----------
Net cash provided by operating activities............... 5,492 4,173
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (138) (78)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to parent.................................... (5,354) (4,095)
---------- ----------
Change in cash and cash at end of period.................... $ -- $ --
========== ==========
See accompanying notes.
F-41
SPS NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
SPS Network Services (the "Company") provides a range of technology
outsourcing services including the processing of credit and debit card
transactions in the United States.
On July 1, 1999, the Company was purchased by Alliance Data Systems
Corporation ("ADSC"). The Company is a wholly owned subsidiary of ADSC.
Prior to July 1, 1999, the Company provided network services for SPS Payment
Systems, Inc., a wholly-owned subsidiary of Associates First Capital
Corporation ("Associates").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PROCESSING AND SERVICE FEES--Processing and service revenues include fees
from transaction processing services which are recognized as such services
are performed.
DEPRECIATION--Depreciation on furniture, fixtures and computer equipment and
software is computed on a straight-line basis, using estimated lives ranging
from three to five years.
3. INCOME TAXES
Prior to July 1, 1999 the Company was included in the consolidated tax
returns of Associates. Associates allocated income tax expense to the
Company based on its proportionate share of the consolidated federal tax
return. There was no deferred tax provision or benefit in 1998 or for the
six months ended June 30, 1999.
A reconciliation of recorded income tax expense to the expected expense
computed by applying the federal statutory rate of 35% to income before
income taxes for 1998 and the six months ended June 30, 1999 is as follows
(in thousands):
SIX MONTHS
ENDED
1998 JUNE 30, 1999
-------- --------------
(IN THOUSANDS)
Expected expense at statutory rate...................... $3,529 $1,468
Other................................................... 182 75
------ ------
Total............................................... $3,711 $1,543
====== ======
F-42
Inside back cover
Includes an example of our "Smart Statement" and our logo
- -------------------------------------------------------
- -------------------------------------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER ALLIANCE DATA SYSTEMS CORPORATION NOR ANY UNDERWRITER HAS
AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF THESE SECURITIES.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT
A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS IN ANY OF THESE JURISDICTIONS. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE THE RESTRICTIONS OF THAT JURISDICTION
RELATED TO THIS OFFERING AND THE DISTRIBUTIONS OF THIS PROSPECTUS.
------------------------------
TABLE OF CONTENTS
------------------------
PAGE
--------
Prospectus Summary............................. 1
Risk Factors................................... 9
Special Note Regarding Forward-Looking
Statements................................... 21
Use of Proceeds................................ 22
Dividend Policy................................ 22
Dilution....................................... 23
Capitalization................................. 24
Unaudited Pro Forma Consolidated Financial
Information.................................. 25
Selected Historical Consolidated Financial and
Operating Information........................ 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 33
Business....................................... 54
Management..................................... 70
Principal Stockholders......................... 81
Certain Relationships and Related
Transactions................................. 84
Description of Capital Stock................... 88
Shares Eligible for Future Sale................ 91
Underwriting................................... 92
Legal Matters.................................. 94
Experts........................................ 94
Where You Can Find More Information............ 95
Index to Consolidated Financial Statements..... F-1
------------------------------
Dealer Prospectus Delivery Obligation:
Until , 2001 (25 days after the date of this prospectus), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligations to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------
- -------------------------------------------------------
[LOGO]
13,000,000 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
, 2001
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13--OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions are set forth in the following table. The Company will pay all
expenses of issuance and distribution. Each amount, except for the SEC, NASD and
New York Stock Exchange fees, is estimated.
SEC registration fees..................................... $ 79,200
NASD filing fees.......................................... 30,500
New York Stock Exchange application listing fee........... 335,000
Transfer agent's and registrar's fees and expenses........ 20,000
Printing and engraving expenses........................... 900,000
Legal fees and expenses................................... 900,000
Accounting fees and expenses.............................. 800,000
Blue sky fees and expenses................................ 5,000
Miscellaneous............................................. 10,300
----------
Total................................................... $3,080,000
==========
ITEM 14--INDEMNIFICATION OF DIRECTORS AND OFFICERS
Alliance Data Systems Corporation's Certificate of Incorporation provides
that it shall, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, indemnify all persons whom it may indemnify under
Delaware law.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Alliance Data Systems Corporation's Bylaws provide for indemnification by it
of its directors, officers and certain non-officer employees under certain
circumstances against expenses (including attorneys' fees, judgments, fines and
amounts paid in settlement) reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of Alliance Data Systems Corporation if such person acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of Alliance Data Systems Corporation, and, with respect to
criminal actions or proceedings, if such person had no reasonable cause to
believe his or her conduct was unlawful.
II-1
Alliance Data Systems Corporation's Certificate of Incorporation also provides
that, to the fullest extent permitted by the Delaware General Corporation Law,
no director shall be personally liable to Alliance Data Systems Corporation or
its stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors.
Expenses for the defense of any action for which indemnification may be
available may be advanced by Alliance Data Systems Corporation under certain
circumstances. The general effect of the foregoing provisions may be to reduce
the circumstances which an officer or director may be required to bear the
economic burden of the foregoing liabilities and expenses. Directors and
officers will be covered by liability insurance indemnifying them against
damages arising out of certain kinds of claims which might be made against them
based on their negligent acts or omissions while acting in their capacity as
such.
ITEM 15--RECENT SALES OF UNREGISTERED SECURITIES
Since January 1998, Alliance Data Systems Corporation has issued and sold
the following unregistered securities:
(1) In July 1998, 9,634,265 shares of common stock were sold to various
Welsh, Carson, Anderson & Stowe limited partnerships and a total of
466,744 shares of common stock were sold to a total of 16 individuals
who are partners of some or all of the Welsh Carson limited
partnerships for $100.0 million to finance, in part, the acquisition of
all of the outstanding capital stock of the Loyalty Management Group
Canada Inc.
(2) In August 1998, 30,303 shares of common stock were sold to WCAS Capital
Partners II, L.P. at a value of $9.90 per share as consideration for
extending the maturity on a 10% subordinated note, issued to WCAS
Capital Partners II, originally due January 24, 2002 to October 25,
2005 and 20,202 shares were sold to Limited Commerce Corp. at a value
of $9.90 per share as consideration for extending the maturity on a 10%
subordinated note, issued to Limited Commerce Corp., originally due
January 24, 2002 to October 25, 2005.
(3) In September 1998, 655,555 shares of common stock were sold to WCAS
Capital Partners III, LP to finance, in part, the acquisition of
Harmonic Systems Incorporated.
(4) In July 1999, a total of 120,000 shares of Series A preferred stock
were sold to Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS
Information Partners, L.P. and 20 individuals who are also partners of
some or all of the Welsh Carson limited partnerships for $120 million.
The shares of Series A preferred stock were issued to finance, in part,
the acquisition of the network transaction processing business of
SPS Payment Systems, Inc.
(5) Since January 1998, Alliance Data Systems Corporation has granted stock
options to purchase shares of its common stock under its stock option
plan covering an aggregate of 4,120,577 shares, at exercise prices
ranging from $9.00 to $15.00 per share. Since January 1998 Alliance
Data Systems Corporation has issued 9,162 shares of Alliance Data
Systems Corporation's common stock pursuant to the exercise of stock
options. Since January 1998, 75,884 stock options have lapsed without
being exercised.
II-2
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with Alliance Data
Systems, to information about the Company.
ITEM 16--EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT
NO. EXHIBITS
- ------- --------
*1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Merger, dated as of August 30, 1996,
by and between Business Services Holdings, Inc. and World
Financial Network Holding Corporation.
*2.2 Agreement and Plan of Merger, dated as of August 14, 1998,
by and among Alliance Data Systems Corporation, HSI
Acquisition Corp., and Harmonic Systems Incorporated.
*2.3 Stock Purchase Agreement, dated June 8, 1998, by and between
SPS Payment Systems, Inc., Alliance Data Systems
Corporation, SPS Commercial Services, Inc., and ADS
Network Services, Inc., amended July 12, 1999.
**2.4 Agreement for the Purchase of all the Shares of Loyalty
Management Group Canada Inc., June 26, 1998, by and
between Air Miles International Group B.V., certain other
shareholders and option holders and Alliance Data Systems
Corporation as amended July 14, 1998.
*3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.
*3.2 Second Amended and Restated Bylaws of the Registrant.
*4 Specimen Certificate for shares of Common Stock of the
Registrant.
*5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
**10.1 Credit Card Processing Agreement between World Financial
Network National Bank, Bath and Body Works, Inc. and
Tri-State Factoring, Inc., dated January 31, 1996.
**10.2 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Catalogue, Inc.,
and Far West Factoring Inc., dated January 31, 1996
(assigned by Victoria's Secret Catalogue, Inc. to
Victoria's Secret Catalogue, LLC, May 2, 1998).
**10.3 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Stores, Inc., and
Lone Mountain Factoring, Inc., dated January 31, 1996.
**10.4 Credit Card Processing Agreement between World Financial
Network National Bank, Lerner New York, Inc., and Nevada
Receivable Factoring, Inc., dated January 31, 1996.
II-3
EXHIBIT
NO. EXHIBITS
- ------- --------
**10.5 Credit Card Processing Agreement between World Financial
Network National Bank, Express, Inc., and Retail
Factoring, Inc., dated January 31, 1996.
**10.6 Credit Card Processing Agreement between World Financial
Network National Bank, The Limited Stores, Inc., and
American Receivable Factoring, Inc., dated January 31,
1996.
**10.7 Credit Card Processing Agreement between World Financial
Network National Bank, Structure, Inc., and Mountain
Factoring, Inc., dated January 31, 1996.
**10.8 Credit Card Processing Agreement between World Financial
Network National Bank, Lane Bryant, Inc., and Sierra
Nevada Factoring, dated January 31, 1996, and amended
August 4, 1998 and September 12, 1999.
**10.9 Credit Card Processing Agreement between World Financial
Network National Bank, Henri Bendel, Inc., and Western
Factoring, Inc., dated January 31, 1996 and amended
May 13, 1998.
**10.10 Supplier Agreement between Canadian Airlines International
Ltd. and Loyalty Management Group Canada Inc., dated March
15, 1996, as amended.
*10.11 Lease between Deerfield and Weiland Office Building, L.L.C.
and ADS Alliance Data Systems, Inc., dated July 30, 1999.
*10.12 Indenture of Sublease between J.C. Penney Company, Inc. and
BSI Business Services, Inc., dated January 11, 1996.
*10.13 Build-to-Suit Net Lease between Opus South Corporation and
ADS Alliance Data Systems, Inc., dated January 29, 1998,
as amended.
*10.14 Industrial Lease Agreement between CIBC Development
Corporation and Loyalty Management Group Canada Inc.,
dated October 19, 1998, amended January 26, 1999.
*10.15 Lease between YCC Limited and London Life Insurance Company
and Loyalty Management Group Canada Inc. dated May 28,
1997 and amended June 19, 1997 and January 15, 1998.
*10.16 Deed of Lease between Boswell International Marine (PTE)
Limited and Financial Automation Limited, dated August 3,
1999.
*10.17 Office Lease between Office City, Inc. and World Financial
Network National Bank, dated December 24, 1986, and
amended January 19, 1987, May 11, 1988, August 4, 1989 and
August 18, 1999.
*10.18 Lease Agreement by and between Continental Acquisitions,
Inc. and World Financial Network National Bank, dated July
2, 1990, and amended September 11, 1990, November 16, 1990
and February 18, 1991.
*10.19 Lease Agreement by and between Americana Parkway Warehouse
Limited and World Financial Network National Bank, dated
June 28, 1994.
*10.20 Lease Agreement by and between Morrison Taylor II, Ltd. and
ADS Alliance Data Systems, Inc., dated June 18, 1998, and
amended June 18, 1998.
*10.21 Lease Agreement between Morrison Taylor, Ltd. and ADS
Alliance Data Systems, Inc. dated July 1, 1997, and
amended June 18, 1998.
*10.22 Commercial Lease Agreement between Waterview Parkway, L.P.
and ADS Alliance Data Systems, Inc., dated July 16, 1997.
II-4
EXHIBIT
NO. EXHIBITS
- ------- --------
*10.23 Preferred Stock Purchase Agreement by and between Alliance
Data Systems Corporation and several persons named in
Schedule I thereto, dated July 12, 1999.
*10.24 Amended and Restated Stockholder Agreement, by and between
World Financial Network Holding Corporation, Limited
Commerce Corp., Welsh, Carson, Anderson, and Stowe VII,
L.P., and the several other investors named in Annex 1
thereto dated August 30, 1996, and amended July 24, 1998,
August 31, 1998 and July 12, 1999.
*10.25 Securities Purchase Agreement, by and between Business
Services Holdings, Inc., and the several purchasers named
in Schedule 1 and Schedule II thereto, dated January 24,
1996, and amended August 31, 1998.
*10.26 Common Stock Purchase Agreement between Alliance Data
Systems Corporation and Welsh, Carson, Anderson, and Stowe
VII, L.P., Welsh, Carson, Anderson, and Stowe VIII, L.P.,
and the persons named in Schedule I thereto, dated July
24, 1998.
*10.27 Securities Purchase Agreement between Alliance Data Systems
Corporation and WCAS Capital Partners III, L.P., dated
September 15, 1998.
*10.28 10% Subordinated Note due September 15, 2008 issued by
Alliance Data Systems Corporation to WCAS Capital Partners
III, L.P. dated September 15, 1998.
*10.29 10% Subordinated Note due October 25, 2005 issued by
Alliance Data Systems Corporation to the Limited Commerce
Corp., dated January 24, 1996.
*10.30 10% Subordinated Note due October 25, 2005 issued by
Alliance Data Systems Corporation to WCAS Capital Partners
II, L.P. dated January 24, 1996.
*10.31 Amended and Restated Credit Agreement between Alliance Data
Systems Corporation, and Loyalty Management Group Canada
Inc., the Guarantors party thereto, the Banks party
thereto, and Morgan Guaranty Trust Company of New York,
dated July 24, 1998.
*10.32 Pooling and Servicing Agreement, dated as of January 30,
1998, by and between World Financial Network National
Bank, as Transferor and as Servicer, and The Bank of New
York, as Trustee.
*10.33 ADS Alliance Data Systems, Inc. Supplemental Executive
Retirement Plan, effective May 1, 1999.
*10.34 Amended and Restated Alliance Data Systems Corporation Stock
Option and its Subsidiaries Restricted Stock Plan.
*10.35 Form of Alliance Data Systems Corporation Incentive Stock
Option Agreement.
*10.36 Form of Alliance Data Systems Corporation Non-Qualified
Stock Option Agreement.
*10.37 Form of Alliance Data Systems Corporation Confidentiality
and Non-Solicitation Agreement.
*10.38 Alliance Data Systems Corporation 1999 Incentive
Compensation Plan.
*10.39 Letter employment agreement with J. Michael Parks, dated
February 19, 1997.
*10.40 Letter employment agreement with Ivan Szeftel, dated May 4,
1998.
II-5
EXHIBIT
NO. EXHIBITS
- ------- --------
*10.41 Registration Rights Agreement dated as of January 24, 1996
between Business Services Holdings, Inc. and Welsh Carson,
Andersen, and Stowe VII, L.P., WCAS Information Partners,
L.P., WCA Management Corporation, Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Richard H. Stowe,
Andrew M. Paul, Thomas E. McInerney, Laura VanBuren, James
B. Hoover, Robert A. Minicucci, Anthony J. deNicola, and
David Bellet.
*10.42 Securities Purchase Agreement, dated as of August 30, 1996,
by and among World Financial Network Holding Corporation,
Limited Commerce Corp., and several persons named in
Schedules I and II thereto, and WCAS Capital Partners II,
L.P., as amended August 31, 1998.
*10.43 Amended and Restated License to Use the Air Miles Trade
Marks in Canada, dated as of July 24, 1998, by and between
Air Miles International Holdings N.V. and Loyalty
Management Group Canada Inc.
*10.44 Amended and Restated License to Use and Exploit the Air
Miles Scheme in Canada, dated July 24, 1998, by and
between Air Miles International Trading B.V. and Loyalty
Management Group Canada Inc.
*10.45 License to Use the Air Miles Trademarks in the United
States, dated as of July 24, 1998, by and between Air
Miles International Holdings N.V. and Loyalty Management
Group Canada Inc.
*10.46 License to Use and Exploit the Air Miles Scheme in the
United States, dated as of July 1998, by and between Air
Miles International Trading B.V. and Alliance Data Systems
Corporation.
*10.47 Form of Retainer Agreement entered into between ADS Alliance
Data Systems, Inc. and certain affiliates of The Limited,
Inc.
*10.48 Form of Business Solutions Master Agreement between ADS
Alliance Data Systems, Inc. and certain affiliates of The
Limited, Inc.
10.49 Second Amendment to Amended and Restated Credit Agreement,
dated as of September 29, 2000, by and among Alliance Data
Systems Corporation, Loyalty Management Group Canada Inc.,
Morgan Guaranty Trust Company of New York and Harris Trust
and Savings Bank.
10.50 Commercial Real Estate Lease, between Route 7 Realty, LLC
and ADS Alliance Data Systems, Inc., dated October 24,
2000.
10.51 Third Amendment to Amended and Restated Credit Agreement,
dated as of January 10, 2001 between Alliance Data Systems
Corporation, Loyalty Management Group Canada, Inc. and
Harris Trust and Savings Bank.
10.52 General Release and Severance Agreement by and between
Edward K. Mims, ADS Alliance Data Systems, Inc., and
Alliance Data Systems Corporation.
10.53 General Release and Severance Agreement by and between James
Anderson, ADS Alliance Data Sytems, Inc. and Alliance Data
Systems Corporation.
+10.54 Consumer Marketing Database Services Agreement among ADS
Alliance Data Systems, Inc., Intimate Brands, Inc. and The
Limited, Inc., dated as of September 1, 2000.
+10.55 Alliance Data Systems Corporation and its Subsidiaries
Employee Stock Purchase Plan.
II-6
EXHIBIT
NO. EXHIBITS
- ------- --------
*21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP with regard to Alliance
Data Systems Corporation and SPS Network Services.
*23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
*23.4 Consent of Kenneth R. Jensen.
*24 Power of Attorney (included on the signature page hereto).
- ------------------------
* Previously filed.
** Portions of Exhibit have been omitted and filed separately with the
commission pursuant to a request for confidential treatment.
+ To be filed by amendment.
(b) Financial Statement Schedules
Schedule II--Valuation and qualifying accounts
ITEM 17--UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on January 26, 2001.
ALLIANCE DATA SYSTEMS CORPORATION
By: /s/ J. MICHAEL PARKS
--------------------------------------------
J. Michael Parks
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on January 26, 2001:
NAME TITLE
---- -----
/s/ J. MICHAEL PARKS Chairman of the Board, Chief Executive Officer
------------------------------------------- and President
J. Michael Parks (principal executive officer)
/s/ EDWARD HEFFERNAN Executive Vice President and Chief Financial
------------------------------------------- Officer
Edward Heffernan (principal financial officer)
* Vice President, Corporate Controller and
------------------------------------------- Chief Accounting Officer
Michael D. Kubic (principal accounting officer)
*
------------------------------------------- Director
Bruce K. Anderson
*
------------------------------------------- Director
Anthony J. deNicola
*
------------------------------------------- Director
Daniel P. Finkelman
*
------------------------------------------- Director
Robert A. Minicucci
*
------------------------------------------- Director
Bruce A. Soll
*By: /s/ J. MICHAEL PARKS
--------------------------------------
J. Michael Parks
ATTORNEY-IN-FACT
II-8
SCHEDULE II
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD INCREASES DEDUCTIONS END OF PERIOD
- ----------- ------------------- --------- ---------- -------------
Allowance for Doubtful Accounts--Trade
receivables:
53 weeks ended January 31, 1998.............. $ -- $ 8,771 $ (6,150) $2,561
11 months ended December 31, 1998............ 2,561 8,151 (7,136) 3,576
Year ended December 31, 1999................. 3,576 5,814 (8,311) 1,079
Allowance for Doubtful Accounts--Credit Card
receivables:
53 weeks ended January 31, 1998.............. $6,759 $13,485 $(15,627) $4,617
11 months ended December 31, 1998............ 4,617 15,352 (15,081) 4,888
Year ended December 31, 1999................. 4,888 14,951 (16,182) 3,657
1
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Merger, dated as of August 30, 1996,
by and between Business Services Holdings, Inc. and World
Financial Network Holding Corporation.
*2.2 Agreement and Plan of Merger, dated as of August 14, 1998,
by and among Alliance Data Systems Corporation, HSI
Acquisition Corp., and Harmonic Systems Incorporated.
*2.3 Stock Purchase Agreement, dated June 8, 1998, by and between
SPS Payment Systems, Inc., Alliance Data Systems
Corporation, SPS Commercial Services, Inc., and ADS
Network Services, Inc., amended July 12, 1999.
**2.4 Agreement for the Purchase of all the Shares of Loyalty
Management Group Canada Inc., June 26, 1998, by and
between Air Miles International Group B.V., certain other
shareholders and option holders and Alliance Data Systems
Corporation as amended July 14, 1998.
*3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.
*3.2 Second Amended and Restated Bylaws of the Registrant.
*4 Specimen Certificate for shares of Common Stock of the
Registrant.
*5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
**10.1 Credit Card Processing Agreement between World Financial
Network National Bank, Bath and Body Works, Inc. and
Tri-State Factoring, Inc., dated January 31, 1996.
**10.2 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Catalogue, Inc.,
and Far West Factoring Inc., dated January 31, 1996
(assigned by Victoria's Secret Catalogue, Inc. to
Victoria's Secret Catalogue, LLC, May 2, 1998).
**10.3 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Stores, Inc., and
Lone Mountain Factoring, Inc., dated January 31, 1996.
**10.4 Credit Card Processing Agreement between World Financial
Network National Bank, Lerner New York, Inc., and Nevada
Receivable Factoring, Inc., dated January 31, 1996.
**10.5 Credit Card Processing Agreement between World Financial
Network National Bank, Express, Inc., and Retail
Factoring, Inc., dated January 31, 1996.
**10.6 Credit Card Processing Agreement between World Financial
Network National Bank, The Limited Stores, Inc., and
American Receivable Factoring, Inc., dated January 31,
1996.
**10.7 Credit Card Processing Agreement between World Financial
Network National Bank, Structure, Inc., and Mountain
Factoring, Inc., dated January 31, 1996.
**10.8 Credit Card Processing Agreement between World Financial
Network National Bank, Lane Bryant, Inc., and Sierra
Nevada Factoring, dated January 31, 1996, and amended
August 4, 1998 and September 12, 1999.
**10.9 Credit Card Processing Agreement between World Financial
Network National Bank, Henri Bendel, Inc., and Western
Factoring, Inc., dated January 31, 1996 and amended
May 13, 1998.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
**10.10 Supplier Agreement between Canadian Airlines International
Ltd. and Loyalty Management Group Canada Inc., dated March
15, 1996, as amended.
*10.11 Lease between Deerfield and Weiland Office Building, L.L.C.
and ADS Alliance Data Systems, Inc., dated July 30, 1999.
*10.12 Indenture of Sublease between J.C. Penney Company, Inc. and
BSI Business Services, Inc., dated January 11, 1996.
*10.13 Build-to-Suit Net Lease between Opus South Corporation and
ADS Alliance Data Systems, Inc., dated January 29, 1998,
as amended.
*10.14 Industrial Lease Agreement between CIBC Development
Corporation and Loyalty Management Group Canada Inc.,
dated October 19, 1998, amended January 26, 1999.
*10.15 Lease between YCC Limited and London Life Insurance Company
and Loyalty Management Group Canada Inc. dated May 28,
1997 and amended June 19, 1997 and January 15, 1998.
*10.16 Deed of Lease between Boswell International Marine (PTE)
Limited and Financial Automation Limited, dated August 3,
1999.
*10.17 Office Lease between Office City, Inc. and World Financial
Network National Bank, dated December 24, 1986, and
amended January 19, 1987, May 11, 1988, August 4, 1989 and
August 18, 1999.
*10.18 Lease Agreement by and between Continental Acquisitions,
Inc. and World Financial Network National Bank, dated July
2, 1990, and amended September 11, 1990, November 16, 1990
and February 18, 1991.
*10.19 Lease Agreement by and between Americana Parkway Warehouse
Limited and World Financial Network National Bank, dated
June 28, 1994.
*10.20 Lease Agreement by and between Morrison Taylor II, Ltd. and
ADS Alliance Data Systems, Inc., dated June 18, 1998, and
amended June 18, 1998.
*10.21 Lease Agreement between Morrison Taylor, Ltd. and ADS
Alliance Data Systems, Inc. dated July 1, 1997, and
amended June 18, 1998.
*10.22 Commercial Lease Agreement between Waterview Parkway, L.P.
and ADS Alliance Data Systems, Inc., dated July 16, 1997.
*10.23 Preferred Stock Purchase Agreement by and between Alliance
Data Systems Corporation and several persons named in
Schedule I thereto, dated July 12, 1999.
*10.24 Amended and Restated Stockholder Agreement, by and between
World Financial Network Holding Corporation, Limited
Commerce Corp., Welsh, Carson, Anderson, and Stowe VII,
L.P., and the several other investors named in Annex 1
thereto dated August 30, 1996, and amended July 24, 1998,
August 31, 1998 and July 12, 1999.
*10.25 Securities Purchase Agreement, by and between Business
Services Holdings, Inc., and the several purchasers named
in Schedule 1 and Schedule II thereto, dated January 24,
1996, and amended August 31, 1998.
*10.26 Common Stock Purchase Agreement between Alliance Data
Systems Corporation and Welsh, Carson, Anderson, and Stowe
VII, L.P., Welsh, Carson, Anderson, and Stowe VIII, L.P.,
and the persons named in Schedule I thereto, dated July
24, 1998.
*10.27 Securities Purchase Agreement between Alliance Data Systems
Corporation and WCAS Capital Partners III, L.P., dated
September 15, 1998.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.28 10% Subordinated Note due September 15, 2008 issued by
Alliance Data Systems Corporation to WCAS Capital Partners
III, L.P. dated September 15, 1998.
*10.29 10% Subordinated Note due October 25, 2005 issued by
Alliance Data Systems Corporation to the Limited Commerce
Corp., dated January 24, 1996.
*10.30 10% Subordinated Note due October 25, 2005 issued by
Alliance Data Systems Corporation to WCAS Capital Partners
II, L.P. dated January 24, 1996.
*10.31 Amended and Restated Credit Agreement between Alliance Data
Systems Corporation, and Loyalty Management Group Canada
Inc., the Guarantors party thereto, the Banks party
thereto, and Morgan Guaranty Trust Company of New York,
dated July 24, 1998.
*10.32 Pooling and Servicing Agreement, dated as of January 30,
1998, by and between World Financial Network National
Bank, as Transferor and as Servicer, and The Bank of New
York, as Trustee.
*10.33 ADS Alliance Data Systems, Inc. Supplemental Executive
Retirement Plan, effective May 1, 1999.
*10.34 Amended and Restated Alliance Data Systems Corporation and
its Subsidiaries Stock Option and Restricted Stock Plan.
*10.35 Form of Alliance Data Systems Corporation Incentive Stock
Option Agreement.
*10.36 Form of Alliance Data Systems Corporation Non-Qualified
Stock Option Agreement.
*10.37 Form of Alliance Data Systems Corporation Confidentiality
and Non-Solicitation Agreement.
*10.38 Alliance Data Systems Corporation 1999 Incentive
Compensation Plan.
*10.39 Letter employment agreement with J. Michael Parks, dated
February 19, 1997.
*10.40 Letter employment agreement with Ivan Szeftel, dated May 4,
1998.
*10.41 Registration Rights Agreement dated as of January 24, 1996
between Business Services Holdings, Inc. and Welsh Carson,
Andersen, and Stowe VII, L.P., WCAS Information Partners,
L.P., WCA Management Corporation, Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Richard H. Stowe,
Andrew M. Paul, Thomas E. McInerney, Laura VanBuren, James
B. Hoover, Robert A. Minicucci, Anthony J. deNicola, and
David Bellet.
*10.42 Securities Purchase Agreement, dated as of August 30, 1996,
by and among World Financial Network Holding Corporation,
Limited Commerce Corp., and several persons named in
Schedules I and II thereto, and WCAS Capital Partners II,
L.P., as amended August 31, 1998.
*10.43 Amended and Restated License to Use the Air Miles Trade
Marks in Canada, dated as of July 24, 1998, by and between
Air Miles International Holdings N.V. and Loyalty
Management Group Canada Inc.
*10.44 Amended and Restated License to Use and Exploit the Air
Miles Scheme in Canada, dated July 24, 1998, by and
between Air Miles International Trading B.V. and Loyalty
Management Group Canada Inc.
*10.45 License to Use the Air Miles Trademarks in the United
States, dated as of July 24, 1998, by and between Air
Miles International Holdings N.V. and Loyalty Management
Group Canada Inc.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.46 License to Use and Exploit the Air Miles Scheme in the
United States, dated as of July 1998, by and between Air
Miles International Trading B.V. and Alliance Data Systems
Corporation.
*10.47 Form of Retainer Agreement entered into between ADS Alliance
Data Systems, Inc. and certain affiliates of The Limited,
Inc.
*10.48 Form of Business Solutions Master Agreement between ADS
Alliance Data Systems, Inc. and certain affiliates of The
Limited, Inc.
10.49 Second Amendment to Amended and Restated Credit Agreement,
dated as of September 29, 2000, by and among Alliance Data
Systems Corporation, Loyalty Management Group Canada Inc.,
Morgan Guaranty Trust Company of New York and Harris Trust
and Savings Bank.
10.50 Commercial Real Estate Lease, between Route 7 Realty, LLC
and ADS Alliance Data Systems, Inc., dated October 24,
2000.
10.51 Third Amendment to Amended and Restated Credit Agreement,
dated as of January 10, 2001 between Alliance Data Systems
Corporation, Loyalty Management Group Canada, Inc. and
Harris Trust and Savings Bank.
10.52 General Release and Severance Agreement by and between
Edward K. Mims, ADS Alliance Data Systems, Inc. and
Alliance Data Systems Corporation.
10.53 General Release and Severance Agreement by and between James
Anderson, ADS Alliance Data Sytems, Inc., and Alliance
Data Systems Corporation.
+10.54 Consumer Marketing Database Services Agreement among ADS
Alliance Data Systems, Inc., Intimate Brands, Inc. and The
Limited, Inc., dated as of September 1, 2000.
+10.55 Alliance Data Systems Corporation and its Subsidiaries
Employee Stock Purchase Plan.
*21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP with regard to Alliance
Data Systems Corporation and SPS Network Services.
*23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
*23.4 Consent of Kenneth R. Jensen.
*24 Power of Attorney (included on the signature page hereto)
- ------------------------
* Previously filed.
** Portions of Exhibit have been omitted and filed separately with the
commission pursuant to a request for confidential treatment.
+ To be filed by amendment.
ALLIANCE DATA SYSTEMS CORPORATION
LOYALTY MANAGEMENT GROUP CANADA INC.
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amendment to Amended and Restated Credit Agreement (herein,
the "AMENDMENT") is entered into as of September 29, 2000, between Alliance Data
Systems Corporation, a Delaware corporation (the "US BORROWER"), Loyalty
Management Group Canada Inc., an Ontario corporation (the "CANADIAN BORROWER";
the US Borrower and the Canadian Borrower being referred to herein individually
as "BORROWER" and collectively as the "BORROWERS"), Banks party to the Credit
Agreement (as such term is defined below), Morgan Guaranty Trust Company of New
York, as a Bank and in its capacity as outgoing Administrative Agent, Pledgee
and Collateral Agent (in such capacity, the "DEPARTING AGENT") and Harris Trust
and Savings Bank, as a Bank and in its capacity as the new Administrative Agent,
Pledgee and Collateral Agent under the Credit Agreement (the "NEW AGENT" or the
"ADMINISTRATIVE AGENT").
PRELIMINARY STATEMENTS
A. The Borrowers, the Departing Agent and the Banks entered into a
certain Amended and Restated Credit Agreement, dated as of July 24, 1998 and
amended and restated as of October 22, 1998 (as amended, restated, modified and
supplemented from time to time, the "CREDIT AGREEMENT"). All capitalized terms
used herein without definition shall have the same meanings herein as such terms
have in the Credit Agreement.
B. The Borrowers have requested that (i) the Departing Agent be
substituted with the New Agent as Administrative Agent, Swing Lender, Pledgee
and Collateral Agent under the relevant Credit Documents and (ii) the Banks
amend certain covenants and make certain other amendments to the Credit
Agreement, and the New Agent, the Departing Agent and the Banks party hereto are
willing to do so under the terms and conditions set forth in this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. RESIGNATION OF MORGAN GUARANTY TRUST COMPANY OF NEW YORK AS
ADMINISTRATIVE AGENT, PLEDGEE AND COLLATERAL AGENT AND
REPLACEMENT BY HARRIS TRUST AND SAVINGS BANK.
Upon satisfaction of the conditions precedent set forth in Section 4
hereof, the Departing Agent shall cease to be the Administrative Agent under the
Credit Agreement and the other relevant Credit Documents, shall cease to be the
Pledgee under the Pledge Agreements and shall cease to be the Collateral Agent
under the other Security Documents and Credit Documents and, except as set forth
below, the Departing Agent shall have no further obligations as Administrative
Agent, Pledgee and Collateral Agent thereunder. In replacement of the Departing
Agent, the New Agent shall assume the role of the Administrative Agent under the
Credit Agreement and the other relevant Credit Documents, the Pledgee under the
Pledge Agreements and Collateral Agent under the other Security Documents and
Credit Documents and shall have all the rights and, from and after the date this
Amendment becomes effective, obligations as
Administrative Agent, Pledgee and Collateral Agent previously held by the
Departing Agent thereunder, PROVIDED that it is expressly acknowledged and
agreed that (x) the New Agent shall not be liable for any acts or omissions
of the Departing Agent and (y) the provisions of Article 8 of the Credit
Agreement (including without limitation the indemnity provisions of Sections
8.5 and 8.6 of the Credit Agreement) shall inure to the benefit of (1) the
Departing Agent as to any actions taken or omitted to be taken by it while it
was Administrative Agent, Pledgee and Collateral Agent under the relevant
Credit Documents including without limitation all actions taken or to be
taken in furtherance of the transfer of agency to the New Agent, regardless
of whether such action is taken before or after the effectiveness thereof and
(2) the New Agent who shall be entitled to all of the rights of, and vested
with the same powers as, the Departing Agent (including without limitation
all the powers of the Administrative Agent, Pledgee and Collateral Agent)
under the Credit Documents prior to the date hereof. The parties hereto (i)
consent to the resignation of the Departing Agent as Administrative Agent
under the Credit Agreement and the other relevant Credit Documents, the
Pledgee under the Pledge Agreements and the Collateral Agent under the other
Security Documents and Credit Documents, (ii) consent to the New Agent as the
successor Administrative Agent under the Credit Agreement and the other
relevant Credit Documents, the successor Pledgee under the Pledge Agreements
and the successor Collateral Agent under the other Security Documents and
Credit Documents and (iii) agree that all references in the Credit Agreement,
each other Credit Document and any other instrument or document related or
supplementary thereto to the Administrative Agent, Pledgee or the Collateral
Agent shall, upon the effectiveness hereof, be deemed references to the New
Agent. Furthermore and without limiting the generality of the foregoing, by
its execution hereto, the Departing Agent hereby assigns the security
interests and liens previously granted to it pursuant to the Security
Documents and its duties thereunder to the New Agent, as agent for the Banks,
including Morgan Guaranty Trust Company of New York in its capacity as a Bank.
SECTION 2. REDUCTION OF TERM LOANS AND REVOLVING LOAN COMMITMENT.
Upon the application of the proceeds of the Eligible IPO to the
repayment in full of the US Term Loans required under Sections 2.11(A)(g) and
2.11(B)(c) of the Credit Agreement (as modified hereby), the amount of each
Bank's outstanding US Term Loans shall be reduced to zero.
SECTION 3. AMENDMENTS.
Upon the satisfaction of the conditions precedent set forth in
Section 5 hereof, the Credit Agreement shall be and hereby is amended as
follows:
3.1 All references in Section 1.1 and Section 8 of the Credit
Agreement to "Morgan Guaranty Trust Company of New York" shall be deleted and
"Harris Trust and Savings Bank" shall be substituted in lieu thereof.
3.2 The definitions of "Domestic Business Day" and "Prime Rate"
appearing in Section 1.1 of the Credit Agreement shall be amended by
inserting "and Chicago, Illinois" immediately after the references to "New
York City" appearing therein.
2
3.3 The definition of "Obligations" appearing in Section 1.1 of
the Credit Agreement shall be amended and restated in its entirety to read as
follows:
"Obligations" means all (i) amounts owing to the
Administrative Agent, the Collateral Agent or any Bank
pursuant to the terms of this Agreement or any other Credit
Document and (ii) Derivatives Obligations of each "Assignor"
(as such term is defined in the Security Agreement) from time
to time owed to a Bank or an Affiliate of a Bank.
3.4 All references in the Credit Agreement to "New York City time"
and "New York time" shall be deleted and "Chicago, Illinois time" shall be
substituted in lieu thereof.
3.5 Section 1.1 of the Credit Agreement shall be amended by adding
the following new definitions thereto:
"Eligible IPO" means any public or private offering of certain
capital stock of the US Borrower to be consummated by no later
than June 30, 2001 and to result in gross cash proceeds raised
by the US Borrower of not less than $250,000,000.
"Senior Secured Leverage Ratio" of any Person means, at any
time, the ratio of (x) all amounts owing by such person to the
Administrative Agent, the Collateral Agent or any Bank
pursuant to the terms of this Agreement or any other Credit
Document to (y) Consolidated EBITDA of such person for the
four fiscal quarters then most recently ended.
3.6 Section 2.3(b) and Section 2.12 of the Credit Agreement shall
each be amended by deleting the references to "funds immediately available in
New York City" appearing therein and inserting "funds immediately available
in Chicago, Illinois" in lieu thereof.
3.7 The first sentence of Section 2.11(B)(c) of the Credit
Agreement shall be amended by (i) adding "(1)" immediately before the
reference to "in no event" appearing therein, (ii) adding ", except as set
forth in the immediately succeeding subparagraph (2)," immediately after the
reference to "in no event" appearing therein and (iii) adding "and (2) all
proceeds of the Eligible IPO shall be applied (i) first to the aggregate
outstanding principal amount of the Subordinated Note and the WCAS
Subordinated Note until such Notes are paid in full and (ii) thereafter to
repay the aggregate outstanding principal amount of the US Term Loans until
such Loans are repaid in full" immediately before the period at the end
thereof.
3.8 Section 6.10 of the Credit Agreement shall be amended and
restated in its entirety to read as follows:
"Section 6.10. END OF FISCAL YEARS AND FISCAL QUARTERS. The US
Borrower shall cause its fiscal year, and shall cause each of
its Subsidiaries' fiscal years, to end on December 31 and
shall cause
3
its and each of its Subsidiaries' fiscal quarters to coincide
with calendar quarters."
3.9 Sections 6.11, 6.12 and 6.13 of the Credit Agreement shall
each be amended and restated in their entirety to read as follows:
"Section 6.11. MINIMUM CONSOLIDATED EBITDA. The US Borrower
will not permit its Consolidated EBITDA for any period of four
consecutive fiscal quarters of the US Borrower, as determined
for such four-quarter period ending on the last day of any
fiscal quarter below, to be less than the respective amount
set forth opposite such fiscal quarter below:
Fiscal Quarter Ended Minimum Consolidated EBITDA
-------------------- ---------------------------
June 30, 2000 $90,000,000
September 30, 2000 $105,000,000
December 31, 2000 $105,000,000
March 31, 2001 $115,000,000
June 30, 2001 $115,000,000
Each fiscal quarter, thereafter $125,000,000
Section 6.12. LEVERAGE RATIOS. (a) LEVERAGE RATIO. The US
Borrower shall not permit its Leverage Ratio at any time
during any fiscal quarter of the US Borrower to exceed
4.0:1.0.
(b) SENIOR SECURED LEVERAGE RATIO. The US Borrower shall not
permit its Senior Secured Leverage Ratio at any time to exceed
the ratio set forth below opposite such fiscal quarter below:
Maximum Senior Secured
Fiscal Quarter Ended Leverage Ratio
-------------------- --------------
December 31, 2000 3.00:1.0
March 31, 2001 3.00:1.0
June 30, 2001 2.00:1.0
September 30, 2001 2.00:1.0
December 31, 2001 1.75:1.0
March 31, 2002 1.75:1.0
June 30, 2002 1.75:1.0
Each fiscal quarter, thereafter 1.50:1.0
Section 6.13. ADJUSTED CONSOLIDATED NET WORTH. Prior to the
Increase Date, the US Borrower will not permit its Adjusted
Consolidated Net Worth at any time to be less than the sum of
(i) $250,000,000, plus (ii) an amount equal to 50% of the
amount by which the US Borrower's quarterly Consolidated Net
Income (determined at the end of each fiscal quarter,
commencing with the
4
fiscal quarter ending on or about September 30, 1998) exceeds
zero, plus (iii) 100% of any proceeds from equity issuances of
capital stock of the US Borrower (other than in connection
with exercises of stock options of the officers, directors and
employees of the US Borrower in the ordinary course of
business). On and after the Increase Date, the US Borrower
will not permit its Adjusted Consolidated Net Worth to be less
than the sum of (i) $600,000,000, plus (ii) an amount equal to
50% of the amount by which the US Borrower's quarterly
Consolidated Net Income (determined at the end of each fiscal
quarter, commencing with the second fiscal quarter ending
after the Increase Date) exceeds zero, plus (iii) 100% of any
proceeds from equity issuances of capital stock of the US
Borrower (other than (A) the Eligible IPO and (B) in
connection with exercises of stock options of the officers,
directors and employees of the US Borrower in the ordinary
course of business). As used in this Section 6.13, the term
"INCREASE DATE" shall mean the earlier of (x) June 30, 2001
and (y) the date of the Eligible IPO."
3.10 Section 6.17 of the Credit Agreement shall be amended and
restated in its entirety to read as follows:
"Section 6.17. INTEREST COVERAGE RATIO. The US Borrower will
not permit its Interest Coverage Ratio for any period of four
consecutive fiscal quarters, as determined for such
four-quarter period ending on the last day of any fiscal
quarter, to be less than 3.0:1.0.
3.11 Section 11.1 of the Credit Agreement shall be amended by (i)
deleting the reference to "or the Administrative Agent" appearing therein and
(ii) deleting the reference to "the signature pages hereof" appearing therein
and inserting "the signature pages hereof and, in the case of the
Administrative Agent, at 111 West Monroe Street, Chicago, Illinois 60603,
Attention: Thad Rasche, Telephone: (312) 461-5739, Facsimile: (312) 461-5225."
3.12 The pricing grid set forth on page 3 of Appendix 1 of the Credit
Agreement shall be amended and restated in its entirety to read as set forth
below:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
STATUS LEVEL I LEVEL II LEVEL III
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Leverage Ratio less than 3.00 greater than or equal to greater than or equal to
3.00 less than 3.50 3.50 less than 4.00
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Euro-Dollar Margin for B Term 3.25% 3.25% 3.25%
Loans
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Euro-Dollar Margin for All 1.50% 1.75% 2.00%
Other Loans
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Base Rate Margin for B Term 2.25% 2.25% 2.25%
Loans
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Base Rate Margin for all 0.50% 0.75% 1.00%
Other Loans
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
5
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Swing Margin .625% .875% 1.125%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Applicable Commitment Fee .30% .375% .45%
Percentage
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
3.13 Exhibits A-1, A-2, A-3, A-4 and A-5 and Schedule II of the
Credit Agreement shall each be amended and restated in their entirety to read
as set forth on Annexes I, II, III, IV, V and VI respectively to this
Amendment.
SECTION 4. CONDITIONS PRECEDENT.
The effectiveness of this Amendment shall be subject to the
satisfaction of the following conditions precedent:
(a) The Borrowers, the Guarantors, the Departing Agent, the
New Agent and the Required Banks shall have executed and delivered this
Amendment. With respect to the amendment set forth in Sections 2 and
3.7 hereof, the Majority Banks of each of the Tranches comprising the
US Term Loans, A Term Loans and B Term Loans shall also have executed
and delivered this Amendment.
(b) The New Agent shall have received for delivery to the
applicable Banks new Notes in the forms of Annexes II, III, IV and V to
this Amendment payable to the order of each applicable Bank, such new
Notes to constitute "NOTES" for all purposes of the Credit Agreement
upon the New Agent's receipt of the same for each Bank.
(c) The US Borrower shall have paid, in accordance with the
terms of a Fee Letter by the US Borrower to the Banks dated as of
September 22, 2000, to the New Agent (for the account of each Bank
which joins in this Amendment by the time and date contemplated in such
Fee Letter) an amendment fee in an amount equal to 0.15% of the sum of
such Bank's outstanding Term Loans plus such Bank's Revolving Loan
Commitment, in each case before giving effect to this Amendment.
(d) The New Agent shall have received an amendment or
assignment to each Credit Document (including without limitation the
Security Documents and all financing statements and other collateral
filings in connection therewith) requested by the New Agent and
reflecting, INTER ALIA, the changes in the Administrative Agent,
Pledgee and the Collateral Agent contemplated hereby, each to be
satisfactory to the New Agent as to form and substance.
(e) The New Agent shall be in receipt of one or more
certificates of insurance (naming the New Agent, as Collateral Agent,
loss payee and additional insured) to the extent such insurance is
required under the terms of a Credit Document.
(f) The US Borrower shall have delivered to the New Agent a
certificate of good standing or foreign equivalent, as appropriate, for
each Borrower from the jurisdiction of its incorporation dated no
earlier than September 15, 2000.
6
(g) All legal matters incident to the execution and delivery
of this Amendment and the instruments and documents contemplated hereby
shall be satisfactory to the Banks and their counsel; and the New Agent
shall have received (with a signed copy for each Bank): (1) the signed
Certificate of the Secretary or an Assistant Secretary of each Credit
Party, dated the date hereof, certifying (A) a true and correct copy of
resolutions adopted by the Board of Directors of each Credit Party
authorizing or ratifying the transactions and instruments contemplated
hereby and (B) the incumbency and specimen signatures of officers of
each Credit Party executing the documents referred to in Section 4
hereof and any other documents delivered to the New Agent in connection
with this Amendment and (2) an opinion of counsel to the Borrowers, in
form and substance satisfactory to the New Agent and its counsel,
covering the transactions contemplated hereby.
(h) The New Agent shall have received copies executed or
certified (as may be appropriate) of all legal documents or proceedings
taken in connection with the execution and delivery of the Credit
Documents and this Amendment and the other instruments and documents
contemplated thereby.
SECTION 5. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this Amendment,
each Borrower hereby represents to each Bank that as of the date hereof, after
giving effect to this Amendment, the representations and warranties set forth in
Section 5 of the Credit Agreement are and shall be and remain true and correct
(except that the representations contained in Section 5.4 shall be deemed to
refer to the most recent financial statements of each Borrower delivered to the
Administrative Agent) and, after giving effect to this Amendment, (i) each
Borrower is in full compliance with all of the terms and conditions of the
Credit Agreement and (ii) no Default or Event of Default has occurred and is
continuing under the Credit Agreement.
SECTION 6. MISCELLANEOUS.
(a) Each Borrower and Guarantor has heretofore executed and
delivered to the Administrative Agent and the Banks certain Security
Documents and the other Credit Documents and each Borrower and
Guarantor hereby acknowledges and agrees that, notwithstanding the
execution and delivery of this Amendment, the Security Documents and
the other Credit Documents remain in full force and effect and the
rights and remedies of the Administrative Agent, the Pledgee and the
Collateral Agent and the Banks thereunder, the obligations of each
Borrower and Guarantor thereunder and the liens and security interests
created and provided for thereunder remain in full force and effect and
shall not be affected, impaired or discharged hereby. Nothing herein
contained shall in any manner affect or impair the priority of the
liens and security interests created and provided for by the Security
Documents and the other Credit Documents as to the indebtedness which
would be secured thereby prior to giving effect to this Amendment.
(b) Except as specifically amended herein or waived hereby,
the Credit Agreement shall continue in full force and effect in
accordance with its original terms. Reference to this specific
Amendment need not be made in the Credit Agreement, the
7
Notes, or any other instrument or document executed in connection
therewith, or in any certificate, letter or communication issued or
made pursuant to or with respect to the Credit Agreement, any
reference in any of such items to the Credit Agreement being
sufficient to refer to the Credit Agreement as amended hereby.
(c) Each Bank agrees to return to the Borrowers, promptly
after the effectiveness hereof, the existing Notes heretofore issued to
each Bank (or such lost note affidavits as may reasonably be
satisfactory to the Borrowers).
(d) The Borrowers agree to pay on demand all reasonable costs
and expenses of or incurred by the Departing Agent and the New Agent in
connection with the negotiation, preparation, execution and delivery of
this Amendment.
(e) By signing below, each Bank hereby (i) appoints and
authorizes Harris Trust and Savings Bank to take such action as
Administrative Agent, Pledgee and Collateral Agent on its behalf and to
exercise such powers under the Credit Agreement and the other Credit
Documents as are delegated to the Administrative Agent, Pledgee and the
Collateral Agent by the terms thereof, together with such powers as are
reasonably incidental thereto and (ii) consents to the taking of all
actions reasonably deemed necessary or desirable by the Departing Agent
and the New Agent to effect the foregoing.
(f) This Amendment may be executed in any number of
counterparts, and by the different parties on different counterpart
signature pages, all of which taken together shall constitute one and
the same agreement. Any of the parties hereto may execute this
Amendment by signing any such counterpart and each of such counterparts
shall for all purposes be deemed to be an original. This Amendment
shall be governed by the laws of the State of New York.
[SIGNATURE PAGES TO FOLLOW]
8
Dated as of September 29, 2000.
ALLIANCE DATA SYSTEMS CORPORATION
By: /s/ Robert P. Armiak
------------------------------------------------
Name: Robert P. Armiak, CCM
-----------------------------------------------
Title: Vice President, Treasurer
----------------------------------------------
LOYALTY MANAGEMENT GROUP CANADA, INC.
By: /s/ Carolyn S. Melvin
-------------------------------------------------
Name: Carolyn S. Melvin
-----------------------------------------------
Title: Secretary
----------------------------------------------
Accepted and agreed to as of the date and year last above written.
HARRIS TRUST AND SAVINGS BANK, in its individual
capacity as a Bank, as the New Agent and as the
Administrative Agent
By: /s/ Thad D. Rasche
-------------------------------------------------
Name: Thad D. Rasche
-----------------------------------------------
Title: Vice President
----------------------------------------------
9
Acknowledged and agreed to as of the date last above written. Upon the
execution and delivery of this Amendment by each of the parties hereto and
satisfaction of the conditions set forth in Section 5 above, the Departing Agent
further agrees to: (i) deliver to the New Agent the Collateral in the Departing
Agent's possession, to be thereafter held by the New Agent as collateral
security for the Obligations, and such executed original counterparts of the
Credit Agreement, the Security Documents and each other Credit Document and all
amendments, modifications and waivers entered into or otherwise delivered in
connection therewith, together with copies of all resolutions, good standing
certificates, organizational documents, regulatory approvals and opinion letters
delivered in connection therewith as may be in the possession of the Departing
Agent, (ii) deliver to the New Agent original file stamped copies of all UCC
financing statements (and their comparable equivalents for purposes of the
Canadian Security Documents) in the Departing Agent's possession that were filed
in connection with the Security Documents, together with all amendments,
assignments and continuations thereof, (iii) execute and deliver to the New
Agent UCC-3 assignment filings prepared by the New Agent, the Borrowers or their
respective counsels (and their comparable equivalents for purposes of the
Canadian Security Documents) assigning to the New Agent all rights, title and
interest in each financing statement running in favor of the Departing Agent
that were filed in connection with the Security Documents and (iv) execute and
deliver, at the expense of the US Borrower, such other instruments and documents
prepared by the New Agent, the Borrowers or their respective counsels, including
additional instruments of assignment and/or transfer, as the Borrowers or the
New Agent may reasonably request to more fully vest in the New Agent the rights
of the Departing Agent with respect to the Obligations and the Collateral.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
in its capacity as the Departing Agent
By: /s/ Colleen B. Galle
-----------------------------------------
Name: Colleen B. Galle
---------------------------------------
Title: Vice President
--------------------------------------
10
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: /s/ Colleen B. Galle
-------------------------------------------
Name: Colleen B. Galle
-----------------------------------------
Title: Vice President
----------------------------------------
FIRST UNION NATIONAL BANK
By: /s/ Susan Schwartz
-------------------------------------------
Name: Susan Schwartz
-----------------------------------------
Title: Vice President
----------------------------------------
BANK ONE, NA
By: /s/ Scott Miller
-------------------------------------------
Name: Scott Miller
-----------------------------------------
Title: Vice President
----------------------------------------
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Robert C. Nagel
-------------------------------------------
Name: Robert C. Nagel
-----------------------------------------
Title: Vice President
----------------------------------------
ARCHIMEDES FUNDING II, LTD.
By: ING Capital Advisors, Inc.,
as Collateral Manager
By: /s/ Richard Barger
-------------------------------------------
Name: Richard Barger
-----------------------------------------
Title: Vice President
----------------------------------------
KZH ING-2 LLC
By: /s/ Kimberly Rowe
-------------------------------------------
Name: Kimberly Rowe
-----------------------------------------
Title: Authorized Agent
----------------------------------------
11
KZH ING-3 LLC
By: /s/ Kimberly Rowe
-------------------------------------------
Name: Kimberly Rowe
-----------------------------------------
Title: Authorized Agent
----------------------------------------
PILGRIM AMERICA HIGH INCOME INVESTMENTS, LTD.
By: Pilgrim Investments, Inc.,
as its Investment Manager
By: /s/ Michel Prince
-------------------------------------------
Name: Michel Prince
-----------------------------------------
Title: Vice President
----------------------------------------
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc.,
as its Investment Manager
By: /s/ Michel Prince
-------------------------------------------
Name: Michel Prince
-----------------------------------------
Title: Vice President
----------------------------------------
THE HUNTINGTON NATIONAL BANK
By: /s/ Nancy J. Cracolice
-------------------------------------------
Name: Nancy J. Cracolice
-----------------------------------------
Title: Vice President
----------------------------------------
CHASE MANHATTAN BANK (formerly known as
Chase Bank of Texas, NA)
By: /s/ Michael J. Lister
-------------------------------------------
Name: Michael J. Lister, Vice President
-----------------------------------------
Title: The Chase Manhattan Bank
----------------------------------------
12
BARCLAYS BANK PLC
By: /s/ Richard Herder
-------------------------------------------
Name: Richard Herder
-----------------------------------------
Title: Director
----------------------------------------
SUNTRUST BANK (formerly known as SunTrust
Bank, Central Florida, N.A.)
By: /s/ Stephen L Leister
-------------------------------------------
Name: Stephen L. Leister
-----------------------------------------
Title: Vice President
----------------------------------------
ARCHIMEDES FUNDING III, LTD.
By: ING Capital Advisors, LLC,
as Collateral Manager
By: /s/ Richard Barger
-------------------------------------------
Name: Richard Barger
-----------------------------------------
Title: Vice President
----------------------------------------
VAN KAMPEN PRIME RATE INCOME TRUST
By: Van Kampen Investment Advisory Corp.
By: /s/ Darvin D. Pierce
-------------------------------------------
Name: Darvin D. Pierce
-----------------------------------------
Title: Vice President
----------------------------------------
SEQUILS-ING I (HBDGM), LTD.
By: /s/ Richard Barger
-------------------------------------------
Name: Richard Barger
-----------------------------------------
Title: Vice President
----------------------------------------
13
PILGRIM CLO 1999-1 LTD.
By: Pilgrim Investments, Inc.,
as its Investment Manager
By: /s/ Michel Prince
-------------------------------------------
Name: Michel Prince, CFA
-----------------------------------------
Title: Vice President
----------------------------------------
14
GUARANTORS' CONSENT
By their execution of the Credit Agreement, the undersigned have
heretofore guaranteed certain Guaranteed Obligations under Article 10 of the
Credit Agreement. Each of the undersigned hereby consents to the Amendment to
the Credit Agreement as set forth above and confirms that all of each of the
undersigned's obligations as a Guarantor remain in full force and effect. The
undersigned further agree that the consent of the undersigned to any further
amendments to the Credit Agreement shall not be required as a result of this
consent having been obtained.
ADS ALLIANCE DATA SYSTEMS, INC.
By /s/ Robert P. Armiak
-------------------------------------------------
Name Robert P. Armiak, CCM
---------------------------------------------
Title Vice President, Treasurer
--------------------------------------------
ADS COMMERCIAL SERVICES, INC.
By /s/ Robert P. Armiak
-------------------------------------------------
Name Robert P. Armiak, CCM
---------------------------------------------
Title Vice President, Treasurer
--------------------------------------------
HARMONIC TECHNOLOGY LICENSING, INC.
By /s/ Robert P. Armiak
-------------------------------------------------
Name Robert P. Armiak, CCM
---------------------------------------------
Title Vice President, Treasurer
--------------------------------------------
15
ANNEX I
EXHIBIT A-1
US TERM NOTE
Chicago, Illinois
---------- --, ----
For value received, Alliance Data Systems Corporation, a Delaware
corporation (the "BORROWER"), promises to pay to the order of Harris Trust and
Savings Bank (the "ADMINISTRATIVE AGENT"), for the account of the [Name of Bank]
(the "Bank"), the unpaid principal amount of each US Term Loan made by the Bank
to the Borrower pursuant to the Credit Agreement referred to below on the
maturity date provided for in the Credit Agreement. The Borrower promises to pay
interest on the unpaid principal amount of each such US Term Loan on the dates
and at the rate or rates provided for in the Credit Agreement. All such payments
of principal and interest shall be made in lawful money of the United States in
Federal or other immediately available funds at the office of Harris Trust and
Savings Bank, 111 West Monroe Street, Chicago, Illinois 60603.
All US Term Loans made by the Bank, the respective types thereof and
all repayments of the principal thereof shall be recorded by the Bank and, if
the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such US Term Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; PROVIDED, that the failure of the Bank to make any such recordation
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This note is one of the US Term Notes referred to in the Credit
Agreement dated as of July 24, 1998 among Alliance Data Systems Corporation,
Loyalty Management Group Canada Inc. (f/k/a 1302598 Ontario Inc.), the Banks
parties thereto and Harris Trust and Savings Bank, as Administrative Agent (as
the same may be amended, restated or supplemented from time to time, the "CREDIT
AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
pre-payment hereof and the acceleration of the maturity hereof.
ALLIANCE DATA SYSTEMS CORPORATION
By
--------------------------------------------
Name
----------------------------------------
Title
---------------------------------------
LOANS AND PAYMENTS OF PRINCIPAL
- ----------------------------------------------------------------------------------------------------------------------
Date Amount Type Amount of
of of Principal Notation
Loan Loan Repaid Made By
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2
ANNEX II
EXHIBIT A-2
A TERM NOTE
Chicago, Illinois
--------- --, ----
For value received, Loyalty Management Group Canada Inc. (f/k/a 1302598
Ontario Inc.), an Ontario corporation (the "BORROWER"), promises to pay to the
order of Harris Trust and Savings Bank (the "ADMINISTRATIVE AGENT"), for the
account of the [Name of Bank] (the "BANK"), the unpaid principal amount of each
A Term Loan made by the Bank to the Borrower pursuant to the Credit Agreement
referred to below on the maturity date provided for in the Credit Agreement. The
Borrower promises to pay interest on the unpaid principal amount of each such A
Term Loan on the dates and at the rate or rates provided for in the Credit
Agreement. All such payments of principal and interest shall be made in lawful
money of the United States in Federal or other immediately available funds at
the office of Harris Trust and Savings Bank, 111 West Monroe Street, Chicago,
Illinois 60603.
All A Term Loans made by the Bank, the respective types thereof and all
repayments of the principal thereof shall be recorded by the Bank and, if the
Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such A Term Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; PROVIDED, that the failure of the Bank to make any such recordation
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This note is one of the A Term Notes referred to in the Credit
Agreement dated as of July 24, 1998 among Alliance Data Systems Corporation,
Loyalty Management Group Canada Inc. (f/k/a 1302598 Ontario Inc.), the Banks
parties thereto and Harris Trust and Savings Bank, as Administrative Agent (as
the same may be amended, restated or supplemented from time to time, the "CREDIT
AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
LOYALTY MANAGEMENT GROUP CANADA INC.
By
------------------------------------------------------
Name
--------------------------------------------------
Title
-------------------------------------------------
LOANS AND PAYMENTS OF PRINCIPAL
- ----------------------------------------------------------------------------------------------------------------------
Date Amount Type Amount of
of of Principal Notation
Loan Loan Repaid Made By
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2
ANNEX III
EXHIBIT A-3
B TERM NOTE
Chicago, Illinois
---------- --, ----
For value received, Loyalty Management Group Canada Inc. (f/k/a 1302598
Ontario Inc.), an Ontario corporation (the "BORROWER"), promises to pay to the
order of Harris Trust and Savings Bank (the "ADMINISTRATIVE AGENT"), for the
account of the [Name of Bank] (the "BANK"), the unpaid principal amount of each
B Term Loan made by the Bank to the Borrower pursuant to the Credit Agreement
referred to below on the maturity date provided for in the Credit Agreement. The
Borrower promises to pay interest on the unpaid principal amount of each such B
Term Loan on the dates and at the rate or rates provided for in the Credit
Agreement. All such payments of principal and interest shall be made in lawful
money of the United States in Federal or other immediately available funds at
the office of Harris Trust and Savings Bank, 111 West Monroe Street, Chicago,
Illinois 60603.
All B Term Loans made by the Bank, the respective types thereof and all
repayments of the principal thereof shall be recorded by the Bank and, if the
Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such B Term Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; PROVIDED, that the failure of the Bank to make any such recordation
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This note is one of the B Term Notes referred to in the Credit
Agreement dated as of July 24, 1998 among Alliance Data Systems Corporation,
Loyalty Management Group Canada Inc. (f/k/a 1302598 Ontario Inc.), the Banks
parties thereto and Harris Trust and Savings Bank, as Administrative Agent (as
the same may be amended, restated or supplemented from time to time, the "CREDIT
AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
pre-payment hereof and the acceleration of the maturity hereof.
LOYALTY MANAGEMENT GROUP CANADA INC.
By
--------------------------------------------
Name
----------------------------------------
Title
---------------------------------------
LOANS AND PAYMENTS OF PRINCIPAL
- ----------------------------------------------------------------------------------------------------------------------
Date Amount Type Amount of
of of Principal Notation
Loan Loan Repaid Made By
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2
ANNEX IV
EXHIBIT A-4
REVOLVING NOTE
Chicago, Illinois
---------- --, ----
For value received, Alliance Data Systems Corporation, a Delaware
corporation (the "BORROWER"), promises to pay to the order of Harris Trust and
Savings Bank (the "ADMINISTRATIVE AGENT"), for the account of the [Name of Bank]
(the "BANK"), the unpaid principal amount of each Revolving Loan made by the
Bank to the Borrower pursuant to the Credit Agreement referred to below on the
maturity date provided for in the Credit Agreement. The Borrower promises to pay
interest on the unpaid principal amount of each such Revolving Loan on the dates
and at the rate or rates provided for in the Credit Agreement. All such payments
of principal and interest shall be made in lawful money of the United States in
Federal or other immediately available funds at the office of Harris Trust and
Savings Bank, 111 West Monroe Street, Chicago, Illinois 60603.
All Revolving Loans made by the Bank, the respective types thereof and
all repayments of the principal thereof shall be recorded by the Bank and, if
the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Revolving Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; PROVIDED, that the failure of the Bank to make any such recordation
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This note is one of the Revolving Notes referred to in the Credit
Agreement dated as of July 24, 1998 among Alliance Data Systems Corporation,
Loyalty Management Group Canada Inc. (f/k/a 1302598 Ontario Inc.), the Banks
parties thereto and Harris Trust and Savings Bank, as Administrative Agent (as
the same may be amended, restated or supplemented from time to time, the "CREDIT
AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
ALLIANCE DATA SYSTEMS CORPORATION
By
------------------------------------------
Name
--------------------------------------
Title
-------------------------------------
LOANS AND PAYMENTS OF PRINCIPAL
- ----------------------------------------------------------------------------------------------------------------------
Date Amount Type Amount of
of of Principal Notation
Loan Loan Repaid Made By
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2
ANNEX V
EXHIBIT A-5
SWING NOTE
Chicago, Illinois
------------ --, ----
For value received, Alliance Data Systems Corporation, a Delaware
corporation (the "BORROWER"), promises to pay to the order of Harris Trust and
Savings Bank (the "ADMINISTRATIVE AGENT"), for its own account as Swing Lender
under the Credit Agreement (in such capacity, the "BANK"), the unpaid principal
amount of each Swing Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the maturity date provided for in the
Credit Agreement. The Borrower promises to pay interest on the unpaid principal
amount of each such Swing Loan on the dates and at the rate or rates provided
for in the Credit Agreement. All such payments of principal and interest shall
be made in lawful money of the United States in Federal or other immediately
available funds at the office of Harris Trust and Savings Bank, 111 West Monroe
Street, Chicago, Illinois 60603.
All Swing Loans made by the Bank, the respective types thereof and all
repayments of the principal thereof shall be recorded by the Bank and, if the
Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Swing Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; PROVIDED, that the failure of the Bank to make any such recordation
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This note is one of the Swing Notes referred to in the Credit Agreement
dated as of July 24, 1998 among Alliance Data Systems Corporation, Loyalty
Management Group Canada, Inc., (f/k/a 1302598 Ontario Inc.), the Banks parties
thereto and Harris Trust and Savings Bank, as Administrative Agent (as the same
may be amended, restated or supplemented from time to time, the "CREDIT
AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
ALLIANCE DATA SYSTEMS CORPORATION
By
-----------------------------------------
Name
-------------------------------------
Title
------------------------------------
LOANS AND PAYMENTS OF PRINCIPAL
- ----------------------------------------------------------------------------------------------------------------------
Date Amount Type Amount of
of of Principal Notation
Loan Loan Repaid Made By
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2
ANNEX VI
SCHEDULE II
Alliance Data Systems Corporation
INVESTMENT POLICY
STATEMENT OF PURPOSE
The purpose of this policy is to institute proper guidelines for the
ongoing management of the cash investments of Alliance Data Systems Corp. and
its subsidiaries.
INVESTMENT OBJECTIVES
The assets are to be invested in a manner, which preserves capital,
provides adequate liquidity, maintains appropriate diversification and generates
returns relative to these guidelines and prevailing market conditions. The
intent is that all of the investments shall be held to maturity.
RESPONSIBILITIES
A. It is the responsibility of the Board of Directors of the
Company to adopt the Investment Policy.
B. It is the responsibility of the Treasurer or the Chief
Financial Officer to implement the Investment Policy of the Company including
the direction of purchases and sales of securities.
C. The approval of either the Treasurer or the Chief Financial
Officer shall be required to transfer Company funds to Company banks or
investment accounts.
D. The Treasurer and Chief Financial Officer may employ the
services of a Bank or a Registered Investment Advisor to direct a portion or
all of the investment activities of the Company consistent with the
guidelines set forth in the Investment Policy. The firms selected must
maintain a net worth of at least $1 billion.
E. The Treasurer and Chief Financial Officer will monitor ongoing
investment activities to insure that proper liquidity is being maintained and
that the investment strategy is consistent with the Company objectives.
F. The Treasurer or the Chief Financial Officer will report to the
Board of Directors quarterly concerning the investment performance during the
most recent quarter.
ALLIANCE DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INVESTMENT GUIDELINES
A. APPROPRIATE INVESTMENTS
1. Direct obligations of the U.S. or Canadian Treasury
including Treasury Bills, Notes and Bonds. Canadian Government Debt must
be rated A or better.
2. Federal Agency Securities which carry the direct or
implied guarantee of the U.S. Government including Government National
Mortgage Association, Federal Home Loan Bank, Federal Farm Credit Bank,
Federal National Mortgage Association, Student Loan Marketing
Association, and World Bank. Investments can include Notes, Discount
Notes, Medium Term Notes and Floating Rate Notes.
3. Certificates of Deposit, Guaranteed Investment Contracts,
Banker's Acceptance and Time Deposits including Eurodollar denominated
and Yankee issues. Investments will be limited to those institutions with
total assets in excess of $1 billion and which carry a short term rating
of "A2" or "P2" or "F2" or better, or a Keefe Bruyette and Woods rating
of at least "A" or better.
4. Corporate Securities (including commercial paper or loan
participations) and corporate debt instruments (including medium term
notes and floating rate notes) issued by Canadian or U.S. corporations
and carry a minimum long term rating of "A" or short term rating of "A2"
or "P2" or "F2" or "R1 (L)" or better.
5. Tax Exempt Securities including municipal notes,
commercial paper, auction rate floaters, and floating rate notes rated A2
or P2 or F2 or better; Municipal Notes rated SP-2/MIG-2/VMIG-2 or better,
or a long term rating of "A" or better.
6. Auction rate preferred stock or bonds issued with a rate
reset mechanism and a maximum term of 180 days. Investment will be
limited to those issuers who have a minimum long term rating of "A" or
short term rating of "A2" or "P2" or "F2" or "RI (L)" or better.
7. Money market mutual funds, which offer daily purchase and
redemption and maintain a constant share price (no equities allowed).
8. Repurchase Agreements. The underlying collateral (of at
least 102%) shall consist of US Government obligations and/or government
agency securities. Investments in repurchase agreements may not exceed
3 days.
B. INVESTMENT CONCENTRATION LIMITS
1. Investments rated AAA (long term) or A1 (short term) or
equivalent - no limit.
2. Investments rated AA or equivalent - not to exceed 70% of
total portfolio.
2
3. Investments rated A (long term) or A2 (short term) or
equivalent - not to exceed 30% of total portfolio.
4. Bank or Insurance Company obligations - not to exceed
50% of total portfolio.
5. Money Market Mutual Funds - no limit.
6. Repurchase Agreements - 30% of total portfolio.
7. No individual investment shall be in excess of $10
million USD (or equivalent).
MATURITY LIMITS
1. No investments may exceed 5 years to maturity.
2. Commercial Paper/Loan Participations/Master Notes may not
exceed 180 days.
3. A minimum of 30% of the portfolio must have a maturity of
1 year or less.
SAFEKEEPING
All securities firms with whom the Company does business must be
qualified to safekeep securities on the Company's behalf at no charge. The
CFO or Treasurer will authorize these firms to hold securities.
WAIVERS
In certain circumstances the appropriate investment criteria and
portfolio concentration limits may be temporarily waived by the Chief
Financial Officer for a period not to exceed four (4) weeks. Any waivers
granted during a fiscal year will be reported to the ADS Board of Directors
annually.
INVESTMENT POLICY REVIEW
THIS POLICY WILL BE REVIEWED ANNUALLY BY THE CFO AND TREASURER TO
ENSURE THAT IT REMAINS CONSISTENT WITH THE FINANCIAL OBJECTIVES OF THE
COMPANY AND CURRENT MARKET CONDITIONS.
3
Exhibit 10.50
COMMERCIAL REAL ESTATE LEASE
This lease agreement (the "Lease") is entered into by and between ROUTE
7 REALTY, LLC, having a mailing address of P.O. Box 555, Marietta, Ohio 45750,
hereinafter called the Lessor, and ADS ALLIANCE DATA SYSTEMS, INC., DBA ALLIANCE
DATA SYSTEMS, a Delaware corporation, having a mailing address of 4590 E. Broad
Street, Columbus, Ohio 43213 hereinafter called the Lessee
WITNESSETH:
In consideration of the mutual covenants herein contained, arid other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties intending to be legally bound hereby agree as follows:
The Lease is subject to all of the following terms and conditions:
1. LEASE OF PREMISES.
Subject to the terms and conditions set forth herein, Lessor leases to
Lessee, and Lessee leases from Lessor, 6,240 square feet, being a portion of the
two-story 20,000 square foot commercial office building (the "Building") located
at Route 7 North, Reno, Ohio, hereinafter referred to as the "Premises",
depicted on EXHIBIT A attached hereto and made a part hereof Effective October
1, 2000, subject to all the same terms and conditions sec forth herein, Lessee
shall lease an additional 5,900 square feet adjoining the 6,240 square feet.
Effective October 1, 2000, the "Premises" shall be defined as 12,140 square
feet. The additional 5,900 square feet is depicted on EXHIBIT B and attached
hereto and made a part hereof.
Lessee shall have the exclusive use of a minimum of 72 parking spaces
on an assigned basis, which spaces shall be located in the northwest parking
lot.
The term "Land" means the parcel of real property upon which the
Building is situated, as more particularly described on Exhibit B, attached
hereto and made a part hereof.
2. INITIAL TERM AND RENEWAL OPTION.
2.1. INITIAL TERM. The initial term of this Lease (the "Initial
Term") shall be two (2) years commencing on May 1, 2000 (the "Commencement
Date") and terminating at 12:00 midnight on April 30, 2002 unless extended
pursuant to SECTION 2.2. For the period May 1, 2000 through September 30, 2000
of the initial term of this Lease, Lessee shall lease from Lessor 6,240 square
feet. Effective October 1, 2000, subject to all the same terms and conditions
set forth herein, Lessee shall lease from Lessor an additional 5,900 square feet
adjoining the 6,240 square feet, increasing the total "Premises" leased to
12,140 square feet.
2.2. RENEWAL OPTION. At the end of the Initial Term of this Lease,
Lessee shall have the option to renew this Lease for five (5) additional periods
of two (2) years each (each a "Renewal Term") provided Lessee gives Lessor
ninety (90) days written notice of its intent to
1
exercise its renewal option prior to the expiration of the Initial Term or
any subsequent Renewal Terms.
3. RENT.
3.1. GROSS LEASE. This Lease is intended to be a "gross" lease and
payment of Rent by Lessee shall include all applicable utilities, taxes, and
insurance. Except as specifically set forth herein, Lessee shall have no
obligation to pay or reimburse Lessor for any operating expenses, service
charges, taxes, insurance, utilities or any other costs or charges associated
with operation, repair or maintenance of the Building or the Premises, all such
costs shall be Lessor's sole responsibility.
3.2. INITIAL TERM. For the Initial Term of this Lease, Lessee shall
pay Lessor rent in equal monthly installments on the first (1st) day of each
month, in advance, as follows:
TERM: SQ. FT. RENT PER SQ. FT. MONTHLY RENT AMOUNT RENT ANNUALLY
- ----- ------- ---------------- ------------------- -------------
Year One
Dates (5.1.00-9.30.00) 6,240 $11.00 $ 5,720 @ 5 months $28,600
Dates (10.1.00-4.30.01) 12,140 $11.00 $11,128 @ 7 months $77,896
Year Two
Dates (5.01.01-4.30.02) 12,140 $12.00 $12,140 @ 12 months $145,680
3.3. RENEWAL TERM. Rent rates for any Renewal Term shall be
negotiated and agreed to between the Lessor and Lessee at least one hundred
twenty (120) days prior to the expiration of the Initial Term or any subsequent
Renewal Terms.
3.4. PAYMENT.
Unless specifically noted otherwise, Lessee shall make all payments to
Lessor under this Lease on or before the first day of each calendar month, in
advance, by normal business methods, at the address of Lessor set forth in
Section 23 or at such other place as Lessor may designate by notice to Lessee
from time to time. If the date for commencement of Rent under this Lease is not
the first day of a calendar month, Lessee's Rent for the first and last months
of the Term shall be prorated on a daily basis and Lessee's first payment of
Rent shall be due on the Commencement Date. If Lessee fails to make any payment
of Rent within ten (10) days after it becomes due, then, in addition to all
other rights of Landlord under this Lease, Lessee shall pay Lessor a late charge
of five percent (5%) of the delinquent amount for each 30-day period or fraction
thereof from the due date until paid, as liquidated damages to cover Lessor's
additional costs and expenses relating thereto.
3.5. ACCORD AND SATISFACTION.
No payment by Lessee or receipt by Lessor of a lesser amount than the
full Rent or other amount payable under this Lease shall be deemed to be other
than on account of the earliest
2
stipulated Rent or other amount. No endorsement or statement of any kind on
any check or any letter accompanying any check or payment shall be deemed to
be an accord and satisfaction. Lessor may accept such check or payment
without prejudice to Lessor's right to recover the balance of such Rent or
other amount, or to pursue any other remedy provided in this Lease at law or
in equity. Every demand for Rent or other amount due whenever and wherever,
made shall have the same effect as if made at the time it falls due and at
the place of payment, and, after the service of any notice or commencement of
any suit, or final judgment therein, Lessor may receive and collect any Rent
or other amount due, and such collection or receipt shall not operate as a
waiver, nor shall it affect such notice, suit or judgment. Any acceptance by
Lessor of payment of less than the full amount owed by Lessee under this
Lease shall be deemed to have been made with full reservation by Lessor of
his rights to recover all the remainder of the amounts owed to it under this
Lease, irrespective of whether or not Lessor so indicates in writing or
otherwise on any check or elsewhere
ALL COMMUNICATIONS CONCERNING DISPUTED DEBTS, INCLUDING ANY CHECKS OR
OTHER INSTRUMENTS TENDERED AS FULL SATISFACTION OF A DEBT, MUST BE SENT
BY CERTIFIED MAIL TO LESSOR AT: ROUTE 7 REALTY, LLC, ATTN: RUDOLPH JOHN
LEHMAN, P.O. BOX 555, MARIETTA, OHIO 45750, OR TO SUCH OTHER PLACE OR
PERSON AS LESSOR MAY DESIGNATE FROM TIME TO TIME IN ACCORDANCE WITH
SECTION 23.
4. UTILITIES, TAXES, & SECURITY DEPOSIT.
4.1. UTILITIES. Lessor shall contract for and pay all reasonable
charges for electricity, gas, water and other utility services furnished to the
Premises. Such utilities shall be made available to the Premises seven (7) days
per week, twenty-four (24) hours per day, 365 (or 366) days per year. Lessee
shall use commercially reasonable efforts to minimize waste of electricity, gas,
water, and other utility services. Lessee shall only be required to turn off the
lighting to the Premises if Lessor installs a separate on/off switch for such
lighting. Lessee shall not be required to turn off the lighting from the
electrical circuit box.
4.2. TAXES AND ASSESSMENTS. Lessor shall pay when due all real
estate taxes and assessments levied against the Land and the Building and any
taxes due with respect to Rent due hereunder.
4.3. SECURITY DEPOSIT. Lessee has paid a security deposit in the
amount of $5,200.00, which is to be held by Lessor, without interest, as
security for the payment of any money for which Lessee shall or may become
liable to Lessor under this Lease, including any damage or destruction to the
Premises, and for the faithful performance of Lessee of all covenants and
agreements under this Lease. Said security deposit shall be returned to Lessee
within thirty (30) days after the termination of this Lease or any renewal
thereof, provided Lessee shall not be in default and has vacated the Premises.
Nothing in this paragraph shall be deemed to limit the amount of any claim,
demand or cause of action of Lessor against Lessee under the provisions of this
Lease.
5. USE OF PREMISES.
3
5.1. Lessee shall use the Premises solely for the functions
associated with the operation of its business, including those uses reasonably
incidental to it, and shall not permit the Premises to be used for any other
purpose without first obtaining Lessor's expressed written consent to that
specific use. Lessee shall not use the Premises in any manner contrary to the
applicable zoning, health, fire or safety regulations, ordinances or statutes
(whether now in effect or hereafter enacted) of the city, county, and state in
which the Premises are located.
5.2. SMOKING. Smoking is not permitted in the Building, whether in
common areas or private offices Smoking shall be permitted in those areas
designated as "smoking areas" on Exhibit "A". Such areas shall be limited to
exterior areas. Lessee shall have the right to provide shelter to such "smoking
areas" at Lessee's expense.
5.3. ELEVATOR AND RESTROOMS. Lessor shall provide Lessee and its
agents and employees with access to the existing elevator located along the
north wall of the subject building and handicap accessible restrooms to be
installed on the first floor space beneath the subject space, which will be in
compliance with the Americans with Disabilities Act.
6. COMPLIANCE WITH LAWS.
Lessee shall comply in full with all laws, regulations, and
requirements of all governments and other lawful authorities and all regulations
and orders of the National Board of Fire Underwriters, or other organization
hereafter exercising similar functions, which now or at any time hereafter may
apply to or affect the Premises or any business conducted on the Premises.
7. CONDITION OF PREMISES.
Lessor has made no representation or warranty, expressed or implied,
with respect to the condition of the Premises or the fitness of the Premises for
any particular use. Lessee acknowledges that it has fully investigated and is
familiar with the size, dimensions, and physical condition of the Premises and
is accepting the Premises "as is". Except as expressly described in this Lease,
Lessor shall not be required to make any improvement, repair, alteration, or
restoration of the Premises or in any manner maintain the Premises, and shall
have no liability for any defects in or any condition of the Premises.
8. MAINTENANCE AND REPAIRS.
8.1. BY LESSOR. Lessor shall keep all structural portions of all
improvements, including without limitation the roof, the heating, cooling,
plumbing, ventilation, and electrical systems and all components thereof,
exclusive of doors and windows on the Premises and Building in good condition
and repair throughout the term of this Lease and any renewals thereof. In the
event that the Premises should become in need of repairs to be made by Lessor
hereunder, Lessee shall give prompt written notice thereof to Lessor.
Lessor shall keep and maintain adjoining areas and sidewalks in a
clean, safe and attractive condition and free from snow and ice. Lessor shall be
responsible for any maintenance of the parking lot, including, but not limited
to, blacktopping and restriping of parking spaces
4
and snow and ice removal. Lessee acknowledges that the driveway and parking
lot are in satisfactory condition as of the date of this Lease.
8.2. BY LESSEE. Lessee agrees to accept the Premises in the
condition existing as of the Commencement Date, to maintain the Premises, and to
make and pay for all necessary routine, normal maintenance (including regular
janitorial service), and reasonable non-structural repairs to properly maintain
the Premises, normal wear and tear excepted. Lessee shall keep the Premises in
good, clean condition and shall at its expense make all needed non-structural
repairs and replacements, except for repairs and replacements required to be
trade by Lessor under the provisions of Section 8.1. At the expiration of this
Lease, or any renewals thereof, Lessee shall surrender the Premises in good
condition, except for reasonable wear and tear, loss by fire or other casualty,
or any repairs or replacements required to be made by Lessor; and shall
surrender all keys for the Premises to Lessor Lessee shall be responsible for
the payment of trash removal service for trash generated by Lessee.
9. ALTERATIONS. No alteration, addition, improvement, remodeling. or other
change in or to the Premises (hereinafter collectively called an "Alteration")
shall be made by Lessee except under the following terms and conditions:
9.1. CONSENT. No Alteration shall be made without first obtaining
the prior written consent of Lessor to the specific alteration and, where
appropriate, the plans and specifications for it.
9.2. LICENSES AND PERMITS. No Alteration shall be commenced until
Lessee has first obtained and paid for all required permits and authorizations,
and has fully complied with all building and zoning laws, and all other laws,
ordinances, regulations, and requirements of all governmental authorities, the
National Board of Fire Underwriters, and any other body that may hereafter
exercise similar functions.
9.3. COSTS. The cost of all Alterations shall be paid in cash or
its equivalent by Lessee so that the Premises shall at all times be free of
liens and claims for work, labor, or materials supplied or claimed to have been
supplied to the Premises.
9.4. OWNERSHIP. All Alterations or improvements made by Lessee to
the Premises, other than trade fixtures or Lessee's personal property, shall
become the property of Lessor upon termination of this Lease, unless required to
be removed at the direction of Lessor. Lessor, at its option, may require Lessee
to remove any and all alterations or improvements installed or made by Lessee
upon termination of the Lease, in which event Lessee shall repair any damage
caused by such removal to restore Lessor's property to substantially the
condition as on the Commencement Date, reasonable wear and tear excepted.
10. INSURANCE.
10.1. HAZARD INSURANCE. Lessor shall, during the Lease Term, keep in
full force art "all risk" policy of fire and casualty insurance on the Building.
Lessee, at its expense, shall keep all its improvements on the Premises,
including improvements currently or hereafter in existence, insured against loss
or damage by fire and the hazards covered by extended coverage insurance
5
in an amount equal to not less than the full replacement value of such
improvements without offset for depreciation.
10.2. LIABILITY INSURANCE. Lessor shall, during the Lease term, at
its expense, keep in full force and effect a policy of commercial general
liability insurance Lessee, shall, at its expense, during the Lease Term,
maintain comprehensive general liability insurance insuring Lessor and Lessee
against death, injury to persons or damage to property on or about the Premises,
with minimum limits of $1,000,000 for injuries to or death of one person as a
result of any one accident or disaster, $2,000,000 for injuries to or death of
more than one person as a result of any one accident or disaster, and $2,000,000
for property damage.
10.3. BLANKET COVERAGE; OTHER PROVISIONS. Any insurance maintained
by Lessee pursuant to this Section 10 may be carried under a blanket policy
covering the Premises and other facilities of Lessee or any affiliate of Lessee;
may name Lessee or any affiliate of Lessee as additional insured with respect to
the Premises, as their interests may appear, and may have such deductible amount
or amounts as Lessee may deem appropriate, but if proceeds of such insurance are
payable to Lessor under this Lease, then Lessee shall pay to Lessor the amount
of any such deductible in connection with such insured loss. Any insurance
policies maintained by Lessee pursuant to this Section 10 shall be issued by a
company licensed to do business in Ohio, shall contain a provision prohibiting
termination with respect to Lessor or the demised Premises without at least
thirty (30) days prior written notice to Lessor, and shall name Lessee and
Lessor, as their interests may appear.
11. LIENS.
Lessee shall keep the Premises free from all liens. If, within ten (10)
days following imposition of any lien, Lessee does not cause the lien to be
released of record, Lessor may, in addition to its other remedies cause the hen
to be released. All sums paid by Lessor for the release of any lien, and all
expenses incurred by it in connection with it, together with interest at the
rate of twelve percent (12%) per annum, shall be payable to Lessor by Lessee on
demand. Lessor may post on the Premises any notices Lessor deems proper for the
protection of Lessor and the Premises from liens.
12. SIGNS AND ADDRESS.
Lessee may, at its expense, utilize or remove any existing sign or
install new signs on the Premises as may be reasonable, which conforms to all
applicable law, and which shall not damage or impair the attractiveness of the
Premises. Lessee may erect three (3) signs, which signs shall be installed at
the entrance to the Premises, in the lobby area of the Building and on a
monument sign located on the Land outside the Building. Such signs shall be at
Lessee's sole expense and shall be approved by Lessor, which approval shall not
be unreasonably withheld, conditioned or delayed. Lessee shall be entitled to
remove any or all such signs at any time during the term of this Lease, or
within fifteen (15) calendar days after termination of this Lease, provided such
removal does not cause irreparable or unreasonable harm to the Premises. In any
event Lessee, at its expense, shall repair any damage caused by such removal.
Lessor will obtain for the Premises during the first year of the Initial Term a
separate suite number or address for mail delivery to the Premises by the U.S.
Postal Service
6
13. COMMON AREAS. The term "Common Areas" shall mean those parts of the
Land and Building designated by Lessor from time to time for the common use of
Lessor, tenants and their employees, agents, customers, and invitees, including
the employee cafeteria, parking areas, sidewalks, landscaping, curbs, loading
areas, foyers, hallways, rest rooms, elevator, and other areas provided and
designated by Lessor for the common use of Lessor and tenants, all of which
shall be subject to Lessor's sole management and control and shall be operated
and maintained in such a manner as Lessor in its reasonable discretion shall
determine. Lessor shall have the right to modify the size, use, nature, location
or configuration of the Common Areas, provided, however, that no such change
shall unreasonably interfere with Lessee's access to or use of the Premises.
Lessee shall have the non-exclusive right to use the Common Areas in common with
Lessor and other tenants of the Buildings, if any. Lessee shall use the Common
Areas in a safe and careful manner and shall not commit waste on or about the
Common Areas.
14. RESTORATION.
If at any time the Premises are materially damaged or destroyed, Lessor
may, at its option, repair or restore the Premises to their condition
immediately prior to such damage or destruction or terminate this Lease as of
the date of such damage or destruction. Upon such termination, the Rent payable
by Lessee shall be apportioned as of the date of such damage or destruction.
Lessor shall give written notice to Lessee of its election either to repair or
restore the Premises or to terminate this Lease within thirty (30) days after
the date such damage or destruction occurs. If damage or destruction to the
Premises occurs which does not result in a termination of this Lease, the rent
payable by the Lessee shall be abated until the Premises of any part thereof so
damaged have been made fit for occupancy. Notwithstanding anything in this
paragraph to the contrary,
(a) Lessor's obligation to repair or restore shall be limited
to cost in the amount of insurance proceeds payable under policies of
fire or extended coverage insurance maintained under the terms and
conditions of this Lease; provided, however, that if the Premises are
not restored to substantially the same condition as such Premises are
in on the Commencement Date of this Lease, then Lessee shall have the
option to terminate this Lease;
(b) Lessee shall bear all costs and expenses of repair and
restoration required as a result of damage caused solely by the
intentional or negligent act or omission of Lessee, its employees,
agents, guests, or invitees;
(c) If any mortgage encumbering the Premises contains
different restoration/repair requirements than those contained in this
Lease, the provisions of such mortgages shall apply and supersede those
contained in this Lease, to the extent of such difference or conflict,
and such differing terms shall be deemed incorporated in this Lease;
and
(d) If the Premises are damaged to an immaterial or
non-substantial degree, Lessor shall promptly cause them to be repaired
and restored within thirty (30) days (or if such work cannot be
completed within such thirty (30) days, such work shall be
7
commenced within thirty (30) days and diligently pursued through
completion), subject to (b) above.
In the event the Premises shall at any time during the Lease term be
damaged by fire or other unavoidable casualty, through no fault or negligence of
Lessee, so as to render said Premises or any part thereof unfit for occupancy,
Lessee shall have the option of terminating this Lease upon thirty (30) days
prior written notice to Lessor.
15. EMINENT DOMAIN.
Lessor shall deliver to Lessee within ten (10) days after receipt
thereof any notice of a governmental entity's intent to exercise its power of
eminent domain with respect to all or a portion of the Premises.
16. CONDEMNATION.
If all or a material part of the Premises are taken by any condemning
authority under the power of eminent domain or by any purchase of other
acquisition in lieu of condemnation, this Lease shall terminate as of the date
possession is required by the condemning authority, and Rent payable by the
Lessee shall be apportioned as of the termination date. In any event, Lessor
shall be entitled to receive the entire appropriation award or consideration
paid by the condemning authority, and Lessee shall have no rights to or in such
award or consideration.
For purposes of this Section 16, any negotiated sale to a public or
quasi-public authority under the threat of condemnation shall be deemed to
constitute a taking by such public or quasi-public authority under the power of
eminent domain.
17. MORTGAGE OF LESSOR'S INTEREST.
This Lease and Lessee's rights under it shall be subject and
subordinate to any mortgages upon the Premises. The subordination of this Lease
and Lessee's rights under it shall be automatic and self-operative, and no
separate instrument of subordination shall be necessary. However, if requested
by the holder of any mortgage, Lessee shall execute, acknowledge, and deliver
any and all documents requested by such holder, provided that the documents are
reasonably acceptable to Lessee.
18. DEFAULT.
18.1. DEFAULT BY LESSEE. Lessee shall be deemed in default of the
Lease in the event the Lessee should: (a) default in the prompt payment of rent
when the same is due and remain in violation of or continue to fail to make such
payment with late payment charge for a period of thirty (30) days from and after
due date of such rental; and (b) fail to perform any of the other covenants,
conditions and agreements performable by Lessee hereunder for a period of thirty
(30) days following the receipt of written notification of Lessee's failure to
comply herewith, or in the event the correction of such default shall take more
than thirty (30) days to complete, then in the event the Lessee should fail to
begin the correction of such default within a period of twenty (20) days
following the receipt for written notification thereof and shall fail to pursue
the
8
correction of such default with due diligence; or (c) should Lessee file a
voluntary petition in bankruptcy, be adjudged bankrupt, be placed in or
subjected to a receivership, or make an assignment for benefit of creditors.
Upon such default, Lessor may elect to cancel this Lease or relet the
premises as agent for Lessee or otherwise, and receive the Rent therefore,
applying the same first to the payment of such expenses as the Lessor may be
put to in entering and letting. The balance remaining will be applied to the
payment of the Rent payable under this Lease, and fulfillment of Lessee's
covenants hereunder, the balance, if any, to be paid to Lessee who shall
remain liable for deficiency. Or, at the option of Lessor, upon any such
default, Lessor may demand the entire Rent for the balance of the term due
and payable as if by the terms of this Lease it were all payable in advance.
18.2. DEFAULT BY LESSOR. Should Lessor fail to perform any of its
duties or obligations hereunder, Lessor shall have a period of thirty (30) days
after receipt of written notice from Lessee of a failure of performance within
which to commence a cure of that failure. Failure of Lessor to commence that
cure within the thirty-day (30-day) period or to effect that cure within that
thirty-day (30-day) period shall be an event of default under this Lease and
Lessee may, at its option, elect to commence such cure itself, and Lessee may
either, at its option, offset any expenses it incurs in effecting such cure
against the Rent and other charges due and payable by Lessee hereunder, or
require that Lessor immediately reimburse Lessee for its expenses; provided,
however, in the event of an emergency, Lessee may immediately effect a cure of
Lessor's failure should Lessor fail to act immediately to do so, without the
requirement of any notice by Lessee to Lessor.
18.3. CUMULATIVE RIGHTS. No right or remedy herein conferred upon or
reserved to Lessor or Lessee is intended to be exclusive of any other right or
remedy provided herein or by law, but each shall be cumulative and in addition
to every other right or remedy given herein or now or hereafter existing at law
or in equity or by statute.
19. RIGHTS TO CURE DEFAULTS.
If Lessee fails to perform any of its obligations under this Lease, for
a period of thirty (30) days following the receipt of written notification of
Lessee's failure to comply herewith, or in the event the correction of such
default shall take more than thirty (30) days to complete, then in the event the
Lessee should fail to begin the correction of such default within a period of
twenty (20) days following the receipt for written notification thereof and
shall fail to pursue the correction of such default with due diligence, Lessor
may, but shall not be obligated to, cause the performance thereof, and all costs
and expenses incurred by Lessor in connection therewith, including without
limitation reasonable attorneys' fees, shall be immediately due and payable from
Lessee to Lessor, with interest thereon from the time paid by Lessor until
Lessor is reimbursed in full by Lessee at a rate of twelve (12%) percent per
annum.
20. ASSIGNMENT OR SUBLEASE.
Lessee shall neither assign this Lease nor sublease all or any part of
the Premises, except to an affiliate of Lessee, without first obtaining Lessor's
expressed written consent to such assignment or sublease, which consent shall
not unreasonably be withheld by Lessor. Lessor may assign this Lease to an
affiliated party without the consent of Lessee.
9
21. LESSOR'S ACCESS.
Lessor and its designees shall have the right to enter the Premises at
any reasonable times upon 24 hours prior verbal or written notice for
non-emergency purposes including, but not limited to, inspecting the Premises,
determining compliance herewith by Lessee, performing any work which the Lessor
is required or elects to undertake, and exhibiting the Premises for sale or
lease. Lessor shall have the right to enter the Premises without notice at any
time deemed necessary by Lessor for emergency and/or urgent maintenance issues.
Nothing herein shall imply any duty upon Lessor to do any such work
that Lessee is required to perform under any provision of this Lease, and the
performance of any such work by Lessor shall not constitute a waiver of Lessees
default.
22. SURRENDER AND HOLDING OVER.
Subject to Lessor's rights under this Lease, Lessee shall deliver and
surrender possession of the Premises to Lessor upon the expiration of this
Lease, or its termination in any way, in as good condition and repair as the
Premises were on the date of Rent commencement, ordinary wear and tear excepted.
If Lessee, or any party claiming under Lessee, remains in possession of the
Premises, or any part of the Premises, after any termination of this Lease,
Lessee or such party claiming under Lessee shall be deemed a Lessee from
month-to-month upon the covenants, provisions and conditions herein contained
and at a rental equal to one hundred and twenty percent (120%) of the rental in
effect during the last month of the term of this Lease, as extended or renewed,
prorated and payable for the period of such occupancy.
23. NOTICES.
Except as provided in SECTION 3.5 any notices, requests, demands, or
other communications required, permitted, or desired to be made or given under
the terms of this Lease shall be in writing, signed by or on behalf of the party
making or giving the same and shall be deemed fully made or given upon personal
delivery, receipted courier, or the deposit of the same in the United States
mail, postage pre-paid certified mail, return receipt requested and addressed to
the other party at its office as set forth below, or at such other address as
each party may have furnished to the other party by like notice.
LESSOR: LESSEE:
Route 7 Realty, LLC Alliance Data Systems
Attn: Rudolph John Lehman Attn: Oren J. Snell
P.O. Box 555 4590 East Broad Street
Marietta, OH 45750 Columbus, OH 43213
24. GENERAL.
24.1. ENTIRE AGREEMENT. This Lease sets forth the entire agreement
and understanding of the parties in respect of the transactions contemplated
hereby and supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof.
10
24.2. BINDING AGREEMENT. All of the terms, covenants,
representations, warranties and conditions of this Lease shall be binding upon,
and inure to the benefit of and be enforceable by, the parties hereto and their
respective permitted successors and assigns.
24.3. AMENDMENTS. This Lease may be amended only by a written
instrument, duly executed by Lessor and Lessee, which specifically refers to
this Lease and states that it amends this Lease.
24.4. WAIVER. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the right
at a later time to enforce the same. No waiver by any party of any condition, or
of any breach of any term, covenant, representation or warranty, contained in
this Lease, in any one or more instances, shall be deemed to be or construed as
a further or continuing waiver of any such condition or breach, or a waiver of
any other condition or of any breach of any other term, covenant, representation
or warranty.
24.5. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio, without regard to
the conflicts of law principles thereof.
24.6. QUIET ENJOYMENT. Upon payment of all amounts required to be
paid by, and full performance of all obligations and covenants of Lessee under
this Lease, Lessee shall peaceably and quietly hold, occupy and enjoy the
Premises during the Term of this Lease without any hindrance by Lessor or any
person lawfully claiming under Lessor.
24.7. TIME OF ESSENCE. Time is expressly declared and agreed to be
of the essence in this Lease with respect to any and all terms, covenants,
conditions, agreements, provisions, options, rights of termination and all other
matters relating to this Lease.
24.8. CUMULATIVE EFFECT. The rights and remedies by this Lease are
cumulative and the use of any one right or remedy by either party shall not
preclude or waive its right to use any or all other remedies. Said rights and
remedies are given in addition to any other rights the parties may have by law,
statute, ordinance or otherwise.
24.9. SEVERABILITY. In case of any one or more of the provisions
contained in this Lease shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provision hereof and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
25. AUTHORITY. Except as otherwise provided herein, each individual
executing this Lease in a representative capacity warrants and represents to the
other party that he has all requisite authority to execute the same on behalf of
the entity represented, in the capacity in which he has executed the same.
26. ATTORNEYS' FEES. In the event of any litigation involving the parties
to this Lease to enforce any provision of this Lease, to enforce any remedy
available upon default under this Lease, or seeking a declaration of the rights
of either party under this Lease, the prevailing party
11
shall be entitled to recover from the other such attorneys' fees and costs as
may be reasonably incurred, including the costs of reasonable investigation,
preparation and professional or expert consultation incurred by reason of
such litigation. All other attorneys' fees and costs relating to this Lease
and the transactions contemplated hereby shall be borne by the party
incurring the same.
27. CONFIDENTIALITY. Lessee understands that the terms of this Lease are
confidential in nature and that disclosure of these terms by Lessee would
jeopardize Lessor's negotiations and/or related business relationships with its
other tenants or potential tenants. Therefore, Lessee agrees to maintain the
terms of this Lease in confidence and not divulge, publish, or communicate the
rental payment terms of this Lease to any individual, firm, or corporation,
without the expressed written consent of Lessor, except to the extent disclosure
is required by applicable law or is necessary in the regular course of the
Lesees's business to be disclosed to its accountants, tax advisors or attorneys.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the day and year written below the signature of the parties or their duly
authorized representative
LESSOR:
WITNESS: ROUTE 7 REALTY, LLC
/s/ By: /s/ Rudolph John Lehman
- ---------------------------------- -----------------------------------
Rudolph John Lehman
/s/
- ----------------------------------
Date: 10/24/00
---------------------------------
LESSEE:
WITNESS: ADS ALLIANCE DATA SYSTEMS, INC.
/s/ By: /s/ Robert G. Case
- ---------------------------------- -----------------------------------
/s/ Printed Name: Robert G. Case
- ---------------------------------- -------------------------
Title: Sr. V.P. Retail Operations
--------------------------------
Date: 10/10/00
---------------------------------
12
ACKNOWLEDGMENTS
STATE OF OHIO )
COUNTY OF WASHINGTON ) SS:
This document was signed and acknowledged before me on this 24th day of
October, 2000, by Rudolph John Lehman on behalf of Route 7 Realty, LLC, the
Lessor hereunder.
/s/ Patricia Huck
---------------------------------------
Notary Public
PATRICIA HUCK, Notary
Public in and For the State
of Ohio My commission,
Expires July 9, 2002
STATE OF OHIO )
COUNTY OF FRANKLIN ) SS:
This document was signed and acknowledged before me on this 10 day of
October, 2000, by Robert Case on behalf of ADS Alliance Data Systems, Inc., the
Lessee hereunder.
/s/ Mary Brewer
---------------------------------------
Notary Public
13
ALLIANCE DATA SYSTEMS CORPORATION
LOYALTY MANAGEMENT GROUP CANADA INC.
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This Third Amendment to Amended and Restated Credit Agreement
(herein, the "AMENDMENT") is entered into as of January 10, 2001, between
Alliance Data Systems Corporation, a Delaware corporation (the "US BORROWER"),
Loyalty Management Group Canada Inc., an Ontario corporation (the "CANADIAN
BORROWER"; the US Borrower and the Canadian Borrower being referred to herein
individually as "BORROWER" and collectively as the "BORROWERS"), the Banks
party to the Credit Agreement (as such term is defined below) and Harris Trust
and Savings Bank, as a Bank and in its capacity as the Administrative Agent,
Pledgee and Collateral Agent under the Credit Agreement (the "ADMINISTRATIVE
AGENT").
PRELIMINARY STATEMENTS
A. The Borrowers, the Administrative Agent and the Banks are
currently party to a certain Amended and Restated Credit Agreement, dated as
of July 24, 1998 and amended and restated as of October 22, 1998 (as amended,
restated, modified and supplemented from time to time, the "CREDIT
AGREEMENT"). All capitalized terms used herein without definition shall have
the same meanings herein as such terms have in the Credit Agreement.
B. The Borrowers have requested that the Administrative Agent
and the Banks amend certain covenants and make certain other amendments to the
Credit Agreement, and the Administrative Agent and the Banks party hereto are
willing to do so under the terms and conditions set forth in this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS.
Upon the satisfaction of the conditions precedent set forth in
Section 2 hereof, the Credit Agreement shall be and hereby is amended as
follows:
1.1. The definitions of "Consolidated EBITDA" and "Eligible IPO"
appearing in Section 1.1 of the Credit Agreement shall be amended and restated
in their entirety to read as follows:
"Consolidated EBITDA" of any Person means, for any period,
Consolidated EBIT for such Person for such period, adjusted
by (i) adding thereto the amount of all depreciation and
amortization expenses that were deducted in determining
Consolidated EBIT,
(ii) adding thereto the change from the prior period in the
Deferred Revenue Account and (iii) subtracting therefrom the
change from the prior period in the Restricted Cash Account.
"Eligible IPO" means any public or private offering of
certain capital stock of the US Borrower to be consummated
by no later than June 30, 2001 and to result in gross cash
proceeds raised by the US Borrower of not less than
$150,000,000.
1.2. Section 1.1 of the Credit Agreement shall be amended by
adding the following new definitions thereto:
"Deferred Revenue Account" means the account on the
consolidating balance sheet of the Borrower associated
solely with the change in revenue recognition by the
Canadian Borrower as required by the Securities and Exchange
Commission of the United States of America.
"Restricted Cash Account" means the account on the
consolidating balance sheet of the Borrower related solely
to redemption settlement assets of the Canadian Borrower's
"Air Miles Program".
1.3. The first sentence of Section 2.11(B)(c) of the Credit
Agreement shall be amended by deleting the reference to "and (2) all proceeds
of the Eligible IPO shall be applied (i) first to the aggregate outstanding
principal amount of the Subordinated Note and the WCAS Subordinated Note until
such Notes are paid in full and (ii) thereafter to repay the aggregate
outstanding principal amount of the US Term Loans until such Loans are repaid
in full" appearing immediately before the period at the end thereof and
inserting "and (2) all proceeds of the Eligible IPO shall be applied to repay
the aggregate outstanding principal amount of the US Term Loans until such
Loans are repaid in full" in lieu thereof.
1.4. The second sentence of Section 2.11(B)(c) of the Credit
Agreement shall be amended by deleting the reference to "such excess"
appearing therein and inserting "the excess referred to in the preceding
subsection (c)(1) of this Section 2.1(B)" in lieu thereof.
1.5. Section 6.13 of the Credit Agreement shall each be amended
and restated in their entirety to read as follows:
"Section 6.13. ADJUSTED CONSOLIDATED NET WORTH. Prior to the
Increase Date, the US Borrower will not permit its
Adjusted Consolidated Net Worth at any time to be less
than the sum of (i) $250,000,000, plus (ii) an amount
equal to 50% of the amount by which the US Borrower's
quarterly Consolidated Net Income (determined at the end
of each fiscal quarter, commencing with the fiscal quarter
ending on or about September 30, 1998) exceeds zero, plus
(iii) 100% of any proceeds from equity issuances of
2
capital stock of the US Borrower (other than in connection
with exercises of stock options of the officers, directors
and employees of the US Borrower in the ordinary course of
business). On and after the Increase Date, the US Borrower
will not permit its Adjusted Consolidated Net Worth to be
less than the sum of (i) $550,000,000, plus (ii) an amount
equal to 50% of the amount by which the US Borrower's
quarterly Consolidated Net Income (determined at the end
of each fiscal quarter, commencing with the second fiscal
quarter ending after the Increase Date) exceeds zero, plus
(iii) 100% of any proceeds from equity issuances of
capital stock of the US Borrower (other than (A) the
Eligible IPO and (B) in connection with exercises of stock
options of the officers, directors and employees of the US
Borrower in the ordinary course of business). As used in
this Section 6.13, the term "INCREASE DATE" shall mean the
earlier of (x) June 30, 2001 and (y) the date of the
Eligible IPO."
SECTION 2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment shall be subject to the
satisfaction of the following conditions precedent:
(a) The Borrowers, the Guarantors, the Administrative Agent
and the Required Banks shall have executed and delivered this
Amendment.
(b) The US Borrower shall have paid, in accordance with the
terms of a Fee Letter by the US Borrower to the Banks dated as of
January 10, 2001, to the Administrative Agent (for the account of each
Bank which joins in this Amendment by the time and date contemplated in
such Fee Letter) an amendment fee in an amount equal to 0.15% of the
sum of such Bank's outstanding Term Loans plus such Bank's Revolving
Loan Commitment.
(c) All legal matters incident to the execution and
delivery of this Amendment and the instruments and documents
contemplated hereby shall be satisfactory to the Banks and their
counsel.
(d) The Administrative Agent shall have received copies
executed or certified (as may be appropriate) of all legal documents or
proceedings taken in connection with the execution and delivery of the
Credit Documents and this Amendment and the other instruments and
documents contemplated thereby.
SECTION 3. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this Amendment,
each Borrower hereby represents to each Bank that as of the date hereof, after
giving effect to this Amendment,
3
the representations and warranties set forth in Section 4 of the Credit
Agreement are and shall be and remain true and correct (except that the
representations contained in Section 4.4 shall be deemed to refer to the most
recent financial statements of each Borrower delivered to the Administrative
Agent) and, after giving effect to this Amendment, (i) each Borrower is in
full compliance with all of the terms and conditions of the Credit Agreement
and (ii) no Default or Event of Default has occurred and is continuing under
the Credit Agreement.
SECTION 4. MISCELLANEOUS.
(a) Each Borrower and Guarantor has heretofore executed and
delivered to the Administrative Agent and the Banks certain Security Documents
and the other Credit Documents and each Borrower and Guarantor hereby
acknowledges and agrees that, notwithstanding the execution and delivery of
this Amendment, the Security Documents and the other Credit Documents remain
in full force and effect and the rights and remedies of the Administrative
Agent, the Pledgee and the Collateral Agent and the Banks thereunder, the
obligations of each Borrower and Guarantor thereunder and the liens and
security interests created and provided for thereunder remain in full force
and effect and shall not be affected, impaired or discharged hereby. Nothing
herein contained shall in any manner affect or impair the priority of the
liens and security interests created and provided for by the Security
Documents and the other Credit Documents as to the indebtedness which would be
secured thereby prior to giving effect to this Amendment.
(b) Except as specifically amended herein or waived hereby, the
Credit Agreement shall continue in full force and effect in accordance with
its original terms. Reference to this specific Amendment need not be made in
the Credit Agreement, the Notes, or any other instrument or document executed
in connection therewith, or in any certificate, letter or communication issued
or made pursuant to or with respect to the Credit Agreement, any reference in
any of such items to the Credit Agreement being sufficient to refer to the
Credit Agreement as amended hereby.
(c) The Borrowers agree to pay on demand all reasonable costs
and expenses of or incurred by the Administrative Agent in connection with the
negotiation, preparation, execution and delivery of this Amendment.
(d) This Amendment may be executed in any number of
counterparts, and by the different parties on different counterpart signature
pages, all of which taken together shall constitute one and the same
agreement. Any of the parties hereto may execute this Amendment by signing any
such counterpart and each of such counterparts shall for all purposes be
deemed to be an original. This Amendment shall be governed by the laws of the
State of New York.
[SIGNATURE PAGES TO FOLLOW]
4
Dated as of January __, 2001.
ALLIANCE DATA SYSTEMS CORPORATION
By: /s/ Robert P. Armiak
----------------------------------------
Name: Robert P. Armiak, CCM
--------------------------------------
Title: Vice President, Treasurer
-------------------------------------
LOYALTY MANAGEMENT GROUP
CANADA INC.
By: /s/ Robert P. Armiak
----------------------------------------
Name: Robert P. Armiak, CCM
--------------------------------------
Title: Vice President, Treasurer
-------------------------------------
Accepted and agreed to as of the date and year last above written.
HARRIS TRUST AND SAVINGS BANK, in its
individual capacity as a Bank and as the
Administrative Agent
By: /s/ Thad D. Rasche
----------------------------------------
Name: Thad D. Rasche
--------------------------------------
Title: Vice President
-------------------------------------
5
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By: /s/ Colleen B. Galle
----------------------------------------
Name: Colleen B. Galle
--------------------------------------
Title: Vice President
-------------------------------------
FIRST UNION NATIONAL BANK
By: /s/ David L. Driggers
----------------------------------------
Name: David L. Driggers
--------------------------------------
Title: Sr. Vice President
-------------------------------------
BANK ONE, NA
By: /s/ Scott Miller
----------------------------------------
Name: Scott Miller
--------------------------------------
Title: Vice President
-------------------------------------
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Robert C. Nagel
----------------------------------------
Name: Robert C. Nagel
--------------------------------------
Title: Vice President
-------------------------------------
THE HUNTINGTON NATIONAL BANK
By: /s/ Nancy J. Cracolice
----------------------------------------
Name: Nancy J. Cracolice
--------------------------------------
Title: Vice President
-------------------------------------
KZH ING-2 LLC
By: /s/ Kimberly Rowe
----------------------------------------
Name: Kimberly Rowe
--------------------------------------
Title: Authorized Agent
-------------------------------------
KZH ING-3 LLC
By: /s/ Kimberly Rowe
----------------------------------------
Name: Kimberly Rowe
--------------------------------------
Title: Authorized Agent
-------------------------------------
6
PILGRIM AMERICA HIGH INCOME
INVESTMENTS, LTD.
By: Pilgrim Investments, Inc.,
as its Investment Manager
By: /s/ Michel Prince
----------------------------------------
Name: Michel Prince, CFA
--------------------------------------
Title: Vice President
-------------------------------------
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc.,
as its Investment Manager
By: /s/ Michel Prince
----------------------------------------
Name: Michel Prince, CFA
--------------------------------------
Title: Vice President
-------------------------------------
PILGRIM CLO 1999-1 LTD.
By: Pilgrim Investments, Inc.,
as its Investment Manager
By: /s/ Michel Prince
----------------------------------------
Name: Michel Prince, CFA
--------------------------------------
Title: Vice President
-------------------------------------
CHASE MANHATTAN BANK
By: /s/ Michael J. Lister
----------------------------------------
Name: Michael J. Lister, Vice President
--------------------------------------
Title: The Chase Manhattan Bank
-------------------------------------
BARCLAYS BANK PLC
By: /s/ Alison McGuigan
----------------------------------------
Name: Alison McGuigan
--------------------------------------
Title: Associate Director
-------------------------------------
SUNTRUST BANK
By: /s/ Shelly M. Browne
----------------------------------------
Name: Shelly M. Browne
--------------------------------------
Title: Managing Director
-------------------------------------
7
ARCHIMEDES FUNDING II, LTD.
By: ING Capital Advisors LLC,
as Collateral Manager
By: /s/ Richard Barger
----------------------------------------
Name: Richard Barger
--------------------------------------
Title: Vice President
-------------------------------------
ARCHIMEDES FUNDING III, LTD.
By: ING Capital Advisors LLC,
as Collateral Manager
By: /s/ Richard Barger
----------------------------------------
Name: Richard Barger
--------------------------------------
Title: Vice President
-------------------------------------
SEQUILS-ING I (HBDGM), LTD.
By: ING Capital Advisors LLC,
as Collateral Manager
By: /s/ Richard Barger
----------------------------------------
Name: Richard Barger
--------------------------------------
Title: Vice President
-------------------------------------
VAN KAMPEN PRIME RATE INCOME TRUST
By: Van Kampen Investment Advisory Corp.
By: /s/ Darvin D. Pierce
----------------------------------------
Name: Darvin D. Pierce
--------------------------------------
Title: Principal
-------------------------------------
8
GUARANTORS' CONSENT
By their execution of the Credit Agreement, the undersigned have
heretofore guaranteed certain Guaranteed Obligations under Article 10 of the
Credit Agreement. Each of the undersigned hereby consents to the Amendment to
the Credit Agreement as set forth above and confirms that all of each of the
undersigned's obligations as a Guarantor remain in full force and effect. The
undersigned further agree that the consent of the undersigned to any further
amendments to the Credit Agreement shall not be required as a result of this
consent having been obtained.
ADS ALLIANCE DATA SYSTEMS, INC.
By: /s/ Robert P. Armiak
----------------------------------------
Name: Robert P. Armiak, CCM
--------------------------------------
Title: Vice President, Treasurer
-------------------------------------
ADS COMMERCIAL SERVICES, INC.
By: /s/ Robert P. Armiak
----------------------------------------
Name: Robert P. Armiak, CCM
--------------------------------------
Title: Vice President, Treasurer
-------------------------------------
HARMONIC TECHNOLOGY LICENSING, INC.
By: /s/ Robert P. Armiak
----------------------------------------
Name: Robert P. Armiak, CCM
--------------------------------------
Title: Vice President, Treasurer
-------------------------------------
9
GENERAL RELEASE AND SEVERANCE AGREEMENT
This General Release and Severance Agreement (hereinafter
"Agreement") is entered into by and between EDWARD K. MIMS (hereinafter
"ASSOCIATE"), and ADS ALLIANCE DATA SYSTEMS, INC. (hereinafter "ALLIANCE"),
and also ALLIANCE DATA SYSTEMS CORPORATION ("ADSC") but only to the extent
specifically provided in this Agreement.
WHEREAS, ASSOCIATE has willingly and voluntarily resigned all
officer positions he held for ALLIANCE, its parent, subsidiaries and
affiliates as of October 11, 2000;
WHEREAS, ASSOCIATE and ALLIANCE will mutually, willingly, and
voluntarily terminate their employment relationship effective as of November
3, 2000 ("TERMINATION DATE");
WHEREAS, ASSOCIATE and ALLIANCE desire to compromise, settle and
forever resolve and dispose of all differences and potential claims and
controversies between them, up to and including the Termination Date;
WHEREAS, all words used in this Agreement will have their plain
meaning in ordinary English; and
WHEREAS, the effective date of this Agreement shall be on the eighth
day following ASSOCIATE'S execution of this Agreement (the "EFFECTIVE DATE").
NOW, THEREFORE, in consideration of the foregoing and promises and
other good and sufficient consideration contained hereinafter, the parties
agree as follows:
I.
A. SEVERANCE PAY. In exchange for ASSOCIATE entering into this
Agreement and signing the General Release, ALLIANCE agrees to pay to
ASSOCIATE the lump sum of $269,923.30, less appropriate payroll tax
deductions and income tax withholdings within five (5) days of the Effective
Date ALLIANCE and ASSOCIATE agree that as of the Termination Date,
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 1
ASSOCIATE is no longer eligible to participate in ALLIANCE's 401(k) savings
plan, and therefore, the aforementioned severance payments shall not be
subject to 401(k) withholdings or employer matching.
B. PAYMENT OF WAGES AND OTHER BENEFITS. ALLIANCE represents and
agrees that as of the Effective Date of this Agreement, ALLIANCE will have
made payment in full to ASSOCIATE for all wages earned through the
Termination Date and all other benefits owed to ASSOCIATE through the
Termination Date other than claims under ALLIANCE's medical plan that have
been filed but not paid and any other benefits specifically provided for in
this Agreement. Further, ALLIANCE and ASSOCIATE agree that by signing this
Agreement and in consideration for the Severance Pay to be paid to ASSOCIATE
pursuant to Section I(A), ASSOCIATE is hereby waiving any payment for accrued
but unused vacation for 2000. Further, ALLIANCE and ASSOCIATE agree that
after the Termination Date, ASSOCIATE will not accrue any vacation or other
benefits for which he was eligible or previously entitled.
C. CONTINUATION OF BENEFITS. ALLIANCE shall continue ASSOCIATE'S
health and life benefits through the end of the month in which the
Termination Date falls. Thereafter, ASSOCIATE may elect to continue health
benefits pursuant to the Comprehensive Omnibus Budget Reconciliation Act
("COBRA"), solely at his cost, by paying the applicable premiums therefor.
D. INCENTIVE COMPENSATION. ASSOCIATE will be entitled to receive an
incentive compensation payment pursuant to the 2000 Incentive Compensation
Plan (the "2000 Plan") provided such payments, if any, are made as directed
by the ALLIANCE Board of Directors, calculated by multiplying (i) $121,000 by
(ii) 90% by (iii) that percentage of corporate
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 2
performance criteria attained by the Company and adding $12,100. ASSOCIATE
will not be eligible to participate in ALLIANCE's 2001 Incentive Compensation
Plan.
E. STOCK OPTIONS. ASSOCIATE, ALLIANCE and Alliance Data Systems
Corporation ("ADSC") agree to amend, as provided in this Paragraph E, the
Incentive Stock Option Agreements dated February 26, 1998, July 24, 1998,
December 1, 1998, and May 7, 1999 between ADSC and ASSOCIATE pursuant to the
Alliance Data Systems Corporation and its Subsidiaries Stock Option and
Restricted Stock Purchase Plan ("ORIGINAL PLAN") and the Incentive Stock
Option Agreement dated September 1, 2000 between ADSC and ASSOCIATE pursuant
to the Amended and Restated Alliance Data Systems Corporation and its
Subsidiaries Stock Option and Restricted Stock Plan ("AMENDED AND RESTATED
PLAN") (hereinafter, both plans are referred to as the "Plan" or "Plans". The
amendments shall provide as follows:
1) ORIGINAL PLAN. The stock options granted to ASSOCIATE pursuant
to the Original Plan ("ORIGINAL PLAN STOCK OPTIONS") which are vested as of
the Termination Date ("VESTED ORIGINAL PLAN STOCK OPTIONS"), may be exercised
pursuant to the Original Plan for a period of up to six (6) months after the
Termination Date. The total number of shares vested under the Original Plan
Stock Options as of the Termination Date is 36,111 shares. All other Original
Plan Stock Options unvested as of the Termination Date ("UNVESTED ORIGINAL
PLAN STOCK OPTIONS") will be forfeited. Notwithstanding the foregoing
sentence, however, if the Board of Directors determines that the vesting of a
certain portion of the Unvested Original Plan Stock Options shall be
accelerated to January 31, 2001 due to Company performance, such options so
designated by the Board of Directors will vest as of January 31, 2001
("JANUARY VESTING DATE") and may be exercised for a period of up to
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 3
six (6) months after the January Vesting Date; provided that ASSOCIATE shall
receive accelerated vesting to the January Vesting Date of the Unvested
Original Plan Stock Options to no less extent than any other associate of
ALLIANCE also holding stock options under the Original Plan. ASSOCIATE hereby
agrees and acknowledges that the aforementioned options which are subject to
the January Vesting Date may be converted from Incentive Stock Options to
Non-Qualified Stock Options. ALLIANCE agrees to provide written notice of any
action by the Board of Directors to accelerate any options granted under the
Original Plan (including the amounts by which every employee's or associate's
options were accelerated) within 10 days of the adoption of such action.
2) AMENDED AND RESTATED PLAN. One-third of the stock options granted
to ASSOCIATE pursuant to the Amended and Restated Plan on September 1, 2000
will vest on August 31, 2001 ("EXTENDED VESTING DATE") and may be exercised
pursuant to the Amended and Restated Plan for each such stock options or
stock awards for a period of up to six (6) months after the Extended Vesting
Date. The amount of such vested stock options shall be 26,667 shares as of
the Extended Vesting Date. All other stock options which were granted on
September 1, 2000 will be forfeited. ASSOCIATE hereby agrees and acknowledges
that the aforementioned options which are subject to the Extended Vesting
Date may be converted from Incentive Stock Options to Non-Qualified Stock
Options.
F. RESTRICTED STOCK AWARDS. ASSOCIATE hereby acknowledges and agrees
that because his employment with ALLIANCE ceased as of November 3, 2000, he
has forfeited and will forfeit any and all Restricted Stock Awards ("RSA")
granted to him prior to the Termination Date and he will no longer be a
participant in the RSA plan as of November 3, 2000. However, if in 2001, the
ALLIANCE Board of Directors decides that all or a portion of the restrictions
on
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 4
such RSA's should lapse for each and every ALLIANCE associate who was,
effective September 1, 2000, granted RSA's and who is, on the date such
lapsing takes effect, then participating in the RSA plan, or if such
restrictions lapse for each and every ALLIANCE associate, due to ALLIANCE
reaching its 2000 EBITDA target, ALLIANCE agrees to make a one-time cash
payment to ASSOCIATE in an amount equal to the fair market value of ADSC
common stock underlying such RSA on the date such lapsing takes effect
multiplied by 7,000 ("Associate's 2000 Vesting Target") multiplied by the
percentage of Associate's 2000 Vesting Target on which the Board of Directors
deems such restrictions should lapse ("Lapsed Restriction Percentage") or by
100% in the case ALLIANCE reaches its 2000 EBITDA target, less applicable
taxes. For example, if the Board designates in 2001 that the Lapsed
Restriction Percentage should be 100%, ASSOCIATE's cash payment would be
calculated by multiplying the fair market value of ADSC common stock on the
date such lapsing takes effect by 7,000 and multiplying that number by 100%.
Alternatively for example, if the Board designates in 2001 that the Lapsed
Restriction Percentage should be 40%, then ASSOCIATE's cash payment would be
calculated by multiplying the fair market value of the ADSC common stock on
the date such lapsing takes effect by 7,000 and multiplying that amount by
40%. For purposes of this Section I(F), the fair market value of one share of
the ADSC common stock shall be that number as calculated by the ADSC finance
department in the normal course of business for similar purposes unless on
the date the fair market value must be determined the ADSC common stock is
traded on a nationally recognized securities exchange, in which case the fair
market value of one share of the ADSC common stock shall be the closing price
of the ADSC common stock on such date, or if such date is not a trading day,
then the closing price per share of the ADSC common stock on the next trading
day thereafter.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 5
ALLIANCE agrees to provide written notice of any action by the Board
of Directors to accelerate vesting of the RSAs within 10 days of such action.
If ALLIANCE does not reach its 2000 EBITDA target and the Board of Directors
does not otherwise accelerate the vesting of the RSAs referenced above, in
such event ASSOCIATE will receive no such cash payment and nothing in this
paragraph shall be construed to entitle ASSOCIATE to any other future
payments of any kind pursuant to this paragraph. All payments due ASSOCIATE
under this Paragraph F shall be payable within thirty (30) days after the
event occurs that creates the payment obligation to ASSOCIATE.
G. FURTHER ACTIONS. ASSOCIATE, ALLIANCE, and ADSC agree to execute
such documents and to take such actions as are necessary to implement the
amendments described in this Paragraph E and Paragraph F above.
H. OUTPLACEMENT BENEFITS. As further consideration of the mutual
promises contained herein, ALLIANCE agrees to provide ASSOCIATE, at
ALLIANCE'S cost, with executive-level outplacement assistance with Spherion
Human Capital Consulting ("SHCC") or another company providing similar
services for a period of one (1) year. By providing this service, ALLIANCE
does not warrant or guarantee the services of SHCC or such other party, nor
does ALLIANCE warrant or guarantee that ASSOCIATE will secure employment
through SHCC or such other party.
I. CONTINUING PROFESSIONAL EDUCATION EXPENSES AND PROFESSIONAL
LICENSE FEES. ALLIANCE agrees to reimburse ASSOCIATE upon the proper
submission of expense reports therefor, expenses related to (1) ASSOCIATE's
attendance at continuing professional education seminars and (2) ASSOCIATE's
professional accountancy license fees which enable
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 6
ASSOCIATE to maintain his professional accountancy licenses in the state of
Texas for the calendar years 2000 and 2001.
In the event Associate breaches any of the promises and covenants
contained in this Agreement, ALLIANCE's duties hereunder shall cease;
provided, however, if ASSOCIATE's breach is capable of being cured, ALLIANCE
shall first provide ASSOCIATE a written notice of the breach and allow
ASSOCIATE twenty (20) days to cure such breach, and only if the breach is not
cured within such twenty (20) day period may ALLIANCE cease its duties
hereunder.
II.
A. GENERAL RELEASE BY ASSOCIATE. In exchange for the consideration
set forth above in Section I. and other good and sufficient consideration set
forth herein, ASSOCIATE, for and on behalf of himself individually and his
heirs, representatives, and assigns, if any, hereby fully, finally,
completely, and forever releases, discharges, acquits, and relinquishes
ALLIANCE, ADSC and their predecessors, successors, parent entities,
subsidiaries, related or affiliated companies, attorneys, officers,
directors, employees, former employees, agents and assigns (collectively the
"Released Parties"), jointly and/or severally, from any and all claims,
actions, demands, liabilities, and/or causes of action of whatever kind or
character, joint or several, whether now known or unknown, asserted or
unasserted, under any federal, state or local statute and common law dealing
with age, race, sex and other types of discrimination in employment,
including, but not limited to, the Texas Commission on Human Rights Act;
Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act
of 1991; the Americans with Disabilities Act; the Age Discrimination in
Employment Act ("ADEA") the Employee Retirement Security Act of 1974; or any
other claim, regardless of the forum in which it might be
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 7
brought, if any, which he has, might have, or might claim to have against the
Released Parties, or any of them individually, for any and all injuries,
harm, damages, penalties, costs, losses, expenses, attorneys' fees, and/or
liability or other detriment, if any, whenever incurred, or suffered by
ASSOCIATE as a result of any and all acts, omissions, or events by the
Released Parties, collectively or individually, through the Termination Date.
It is expressly agreed and understood by ASSOCIATE that this Agreement and
Release includes without limitation any and all claims, actions, demands, and
causes of action, if any, arising from or in any way connected with the
employment relationship between ASSOCIATE and ALLIANCE and the termination
thereof, including any claim of discrimination, retaliation, harassment,
failure to accommodate, wrongful termination, breach of contract, and/or
tortious conduct, including all claims that were or could have been brought
by ASSOCIATE. However, the parties agree that notwithstanding the foregoing
language, ASSOCIATE in no way releases any claims to any of the following:
(i) any employee benefits, including, but not limited to, pension and/or
retirement benefits, which were vested as of the Termination Date or (ii) any
breach by ALLIANCE or ADSC of its obligations to ASSOCIATE under this
Agreement.
B. ADEA RELEASE. ASSOCIATE hereby acknowledges that he knowingly and
voluntarily enters into this Agreement with the purpose of waiving and
releasing any claims under the Age Discrimination in Employment Act of 1967,
and as such, he acknowledges and agrees that:
(1) this Agreement is worded in an understandable way;
(2) any rights or claims arising under the ADEA are waived;
(3) claims under the ADEA that may arise after the date this
Agreement is executed are not waived;
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 8
(4) the rights and claims waived in this Agreement are in exchange
for additional consideration over and above anything to which
ASSOCIATE was already undisputedly entitled;
(5) ASSOCIATE has been advised in writing to consult with an
attorney prior to executing this Agreement;
(6) ASSOCIATE has been given a twenty-one (21) day period of time,
if desired, to consider this Agreement.
(7) He may revoke this waiver and release of any ADEA (age
discrimination) claims covered by this Agreement within seven
days from execution of this Agreement; provided, however, that
such a revocation may, at the election of ASSOCIATE, be deemed
to cause a failure of consideration for this Agreement,
whereupon ALLIANCE would be entitled to a return of any monies
paid to ASSOCIATE under this Agreement; and
(8) Any changes made to this Agreement, whether material or
immaterial, will not restart the running of this twenty-one
(21) day period.
III.
For the same consideration set forth herein, ASSOCIATE further
agrees as follows:
A. CONFIDENTIALITY AND NONDISCLOSURE. ASSOCIATE agrees to be
permanently bound by any and all prior confidentiality agreements he executed
while an employee of ALLIANCE. ASSOCIATE further covenants and agrees that he
will not take with him following the end of him employment with ALLIANCE or
any of its affiliates, any document, papers or materials in any form
(including without limitation originals or copies, printed or in electronic
form) in ASSOCIATE'S possession or control containing any confidential
information and that he will surrender all such material upon the termination
of him employment with ALLIANCE.
B. NONDISPARAGEMENT. The parties further agree that from and after
the Termination Date, the parties will not make or publish any statement,
written or oral, materially disparaging the reputation of ASSOCIATE or of
ALLIANCE, any of its present or future officers, shareholders, subsidiaries
or affiliates, or any of such parties' respective businesses or
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 9
products. To each prospective employer contacted by ASSOCIATE while J. Michael
Parks ("Parks") is ALLIANCE's Chief Executive Officer, ASSOCIATE agrees to
name only Parks as a reference to whom such prospective employer may contact
with regard to ASSOCIATE'S employment with ALLIANCE. If ALLIANCE is requested
by a prospective employer of ASSOCIATE for a job reference, ALLIANCE agrees
that such reference will be favorable to ASSOCIATE, and if Parks is then the
CEO of ALLIANCE, Mr. Parks shall give such reference.
C. NON-SOLICITATION. ASSOCIATE agrees that for a period of twelve
(12) months after the Termination Date, ASSOCIATE agrees not to (a) directly
or indirectly solicit for employment any person then employed by ALLIANCE or
any of its affiliates or any then engaged subcontractors of ALLIANCE of its
affiliates or subsidiaries used in connection with ALLIANCE-related work or
(b) advise or recommend to any other person, firm, partnership, or corporation
that competes with ALLIANCE'S business in those areas of the United States
where ALLIANCE conducts business, that it employ or solicit for employment any
person then employed by ALLIANCE or any of its subsidiaries used in connection
with ALLIANCE-related work; provided, however, that ASSOCIATE shall not be
prohibited from communicating with any current or former employee of ALLIANCE
as to matters other than as described in this Paragraph III(C).
D. INJUNCTIVE RELIEF. ASSOCIATE agrees that enforcement of the
Confidentiality and Nondisclosure and Nondisparagement convenants would be
difficult if not impossible to enforce through an action at law. Therefore,
ASSOCIATE agrees that ALLIANCE may seek any all remedies available to it to
enforce these covenants, including seeking any injunctive relief to enjoin
ASSOCIATE from further violation of the covenants or for specific enforcement
of this Agreement. ASSOCIATE further agrees that ALLIANCE may seek recovery of
all actual
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 10
damages incurred as a result of ASSOCIATE'S breach of any of the
above-referenced sections including but not limited to attorneys' fees, courts
costs and expenses incurred by ALLIANCE in seeking to enforce this section.
IV.
ASSOCIATE further agrees that any and all sums paid or provided to
him in consideration for this Agreement will be forfeited and become
immediately due and payable to ALLIANCE, at its sole discretion, in the event
that ASSOCIATE asserts any claim, demand or cause of action, arising out of,
resulting from, or in any way related to any of the claims released by
ASSOCIATE under this Agreement, or any action to set aside, invalidate, or
void this Agreement, except as a result of ALLIANCE's or ADSC's breach of
their respective obligations under this Agreement, unless ASSOCIATE withdraws
such claim, demand or cause of action within ten (10) days after receipt of
written notice from ALLIANCE. ASSOCIATE also agrees that a breach of the
covenant set forth in this Section IV will entitle ALLIANCE and its successors
and assigns to a full recovery in an action for damages, including, but not
limited to, recovery of its or their costs, expenses and attorneys' fees for
investigation, prosecution or defense of any action brought in breach of this
covenant. Such recovery of monies shall not otherwise affect the
enforceability of this Agreement or of other individual promises contained in
this Agreement.
V.
ASSOCIATE hereby represents and warrants that he has not assigned or
otherwise transferred to any other person or entity any interest in any claim,
demand, action and/or cause of action he has, or may have, or may claim to
have against any Released Party. ASSOCIATE agrees to indemnify and hold
harmless all of the Released Parties from any and all injuries, harm,
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 11
damages, costs, losses, expenses and/or liability, including reasonable
attorneys' fees and court costs, incurred as a result of any claims or demands
which may hereafter be asserted against any such Released Parties by, through,
or by virtue of an assignment or other transfer by ASSOCIATE.
VI.
ASSOCIATE acknowledges and agrees that by signing this Agreement, he
is hereby releasing and forever waiving re-employment or reinstatement with
ALLIANCE in any capacity; although nothing herein shall prevent ALLIANCE from
reemploying ASSOCIATE should ALLIANCE, in its own discretion decide to
reemploy him.
VII.
This Agreement, the offer of this Agreement and compliance with this
Agreement shall not constitute or be construed as an admission by the Released
Parties or any of them individually, of any wrongdoing or liability of any
kind or an admission by any of them of any violation of the rights of
ASSOCIATE, but rather, such liability or wrongdoing is expressly denied. This
Agreement shall not be admissible in any judicial, administrative or other
proceeding or cause of action as an admission of liability or for any purpose
other than to enforce the terms of this Agreement. Moreover, ASSOCIATE agrees
that he will not disclose to any third parties except as provided below the
fact that the parties have entered into this Agreement or the terms and
conditions of this Agreement. Unless otherwise authorized in writing by
ALLIANCE, ASSOCIATE may not disclose the fact the parties have entered this
Agreement as well as the information contained herein, except with respect to
his spouse, attorneys and tax advisors (the "Associate Authorized Parties"),
but only upon advising the Associate Authorized Parties of the restrictions of
this Section VII and obtaining the agreement of the Associate
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 12
Authorized Parties to terms of same. This Agreement is not intended to
prohibit or interfere with either ASSOCIATE'S ability to respond to or
cooperate with any governmental agency request or subpoena or court order.
However, in the event ASSOCIATE receives such a subpoena or order, ASSOCIATE
agrees to provide ALLIANCE notice of the subpoena or order within (5) days of
ASSOCIATE's receipt of such subpoena or order, with delivery to HR Counsel,
Alliance Data Systems, 17655 Waterview Parkway, Dallas, Texas 75252.
VIII.
The parties agree that the terms of this Agreement are contractual in
nature and not merely recitals and shall be governed and construed in
accordance with the laws of the State of Texas. The parties further agree that
should any part of this Agreement be declared or determined by a court of
competent jurisdiction to be illegal, invalid, or unenforceable, the parties
intend the legality, validity, and enforceability of the remaining parts shall
not be affected thereby, and said illegal, invalid or unenforceable part shall
be deemed not to be a part of this Agreement. Venue to decide any disputes
arising under this Agreement shall be in Dallas County.
The parties further agree that while a breach of any of the covenants
set forth in this Agreement will entitle the ALLIANCE and its successors and
assigns to a full recovery in an action for damages, including, but not
limited to, recovery of its or their costs, expenses and attorneys' fees for
investigation, prosecution or defense of any action brought in breach of such
covenants, the recovery of monies shall not otherwise affect the
enforceability of this Agreement or of other individual promises contained in
this Agreement.
IX.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 13
This Agreement shall be binding upon and the benefits shall inure to
ASSOCIATE and his heirs, successors, and assigns, and to ALLIANCE, ADSC and
their successors and assigns.
X.
No waiver of any of the terms of this Agreement shall be valid unless
in writing and signed by the party to this Agreement against whom such waiver
is sought to be enforced. The waiver by any party hereto of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach by any party, nor shall any waiver operate or be construed as a
recission of this Agreement.
XI.
All notices, requests, consents, and other communications under this
Agreement shall be in writing and shall be deemed to have been delivered on
the date personally delivered or on the date deposited in a receptacle
maintained by the United States Postal Service for such purpose, postage
prepaid, by certified mail, return receipt requested, addressed to HR Legal
Counsel, Legal Department at:
ADS Alliance Data Systems, Inc.
17655 Waterview Parkway
Dallas, Texas 75252
and to ASSOCIATE at the address set forth below ASSOCIATE'S signature
on the signature page hereto. Either party hereto may designate a different
address by providing written notice of such new address to the other party
hereto.
XII.
ASSOCIATE agrees that in executing this Agreement he does not rely
and has not relied on any document, representation or statement, whether
written or oral, other than those specifically set forth in this written
Agreement. The parties agree that this Agreement constitutes
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 14
the entire agreement between ASSOCIATE, ALLIANCE, and ADSC and supersedes any
and all prior agreements or understandings, written or oral, pertaining to the
subject matter of this Agreement, and contains all the covenants and
agreements in any manner whatsoever between the parties with respect to such
matters. No oral understandings, statements, promises or inducements contrary
to the terms of this Agreement exist. This Agreement cannot be changed or
terminated orally, but may be changed only through written addendum executed
by both parties.
XIII.
The wording in this Agreement was reviewed and accepted by all
parties after reasonable time to review with legal counsel, and no party shall
be entitled to have any wording of this Agreement construed against the other
party as the drafter of the Agreement in the event of any dispute in
connection with this Agreement.
XIV.
ASSOCIATE and ALLIANCE agree that prior to the execution of this
Agreement, ASSOCIATE has returned to ALLIANCE all Company property within
ASSOCIATE'S possession, or control, including, but not limited to, beepers,
cellular telephones, keys, access cards, computers and peripheral equipment,
software, automobiles, equipment, customer lists, forms, plans, documents, and
other written and computer material, and copies of the same, belonging to
ALLIANCE or its affiliates, or any of their customers. ASSOCIATE represents
and warrants that he has not and will not at any time copy or reproduce any of
the items referred to in this Section XIV.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 15
XV.
ASSOCIATE agrees to tender his resignation as a member of the board
of any ALLIANCE affiliate as of October 31, 2000.
ALLIANCE and ADSC agree that for the period during which ASSOCIATE
was employed by ALLIANCE or ADSC, ASSOCIATE shall be entitled to the benefit
of the indemnification provisions contained in the Certificate of
Incorporation and/or Bylaws of ALLIANCE, ADSC or any other affiliate of ADSC
or any other contractual indemnification provision in place at the Effective
Date. ALLIANCE and ADSC covenant and agree that during the period of
ASSOCIATE'S employment with ALLIANCE or service on the board of directors of
any affiliate of ALLIANCE, ALLIANCE and ADSC have continually maintained a
directors' and officers' insurance policy, that ASSOCIATE has been included in
the category of covered directors and executives under such policy for acts
which occurred during the period of ASSOCIATE'S employment and/or services on
Board of Directors of any affiliate of ALLIANCE, and that such policy, as
maintained, insures ASSOCIATE for events or occurrences while such policy was
or is in force. ALLIANCE and ADSC further covenant and agree that as long as
they maintain any directors' and officers' insurance policy which provides
coverage for other officers and/or directors of ALLIANCE, ADSC or any
affiliate thereof, who served during the same period as ASSOCIATE, ALLIANCE
and ADSC agree that neither ALLIANCE or ADSC will make any request to any
carrier of any directors' and officers' insurance policy to exclude ASSOCIATE
from such same coverage.
XVI.
ASSOCIATE declares that the terms of this Agreement have been
completely read, are fully understood, and are voluntarily accepted, after
complete consideration of all facts and him
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 16
legal rights, of which he has been fully advised by him respective attorneys
for the purpose of making a full and final compromise, adjustment and
settlement of any and all claims, disputed or otherwise, that ASSOCIATE may
have against the Released Parties.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 17
IN WITNESS WHEREOF, the parties have executed this Agreement as
follows:
EDWARD K. MIMS
/s/ Edward K. Mims
- -------------------------------------------
8912 Maple Glen Drive, Dallas, Texas 75231
- -------------------------------------------
ADDRESS
Date: November 27, 2000
- -----------------------
ADS ALLIANCE DATA SYSTEMS, INC.
By: J. Michael Parks
---------------------------
Its: Chief Executive Officer
---------------------------
Date: 11/27/00
--------------------------
As to the provisions of this Agreement to which it is mentioned:
ALLIANCE DATA SYSTEMS CORPORATION
By: J. Michael Parks
----------------------------
Its: Chief Executive Officer
---------------------------
Date: 11/27/00
--------------------------
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 18
GENERAL RELEASE AND SEVERANCE AGREEMENT
This General Release and Severance Agreement (hereinafter "Agreement")
is entered into by and between JAMES ANDERSON (hereinafter "ASSOCIATE"), and ADS
ALLIANCE DATA SYSTEMS, INC. (hereinafter "ALLIANCE"), and also ALLIANCE DATA
SYSTEMS CORPORATION ("ADSC") but only to the extent specifically provided in
this Agreement.
WHEREAS, ASSOCIATE and ALLIANCE will mutually, willingly, and
voluntarily terminate their employment relationship effective as of December 31,
2000 ("TERMINATION DATE");
WHEREAS, ASSOCIATE and ALLIANCE desire to compromise, settle and
forever resolve and dispose of all differences and potential claims and
controversies between them, up to and including the Termination Date;
WHEREAS, all words used in this Agreement will have their plain meaning
in ordinary English; and
WHEREAS, the effective date of this Agreement shall be on the eighth
day following ASSOCIATE'S execution of this Agreement (the "EFFECTIVE DATE").
NOW, THEREFORE, in consideration of the foregoing and promises and
other good and sufficient consideration contained hereinafter, the parties agree
as follows:
I.
A. SEVERANCE PAY. In exchange for ASSOCIATE entering into this
Agreement and signing the General Release, ALLIANCE agrees to pay to ASSOCIATE
beginning the first payroll cycle after the Effective Date of this Agreement
severance pay equal to fifty-two (52) weeks ("SEVERANCE PAY PERIOD") of his
current annual base salary, payable in bi-weekly installments. All payments
under this paragraph will be subject to appropriate payroll tax deductions and
income tax withholdings.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 1
ALLIANCE and ASSOCIATE agree that as of the Termination Date, ASSOCIATE
is no longer eligible to participate in ALLIANCE's 401(k) savings plan, and
therefore, the aforementioned severance payments shall not be subject to 401(k)
withholdings or employer matching.
B. PAYMENT OF WAGES AND OTHER BENEFITS. ALLIANCE represents and agrees
that as of the Effective Date of this Agreement, ALLIANCE will have made payment
in full to ASSOCIATE for all wages earned through the Termination Date and all
other benefits owed to ASSOCIATE through the Termination Date, including five
(5) weeks of vacation pay. Further, ALLIANCE and ASSOCIATE agree that after the
Termination Date, ASSOCIATE will not accrue any vacation or other benefits for
which he was eligible or previously entitled.
C. CONTINUATION OF BENEFITS. ALLIANCE shall continue ASSOCIATE'S health
and life benefits through the end of the month in which the Termination Date
falls. Thereafter, should ASSOCIATE elect to continue health benefits pursuant
to the Comprehensive Omnibus Budget Reconciliation Act ("COBRA"), as amended, he
will continue to pay the employee premium he paid prior to the Termination Date,
and ALLIANCE agrees to pay the additional cost of the applicable premiums under
COBRA for such coverage, through the Severance Pay Period, or the date he
becomes eligible for coverage with any employer. The ASSOCIATE premium amount(s)
will be withheld from future installment payments upon notification of COBRA
election. Any missed premiums will be deducted retroactively.
D. INCENTIVE COMPENSATION. ASSOCIATE will be entitled to receive an
incentive compensation payment pursuant to the 2000 Incentive Compensation Plan
in the amount of $117,500.00, less required income tax withholdings. ASSOCIATE
will not be eligible to participate in ALLIANCE'S 2001 Incentive Compensation
Plan.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 2
E. ONE-TIME CONDITIONAL PAYMENT. Within thirty (30) days of ASSOCIATE's
notification to ALLIANCE that he is closing on the sale of his Dallas-area home,
and provided at such time ASSOCIATE has not been relocated from or within the
Dallas/Ft. Worth metroplex at the sole cost and expense of another employer,
ALLIANCE will make a one-time cash payment to ASSOCIATE in the amount of
eighty-thousand dollars ($80,000.00), less any required income tax withholdings.
F. STOCK OPTIONS. ASSOCIATE, ALLIANCE and Alliance Data Systems
Corporation ("ADSC") agree to amend, as provided in this Paragraph F, the
Incentive Stock Option Agreements dated May 1, 1997, July 24, 1998, December 1,
1998, and May 7, 1999 between ADSC and ASSOCIATE pursuant to the Alliance Data
Systems Corporation and its Subsidiaries Stock Option and Restricted Stock
Purchase Plan ("ORIGINAL PLAN") and the Incentive Stock Option Agreement dated
September 1, 2000 between ADSC and ASSOCIATE pursuant to the Amended and
Restated Alliance Data Systems Corporation and its Subsidiaries Stock Option and
Restricted Stock Plan ("AMENDED AND RESTATED PLAN") (hereinafter, both plans are
referred to as the "Plan" or "Plans". The amendments shall provide as follows:
1) ORIGINAL PLAN. The stock options granted to ASSOCIATE pursuant to
the Original Plan ("ORIGINAL PLAN STOCK OPTIONS") which are vested as of the
Termination Date ("VESTED ORIGINAL PLAN STOCK OPTIONS"), may be exercised
pursuant to the Original Plan until February 28, 2002. Except as otherwise set
forth in this subsection (1) all other Original Plan Stock Options unvested as
of the Termination Date ("UNVESTED ORIGINAL PLAN STOCK OPTIONS") will be
forfeited. Notwithstanding the foregoing sentence, however, if the Board of
Directors determines that the vesting of a certain
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 3
portion of the Unvested Original Plan Stock Options shall be accelerated to
January 31, 2001 due to Company performance, such options so designated by
the Board of Directors ("JANUARY, 2001 OPTIONS") will vest as of January 31,
2001 ("JANUARY VESTING DATE") and may be exercised until February 28, 2002.
ASSOCIATE hereby agrees and acknowledges that the January Options may be
converted from Incentive Stock Options to Non-Qualified Stock Options.
2) AMENDED AND RESTATED PLAN. One-third of the stock options granted to
ASSOCIATE pursuant to the Amended and Restated Plan on September 1, 2000, the
amount of which is 26,400 options ("SEPTEMBER, 2000 OPTIONS"), will vest on
August 31, 2001 ("EXTENDED VESTING DATE") and may be exercised pursuant to the
Amended and Restated Plan for each such stock options until February 28, 2002.
All other stock options which were granted on September 1, 2000 will be
forfeited. ASSOCIATE hereby agrees and acknowledges that the aforementioned
options which are subject to the Extended Vesting Date may be converted from
Incentive Stock Options to Non-Qualified Stock Options.
3) CHANGE OF CONTROL. Notwithstanding the foregoing subsections I(F)(1)
and (2), ALLIANCE hereby agrees that if all or substantially all of ALLIANCE's
assets or outstanding common stock is purchased by another entity ("STOCK
PURCHASE") before the expiration of the Severance Pay Period, and in conjunction
with the Stock Purchase the Board of Directors determines that it shall
accelerate the vesting of either or both of the January, 2001 Options or the
September, 2000 Options, the vesting of such options shall be accelerated as
determined by the ALLIANCE Board of Directors.
4) NO OTHER ACCELERATION. Except as set forth in this Section F,
ASSOCIATE agrees and acknowledges that no other unvested options awarded to
ASSOCIATE prior to the
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 4
Termination Date under either the Original Plan or the Amended and Restated
Plan shall be accelerated for any reason.
G. RESTRICTED STOCK AWARDS. ASSOCIATE hereby acknowledges and agrees
that because his employment with ALLIANCE will cease as of December 31, 2000,
any and all Restricted Stock Awards ("RSA") granted to him prior to the
Termination Date will be forfeited and he will no longer be a participant in the
RSA plan as of December 31, 2000. However, if in 2001, the ALLIANCE Board of
Directors decides that all or a portion of the restrictions on such RSA's should
lapse for each and every ALLIANCE executive committee member who was, effective
September 1, 2000, granted RSA's and who is, on the date such lapsing takes
effect, then participating in the RSA plan, ALLIANCE agrees to make a one-time
cash payment to ASSOCIATE in an amount equal to the fair market value of ADSC
common stock underlying such RSA on the date such lapsing takes effect
multiplied by 7,000 ("Associate's 2000 Vesting Target") multiplied by the
percentage of Associate's 2000 Vesting Target on which the Board of Directors
deems such restrictions should lapse ("Lapsed Restriction Percentage"). For
example, if the Board designates in 2001 that the Lapsed Restriction Percentage
should be 100%, ASSOCIATE's cash payment would be calculated by multiplying the
fair market value of ADSC common stock on the date such lapsing takes effect by
7,000 and multiplying that number by 100%. Alternatively for example, if the
Board designates in 2001 that the Lapsed Restriction Percentage should be 40%,
then ASSOCIATE's cash payment would be calculated by multiplying the fair market
value of the ADSC common stock on the date such lapsing takes effect by 7,000
and multiplying that amount by 40%. For purposes of this Section I(G), the fair
market value of one share of the ADSC common stock shall be that number as
calculated by the ADSC finance department in the normal course of business for
similar purposes unless on the
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 5
date the fair market value must be determined the ADSC common stock is traded
on a nationally recognized securities exchange, in which case the fair market
value of one share of the ADSC common stock shall be the closing price of the
ADSC common stock on such date, or if such date is not a trading day, then
the closing price per share of the ADSC common stock on the next trading day
thereafter.
If ALLIANCE does not accelerate the vesting of the RSAs referenced
above, in such event ASSOCIATE will receive no such cash payment and nothing in
this paragraph shall be construed to entitle ASSOCIATE to any other future
payments of any kind pursuant to this paragraph.
H. FURTHER ACTIONS. ASSOCIATE, ALLIANCE, and ADSC agree to execute such
documents and to take such actions as are necessary to implement the amendments
described in this Paragraph F and Paragraph G above.
I. REFERENCES. To each prospective employer, ASSOCIATE agrees to name
either Mike Parks, ALLIANCE's Chief Executive Officer ("Parks") or Dwayne
Tucker, ALLIANCE's Executive Vice President ("Tucker"), as a reference to whom
such prospective employer may contact with regard to ASSOCIATE'S employment with
ALLIANCE. ALLIANCE shall cause Parks and Tucker, as applicable to give ASSOCIATE
a favorable reference to each such prospective employer if and when contacted by
such prospective employer.
In the event Associate breaches any of the promises and covenants
contained in this Agreement, ALLIANCE's duties hereunder shall cease.
II.
A. GENERAL RELEASE BY ASSOCIATE. In exchange for the consideration set
forth above in Section I. and other good and sufficient consideration set forth
herein, ASSOCIATE, for and
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 6
on behalf of himself individually and his heirs, representatives, and
assigns, if any, hereby fully, finally, completely, and forever releases,
discharges, acquits, and relinquishes ALLIANCE, ADSC and their predecessors,
successors, parent entities, subsidiaries, related or affiliated companies,
attorneys, officers, directors, employees, former employees, agents and
assigns (collectively the "Released Parties"), jointly and/or severally, from
any and all claims, actions, demands, liabilities, and/or causes of action of
whatever kind or character, joint or several, whether now known or unknown,
asserted or unasserted, under any federal, state or local statute and common
law dealing with age, race, sex and other types of discrimination in employment,
including, but not limited to, the Texas Commission on Human Rights Act;
Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act
of 1991; the Americans with Disabilities Act; the Age Discrimination in
Employment Act ("ADEA") the Employee Retirement Security Act of 1974; or any
other claim, regardless of the forum in which it might be brought, if any,
which he has, might have, or might claim to have against the Released Parties,
or any of them individually, for any and all injuries, harm, damages,
penalties, costs, losses, expenses, attorneys' fees, and/or liability or
other detriment, if any, whenever incurred, or suffered by ASSOCIATE as a
result of any and all acts, omissions, or events by the Released Parties,
collectively or individually, through the Termination Date. It is expressly
agreed and understood by ASSOCIATE that this Agreement and Release includes
without limitation any and all claims, actions, demands, and causes of action,
if any, arising from or in any way connected with the employment relationship
between ASSOCIATE and ALLIANCE and the termination thereof, including any
claim of discrimination, retaliation, harassment, failure to accommodate,
wrongful termination, breach of contract, and/or tortious conduct, including
all claims that were or could have been brought by ASSOCIATE.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 7
B. ADEA RELEASE. ASSOCIATE hereby acknowledges that he knowingly and
voluntarily enters into this Agreement with the purpose of waiving and releasing
any claims under the Age Discrimination in Employment Act of 1967, and as such,
he acknowledges and agrees that:
(1) this Agreement is worded in an understandable way;
(2) any rights or claims arising under the ADEA are waived;
(3) claims under the ADEA that may arise after the date this
Agreement is executed are not waived;
(4) the rights and claims waived in this Agreement are in exchange
for additional consideration over and above anything to which
ASSOCIATE was already undisputedly entitled;
(5) ASSOCIATE has been advised in writing to consult with an
attorney prior to executing this Agreement;
(6) ASSOCIATE has been given a twenty-one (21) day period of time,
if desired, to consider this Agreement.
(7) He may revoke this waiver and release of any ADEA (age
discrimination) claims covered by this Agreement within seven
days from execution of this Agreement; provided, however, that
such a revocation may, at the election of ASSOCIATE, be deemed
to cause a failure of consideration for this Agreement,
whereupon ALLIANCE would be entitled to a return of any monies
paid to ASSOCIATE under this Agreement; and
(8) Any changes made to this Agreement, whether material or
immaterial, will not restart the running of this twenty-one
(21) day period.
III.
For the same consideration set forth herein, ASSOCIATE further agrees
as follows:
A. CONFIDENTIALITY AND NONDISCLOSURE. ASSOCIATE acknowledges and agrees
that he has had access to confidential ALLIANCE business information concerning
the business, plans, finances and assets of ALLIANCE and/or its subsidiaries and
affiliates (including, but not limited to financial information, marketing
plans, and the design and development of
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 8
ALLIANCE systems) and which is not generally known outside ALLIANCE
("Confidential Information"). Accordingly, ASSOCIATE agrees that, unless
otherwise compelled by law, for a period of five (5) years from and after the
Termination Date he shall not, without the proper written authorization of
ALLIANCE, directly or indirectly use, divulge, furnish or make accessible to
any person any Confidential Information, but instead shall keep all
Confidential Information strictly and absolutely confidential. ASSOCIATE will
use reasonable and prudent care to safeguard and prevent the unauthorized use
or disclosure of Confidential Information. ASSOCIATE further agrees that he
shall continue to be bound by any and all prior confidentiality agreements he
executed while an employee of ALLIANCE. ASSOCIATE further covenants and
agrees that he will not take with him following the Termination Date, any
Confidential Information, documents, papers or materials in any form (including
without limitation originals or copies, printed or in electronic form) in
ASSOCIATE'S possession or control containing any confidential information and
that he will surrender all such material upon the Termination Date.
B. NONDISPARAGEMENT. The parties further agree that for a period of
five (5) years from and after the Termination Date, the parties will not make or
publish any statement, written or oral, materially disparaging the reputation of
ASSOCIATE or of ALLIANCE, any of its present or future officers, shareholders,
subsidiaries or affiliates, or any of such parties' respective businesses or
products.
C. NON-SOLICITATION.
1) EMPLOYEE. ASSOCIATE agrees that for a period of twenty-four (24)
months after the expiration of the Severance Pay Period, ASSOCIATE agrees not to
(a) directly or indirectly solicit for employment any person then employed by
ALLIANCE or any of its
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 9
affiliates or subsidiaries, any then engaged individual subcontractors of
ALLIANCE or its affiliates or subsidiaries used in connection with
ALLIANCE-related work or (b) advise or recommend to any other person, firm,
partnership, or corporation that competes with ALLIANCE'S business in those
areas of the United States where ALLIANCE conducts business, that it employ
or solicit for employment any person then employed by ALLIANCE or any of its
affiliates or subsidiaries used in connection with ALLIANCE-related work;
provided, however, that ASSOCIATE shall not be prohibited from communicating
with any current or former employee of ALLIANCE as to matters other than as
described in this Paragraph III(C)(1).
2) CUSTOMER. ASSOCIATE agrees that for a period of twenty-four (24)
months after the expiration of the Severance Pay Period ("Restricted
Period"), ASSOCIATE agrees not to (a) directly or indirectly solicit, offer
to provide, or provide, any services similar to those offered by ALLIANCE or
any of its affiliates to any person or entity, who, as of the Termination
Date, is (or is associated with), a client, customer, or agent of ALLIANCE or
any of its affiliates, nor will ASSOCIATE encourage or assist any such person
or entity to stop doing business with ALLIANCE or any of its subsidiaries or
affiliates. ASSOCIATE agrees that during the Restricted Period, if such a
client, customer, or agent contacts ASSOCIATE about discontinuing business
with ALLIANCE or any of its subsidiaries or affiliates and/or moving that
business elsewhere, ASSOCIATE will inform such client, customer, or agent
that he cannot discuss the matter further without informing ALLIANCE or such
affected subsidiary or affiliate.
D. NON-COMPETITION. ASSOCIATE agrees that for a period of
twenty-four (24) months after the expiration of the Severance Pay Period, he
will not, without the express written permission of Parks or his successor,
directly or indirectly (i) participate in the ownership, management,
operation or control of, (ii) be connected as an officer, employee,
consultant,
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 10
partner, member, or director of, (iii) have any financial interest in, or
(iv) aid or assist anyone in the conduct of, a Competing Business. For this
purpose, a Competing Business means any entity, person, or operation whose
business is primarily the provision of third-party service bureau billing
and/or customer services to regulated or deregulated gas, electric or water
utilities in the United States. Nothing in this paragraph shall be construed
to preclude the ownership of securities of corporations which are listed on a
national securities exchange or traded in the national over-the-counter
market in an amount which shall not exceed one percent (1%) of the
outstanding shares in such corporation.
E. INJUNCTIVE RELIEF. ASSOCIATE agrees that enforcement of the
Confidentiality and Non-Disclosure, Nondisparagement, Non-Solicitation, and
Non-Competition convenants would be difficult if not impossible to enforce
through an action at law. Therefore, ASSOCIATE agrees that ALLIANCE may seek
any all remedies available to it to enforce these covenants, including
seeking any injunctive relief to enjoin ASSOCIATE from further violation of
the covenants or for specific enforcement of this Agreement. ASSOCIATE
further agrees that ALLIANCE may seek recovery of all actual damages incurred
as a result of ASSOCIATE'S breach of any of the above-referenced sections
including but not limited to attorneys' fees, courts costs and expenses
incurred by ALLIANCE in seeking to enforce this section.
IV.
ASSOCIATE further agrees that any and all sums paid or provided to
him in consideration for this Agreement will be forfeited and become
immediately due and payable to ALLIANCE, at its sole discretion, in the event
that ASSOCIATE asserts any claim, demand or cause of action, arising out of,
resulting from, or in any way related to any of the claims released by
ASSOCIATE under this Agreement, or any action to set aside, invalidate, or
void this
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 11
Agreement, except as a result of ALLIANCE's or ADSC's breach of their
respective obligations under this Agreement, unless ASSOCIATE withdraws such
claim, demand or cause of action within ten (10) days after receipt of
written notice from ALLIANCE. ASSOCIATE also agrees that a breach of the
covenant set forth in this Section IV will entitle ALLIANCE and its
successors and assigns to a full recovery in an action for damages,
including, but not limited to, recovery of its or their costs, expenses and
attorneys' fees for investigation, prosecution or defense of any action
brought in breach of this covenant. Such recovery of monies shall not
otherwise affect the enforceability of this Agreement or of other individual
promises contained in this Agreement.
V.
ASSOCIATE hereby represents and warrants that he has not assigned or
otherwise transferred to any other person or entity any interest in any
claim, demand, action and/or cause of action he has, or may have, or may
claim to have against any Released Party. ASSOCIATE agrees to indemnify and
hold harmless all of the Released Parties from any and all injuries, harm,
damages, costs, losses, expenses and/or liability, including reasonable
attorneys' fees and court costs, incurred as a result of any claims or
demands which may hereafter be asserted against any such Released Parties by,
through, or by virtue of an assignment or other transfer by ASSOCIATE.
VI.
ASSOCIATE acknowledges and agrees that by signing this Agreement, he
is hereby releasing and forever waiving re-employment or reinstatement with
ALLIANCE in any capacity; although nothing herein shall prevent ALLIANCE from
reemploying ASSOCIATE should ALLIANCE, in its own discretion decide to
reemploy him.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 12
VII.
This Agreement, the offer of this Agreement and compliance with this
Agreement shall not constitute or be construed as an admission by the
Released Parties or any of them individually, of any wrongdoing or liability
of any kind or an admission by any of them of any violation of the rights of
ASSOCIATE, but rather, such liability or wrongdoing is expressly denied. This
Agreement shall not be admissible in any judicial, administrative or other
proceeding or cause of action as an admission of liability or for any purpose
other than to enforce the terms of this Agreement. Moreover, ASSOCIATE agrees
that he will not disclose to any third parties except as provided below the
fact that the parties have entered into this Agreement or the terms and
conditions of this Agreement. Unless otherwise authorized in writing by
ALLIANCE, ASSOCIATE may not disclose the fact the parties have entered this
Agreement as well as the information contained herein, except with respect to
his family, financial advisors, attorneys and tax advisors (the "Associate
Authorized Parties"), but only upon advising the Associate Authorized Parties
of the restrictions of this Section VII and obtaining the agreement of the
Associate Authorized Parties to terms of same. This Agreement is not intended
to prohibit or interfere with either ASSOCIATE'S ability to inform a
prospective employer as to the restrictions placed upon ASSOCIATE pursuant to
this Agreement or to respond to or cooperate with any governmental agency
request or subpoena or court order. However, in the event ASSOCIATE receives
such a subpoena or order, ASSOCIATE agrees to provide ALLIANCE notice of the
subpoena or order within (5) days of ASSOCIATE's receipt of such subpoena or
order, with delivery to HR Counsel, Alliance Data Systems, 17655 Waterview
Parkway, Dallas, Texas 75252.
VIII.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 13
The parties agree that the terms of this Agreement are contractual
in nature and not merely recitals and shall be governed and construed in
accordance with the laws of the State of Texas. The parties further agree
that should any part of this Agreement be declared or determined by a court
of competent jurisdiction to be illegal, invalid, or unenforceable, the
parties intend the legality, validity, and enforceability of the remaining
parts shall not be affected thereby, and said illegal, invalid or
unenforceable part shall be deemed not to be a part of this Agreement. Venue
to decide any disputes arising under this Agreement shall be in Dallas County.
The parties further agree that while a breach of any of the
covenants set forth in this Agreement will entitle the ALLIANCE and its
successors and assigns to a full recovery in an action for damages,
including, but not limited to, recovery of its or their costs, expenses and
attorneys' fees for investigation, prosecution or defense of any action
brought in breach of such covenants, the recovery of monies shall not
otherwise affect the enforceability of this Agreement or of other individual
promises contained in this Agreement.
IX.
This Agreement shall be binding upon and the benefits shall inure to
ASSOCIATE and his heirs, successors, and assigns, and to ALLIANCE, ADSC and
their successors and assigns.
X.
No waiver of any of the terms of this Agreement shall be valid
unless in writing and signed by the party to this Agreement against whom such
waiver is sought to be enforced. The waiver by any party hereto of any
provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by any party, nor shall any waiver operate or be
construed as a recission of this Agreement.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 14
XI.
All notices, requests, consents, and other communications under this
Agreement shall be in writing and shall be deemed to have been delivered on
the date personally delivered or on the date deposited in a receptacle
maintained by the United States Postal Service for such purpose, postage
prepaid, by certified mail, return receipt requested, addressed to HR Legal
Counsel, Legal Department at:
ADS Alliance Data Systems, Inc.
17655 Waterview Parkway
Dallas, Texas 75252
and to ASSOCIATE at the address set forth below ASSOCIATE'S signature on the
signature page hereto. Either party hereto may designate a different address
by providing written notice of such new address to the other party hereto.
XII.
ASSOCIATE agrees that in executing this Agreement he does not rely
and has not relied on any document, representation or statement, whether
written or oral, other than those specifically set forth in this written
Agreement. The parties agree that this Agreement constitutes the entire
agreement between ASSOCIATE, ALLIANCE, and ADSC and supersedes any and all
prior agreements or understandings, written or oral, pertaining to the
subject matter of this Agreement, and contains all the covenants and
agreements in any manner whatsoever between the parties with respect to such
matters. No oral understandings, statements, promises or inducements contrary
to the terms of this Agreement exist. This Agreement cannot be changed or
terminated orally, but may be changed only through written addendum executed
by both parties.
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 15
XIII.
The wording in this Agreement was reviewed and accepted by all
parties after reasonable time to review with legal counsel, and no party
shall be entitled to have any wording of this Agreement construed against the
other party as the drafter of the Agreement in the event of any dispute in
connection with this Agreement.
XIV.
ASSOCIATE and ALLIANCE agree that prior to the execution of this
Agreement, ASSOCIATE has returned to ALLIANCE all Company property within
ASSOCIATE'S possession, or control, including, but not limited to, beepers,
cellular telephones, keys, access cards, computers and peripheral equipment,
software, automobiles, equipment, customer lists, forms, plans, documents,
and other written and computer material, and copies of the same, belonging to
ALLIANCE or its affiliates, or any of their customers. ASSOCIATE represents
and warrants that he has not and will not at any time copy or reproduce any
of the items referred to in this Section XIV.
XV.
ASSOCIATE declares that the terms of this Agreement have been
completely read, are fully understood, and are voluntarily accepted, after
complete consideration of all facts and him legal rights, of which he has
been fully advised by him respective attorneys for the purpose of making a
full and final compromise, adjustment and settlement of any and all claims,
disputed or otherwise, that ASSOCIATE may have against the Released Parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as
follows:
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 16
JAMES ANDERSON
/s/ James Anderson
- --------------------------------------------
3513 Potomac Avenue, Dallas, Texas 75205
- --------------------------------------------
ADDRESS
Date: 1/08/01
---------------------------------------
ADS ALLIANCE DATA SYSTEMS, INC.
By: Dwayne H. Tucker
---------------------------------------------------------------
Its: Executive Vice President and Chief Administrative Officer
--------------------------------------------------------------
Date: 1/08/01
-------------------------------------------------------------
As to the provisions of this Agreement to which it is mentioned:
ALLIANCE DATA SYSTEMS CORPORATION
By: Dwayne H. Tucker
---------------------------------------------------------------
Its: Executive Vice President and Chief Administrative Officer
--------------------------------------------------------------
Date: 1/08/01
-------------------------------------------------------------
GENERAL RELEASE AND SEVERANCE AGREEMENT - PAGE 17
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-94623 of Alliance Data Systems Corporation and Subsidiaries of our
report dated March 1, 2000 (January 23, 2001 as to Note 22) which expresses an
unqualified opinion and includes an explanatory paragraph related to the
restatement as described in Note 22 and of our report dated March 1, 2000
relating to the financial statements of SPS Network Services, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Historical Consolidated Financial and Operating Information" and "Experts" in
such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the consolidated financial statement schedules of Alliance
Data Systems Corporation, listed in Item 16. These financial statement schedules
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 26, 2001